What's Next After Silicon Valley Bank’s Collapse?
Melissa-Harris Perry: It's The Takeaway. I'm Melissa Harris-Perry.
On Friday, one of Silicon Valley's top banks failed, after depositors rushed to withdraw money from their accounts, causing a run on the bank.
Speaker 1: Don't look now, but there's something funny going on over there at the bank, George. I've never really seen one, but that's got all the earmarks of being a run.
Melissa-Harris Perry: It was the December 1930 run on the bank of United States which brought the Roaring Twenties to a screeching halt, and signal the country's descent into the Great Depression. Frank Capra captured these economy-crashing runs in his classic film, the holiday favorite, It's a Wonderful Life. Oh, poor George Bailey and his new bride Mary. they were headed off to their honeymoon when a run on his family's savings and loan forced George to delay and he seeks to calm his depositors with a little impromptu lesson in banking.
Speaker 1: You're thinking of this place all wrong as if I had the money back in a safe. The money is not here, well, your money is in Joe's house that's right next to yours, and in the Kennedy house and Ms. Meclans house and 100 others. You're lending them the money to build and then they're going to pay it back to you as best I can. What are you going to do, foreclose on them?
Melissa-Harris Perry: Oh, earnest, honest George Bailey. Too bad he wouldn't guard the digital doors of Silicon Valley Bank. Maybe he could have taught the multi-millionaire VCs out of their hasty withdrawals. "Listen, Stu, I mean, you're thinking of this place all wrong. Your money is not here. It's embedded in Steve's back-end algorithm development team and Joe's crypto portfolio." Instead, SVB imploded swiftly and took New York-based Signature Bank right along with it, becoming the largest American bank failure since 2008.
The comparison to the Bailey's old savings and loan isn't entirely hyperbolic. I mean, SVB was the go-to lender for many large tech startups and some small businesses like wineries in California. Its failure initially left many worried about making payroll and paying bills. Federal regulators quickly stepped in to take over both banks, and they took extraordinary measures to guarantee depositors full access to their money, even the 93% of accounts that were well over the usual $250,000 FDIC insurance limit. On Monday, regulators and President Biden rush to contain the fallout and assure Americans that the financial system is still stable.
President Biden: Americans can have confidence that the banking system is safe. Your deposits will be there when you need them. Small businesses across the country, the deposit accounts for these banks can breathe easier knowing they'll be able to pay their workers and pay their bills. Our hard-working employees can breathe easier as well.
Melissa-Harris Perry: The Federal Reserve has said is leading a review on the supervision and regulation of Silicon Valley Bank, and the Justice Department and Securities and Exchange Commission have also opened investigations.
Speaker 2: Goal, we've made it. Close the door [unintelligible 00:03:23]. Look, we're still in Bowser. We still got two bucks left. Let's celebrate or get some glass of something.
Melissa-Harris Perry: I'm joined now by Aaron Klein. He's Senior Economic Studies Fellow at The Brookings Institution and is the former Deputy Assistant Secretary for Economic Policy at the Department of the Treasury. Welcome to The Takeaway, Aaron.
Aaron Klein: Must say it's a pleasure to be here.
Melissa-Harris Perry: We know it's been unstable year for the tech industry, but what initiated this panic about SVB?
Aaron Klein: Look, SVB had a series of classic red flags going on there for a while. It quadrupled in assets over four years. It had a massive reliance on these uninsured deposits, large corporations you described. It had a huge unhedged interest rate exposure. Remember back a couple of years ago when you could get interest mortgages at 4%, 3%, 4%. It bought those mortgage securities, it didn't make mortgages. You did a very good job in the introduction of explaining the difference between what most banks of its size does and what Silicon Valley Bank did, but it bought all of these mortgage assets and then didn't hedge it against a sudden interest rate increase.
As interest rates rose, the value of owning those lower-yielding securities fell, and they were able to try to hide it in their accounting statements, although some of those were public. When they needed money, they rushed to this arcane part of the United States government support for banks called the Federal Home Loan Bank, also created in the 1930s in response to the depression. Which has a weird little thing in it, it stands in front of the FDIC and the taxpayer when the bank fails. They hollowed out their assets by borrowing from this Home Loan Bank thing that allowed them to last a little bit longer, but when it all collapsed, made losses that much greater.
Melissa-Harris Perry: Okay, what could have fixed that? What could have kept that from happening?
Aaron Klein: Oh, a lot of things. First of all, the Federal Reserve regulated this bank, from head to toe. Most banks are very complicated institutions with multiple different regulators. The US is a very confusing, almost Byzantine set of acronyms and agencies that regulate banks. This happens to have been a rare example of a bank that all the way through its corporate structure was regulated by the Federal Reserve, mostly out of the San Francisco branch.
They seem to have missed things that bank examination 101 would have taught you. The Fed could have stepped in at any point, slowed their growth, required them to buy interest rate hedges, require them to have more insured deposits and not rely so heavily on uninsured, stop them from hollowing out the bank by running to the San Francisco Home Loan Bank. The Fed had all the authority in the world to stop them, and they sat on their hands.
Look, had they made these changes Silicon Valley Bank wouldn't have been as profitable. Its stock price a week ago was $275 a share. It wouldn't have appeared to be making as much money as it did during the good times, and then it wouldn't have suddenly collapsed when folks realize what was going on. This is a complete failure of supervision by the Federal Reserve. There's bank regulation and their's supervision. Regulation sets the rules. Supervision enforces them.
Some of the rules were right, some of the rules were wrong. I'm not saying regulation was perfect by any stretch, but you can't legislate judgment. The enforcement of the rules here seem to just have been thrown out the window.
Melissa-Harris Perry: All right, stick with us because there's more to explain about these recent bank collapses right after this.
You're back with The Takeaway. I'm still with Aaron Klein from The Brookings Institution talking about the Silicon Valley Bank and Signature Bank collapses. Now, are we missing it, or is this a predictable outcome of an attack on regulation? I hear you on there's a distinction between regulation and supervision. Part of this notion of going after the deep state or of removing even regulations is also about loosening supervision, that even those things that are still on the books to not enforce, to not have even the staffing to do the enforcement.
Aaron Klein: The San Francisco Fed has as much money as they want. The Federal Reserve exists off-budget. It's a multibillion-dollar institution that hires thousands of economists, the Federal Reserve System has more economists than any other employer in the United States, so they had all the money they needed. They didn't do their job. You can go back and create more rules, but if people aren't going to enforce them, and so look, the war problem couldn't be regulation.
Melissa-Harris Perry: This is not like agriculture, not having enough inspectors to make sure-
Aaron Klein: Correct, not at all.
Melissa-Harris Perry: -that our food is safe.
Aaron Klein: No, no, no. I'll tell you what it is. I mean, I'll tell you one element of it, the Federal Reserve Bank of San Francisco, which is not part of the government, it's a privately owned thing owned by other banks, imbued with government powers has nine directors that sit on its board. You want to guess who one of those directors was?
Melissa-Harris Perry: Barney Frank.
Aaron Klein: No, the CEO of Silicon Valley Bank-
Melissa-Harris Perry: Oh, stop. Wait.
Aaron Klein: -sat on the board. The CEO of Silicon Valley Bank sat on the board of the San Francisco Federal Reserve who was regulating it.
Melissa-Harris Perry: That's against the rules. I mean, it's not but it's against the practices, right?
Aaron Klein: No, that's completely allowable. In fact, every other Fed has bankers on its board, that's how the law was set up.
Melissa-Harris Perry: Okay. Didn't we just go through this in 2008?
Aaron Klein: Oh, yes. Although a senior executive at Goldman Sachs was on the board of the New York Fed in 2008. Yes, we did. We went through it, 15 years later, here we are.
Melissa-Harris Perry: Is this exclusively about profits? I mean, this is just about how much money can be made, how swiftly?
Aaron Klein: There's a core tension. If you want banks to be private enterprises that allocate money, which I think is actually probably a good thing. Then some banks need to be able to fail and the structure needs to be set up to tolerate that failure and that failure needs to have consequences. In all of American history, do you know the first year, Melissa, where not a single bank failed?
Melissa-Harris Perry: 2008.
Aaron Klein: 2008, they all failed. There were hundreds of failures. You're very close, your intuition is right, 2005. Up until 2005, every year in American history some bank had failed somewhere. In 2005, not a single bank failed. In 2006, it happened again. The bank regulators came to Congress and said, "Look, we won. We solved the problem. Look how great the system is." It's never been safer because no one's failing. Well, what then?
Melissa-Harris Perry: Then everybody fails. It's that lead-up that we see in '05, and '06, no failures, and then the big crash.
Aaron Klein: Do you want to know the next two years in American history where no two banks failed?
Melissa-Harris Perry: Probably 2020.
Aaron Klein: 2021 and 2022. The situation here is we need to live in a society that tolerates a little bit more bank failure as a regular thing so we don't have these giant runs. Now, what really concerns me here is rather than let the large businesses that would've lost a little bit of money, look, at the end of the day, when a failure like Silicon Valley Bank happens, most of the money is there and can be recovered.
These securities, these mortgages, I told you, they lost a little bit of money as the fed raise rates. By the way, at some point, as interest rates go down, the value of the security's going to go back up. The mortgages are still good. This isn't like 2008 where these were subprime mortgages many of whom were liar loans and had real structural problems. We don't have a housing market problem.
These uninsured depositors would've gotten anywhere from 85 cents on the dollar to 95 cents is a reasonable guess. Maybe I'm wrong, a couple of pennies here, a couple of pennies there. There's an alternate world where on Monday morning, it was announced every business has access to 65% of what was in the bank on Friday. We anticipate you'll get half or more of the other 35% back, but we can't give it to you right now. We have to unwind this institution.
I think those businesses could have made payroll. By the way, today is March 15th. Many people get paid on the 15th of the month and there's going to be someone somewhere, a working person who didn't get their money, the direct deposit got delayed and it's a couple of days late. They may overdraft, have the bank suspended those overdrafts, billion dollar a year source of profit. By the way, the Federal Reserve has had plenty of authority to try and tackle the overdraft problem for the last 15 years, but the minute that Roku could possibly lose 5, 6, 10% of their uninsured bank deposits, uncle Sam opens up his wallet and bails them out.
Melissa-Harris Perry: Aaron Klein is Senior Economic Studies fellow at the Brookings Institution and former Deputy Assistant Secretary for Economic Policy at the Department of Treasury. Aaron, thank you so much for being here.
Aaron Klein: It was a pleasure.
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