Typically, financial crises, as in the sort that might or actually do impair the banking system, are the result of leveraged speculation. Is this one of those rare instances when this time might actually be different, via rising wealth inequality creating new levels of hot money that can slosh in and out of banks, making many of them fundamentally less stable?
Now admittedly, the continued rise in wealth inequality is an effect of sustained low central bank interest rates, which goosed asset prices generally and particularly favored speculative plays as investors reached for returns. A great deal of commentary has correctly focused on the effects of deflating these asset bubbles and how the rollback of paper wealth can be particularly harmful to financial firms that wrongfooted the correction.
But the reduction in wealth also produces a system wide reduction in liquidity (mind you, we’ve always thought liquidity is not the virtue that investment touts make it out to be; the world got by just fine in the stone ages with less that instantaneous trading times and higher transaction costs). The effect in a regime, where for better or worse, there are (or have been) lots of big fish with tons of cash who are accustomed to moving it quickly would wind up looking like an emerging market, where US interest rate moves wind up producing huge and destabilizing waves of hot money moving in and out. It appears not to have occurred to the authorities that we were restructuring our financial system so as to make it possible to generate banana-republic levels of upheaval.
The Great Crash blew back to the banking system because stock buyers were making heavy use of margin loans, and on top of that, stock operators were creating leveraged structures (trusts of trusts of trusts). By contrast, the 1987 crash, the result of leveraged buyouts producing a stock market bubble, didn’t do lasting damage, and neither did the later leveraged buyout collapse and large-scale workouts o LBO loans (a big reason is that the loans were syndicated and big foreign banks were big buyers but they didn’t eat enough of this bad US cooking to get really sick). But the Japanese financial crisis was the result of a dual commercial real estate and stock market crash, together on a scale that has stalled Japanese growth for decades. The 2008 crisis looks like a housing crisis, but the severity of the damage resulted from credit default swaps creating synthetic subprime debt that was four to six times real economy exposures.
This is a long-winded way of saying that herd behavior in bad lending and/or leveraged speculation produced enough in the way of actual or soon to be realized losses to damage a lot of banks. And banks are interconnected: if one bank gets in trouble, its depositors are the customers or employers of customers of other banks. If those linked customers of other banks have an unexpected hit to income, they could default on their debt payments, propagating damage across the system.
The crisis of the past week was not that. Three different banks with very different business strategies and asset mixes got in trouble at the same time.1 Some like Barney Frank, on the board of Signature Bank, argue that the common element was a regulatory crackdown on banks too cozy with the crypto industry. But that’s not really the case with Silicon Valley Bank, which has been suffering for a while from declines in its deposits due to a falloff in new funding all across tech land, as well as more difficult business conditions leading to not much in the way of new customers and falling deposit balances at most existing customers.
What the three banks did have in common was a very high level of uninsured deposits which made them particularly vulnerable to runs and therefore should have led the banks’ managements to be very mindful of asset-liability mismatches and liquidity. And they should have focused on fees rather than the balance sheet to achieve better than ho-hum profits.
Silicon Valley Bank has attempted to wrap itself in the mantle of being a stalwart of those rent-extracting innovative tech companies. But Silicon Valley Bank is hiding behind the skirts of venture capital firms. They are the ones who provided and then kept organizing the influx of capital to these companies. The story of the life of a venture capital backed business is multiple rounds of equity funding. Borrowing is very rarely a significant source of capital. So the idea that Silicon Valley Bank was a lender to portfolio companies is greatly exaggerated.2
Both the press and several readers have confirmed that the reason for Silicon Valley Bank’s lock on the banking business of venture-capital-funded companies was that the VCs required that the companies keep their deposits there. And that’s because the VCs could keep much tighter tabs on their investee companies by having the bank monitor fund in and outflows on a more active basis than the VCs could via periodic management and financial reports.
Now what flows from that? One of the basic rules of business is that it is vastly cheaper to keep customers than find them. Silicon Valley Bank would be highly motivated to attract and retain both the fund and the personal business of its venture capital kingpins. Accordingly, the press has pointed out that loans to vineyards and venture capital honchos’ mortgages were important businesses. It’s not hard to think that these were done on preferential terms to members of a big VC firm’s “family” as a loyalty bonus of sorts.
On top of that, recall that Silicon Valley Bank bought Boston Private with over $10 billion in assets, in July 2021. The wealth management firm also had a very strong registered investment adviser platform and additional assets under management. That suggests Silicon Valley recognized increasingly that the care and feeding of its rich individual clients was core to its strategy.
It’s impossible to prove at this juncture, but I strongly suspect that the individual account withdrawals were at least as important to Silicon Valley Bank’s demise as any corporate pullouts. One tell was the demand for a backstop of all unsecured deposits, and not accounts that held payrolls. A search engine gander quickly shows that it’s recommended practice for companies to keep their payroll funds in a bank account separate from that of operating funds. One has to assume that the venture capital overlords would have their portfolio companies adhere to these practices.
The press also had anedcata about wealthy customers in Boston getting so rowdy when trying to get their money out that the bank called the police, as well as Peter Thiel (to the tune of $50 million), Oprah, and Harry & Meghan as serious depositors.
Similarly, there is evidence that the run at Signature Bank was that of rich people. Lambert presented this tidbit from the Wall Street Journal yesterday in Water Cooler:
A rush by New York City real-estate investors to yank money out of Signature Bank last week played a significant role in the bank’s collapse, according to building owners and state regulators. The withdrawals gained momentum as talk circulated about the exposure Signature had to cryptocurrency firms and that its fate might follow the same path as Silicon Valley Bank, which suffered a run on the bank last week before collapsing and forcing the government to step in. Word that landlords were withdrawing cash spread rapidly in the close-knit community of New York’s real-estate families, prompting others to follow suit. Regulators closed Signature Bank on Sunday in one of the biggest bank failures in U.S. history. Real-estate investor Marx Realty was among the many New York firms to cash out, withdrawing several million dollars early last week from Signature accounts tied to an office building, said chief executive Craig Deitelzweig.
This selection also illustrates a point that makes it hard to analyze these bank crashes well. The very wealthy regularly use corporate entities for personal investments, so looking at corporate versus purely individual account holdings is often misleading in terms of who is holding the strings. A business owned by a billionaire does not operate like a similar-sized company with a typical corporate governance structure.3
Ironically, First Republic Bank, which holds itself out as primarily a private bank, had the lowest level of uninsured deposits, 67% versus 86% at Silicon Valley Bank and 89% at Signature. But its balance sheet was heavy on long-term municipal bonds, which are not eligible collateral at the discount window or the Fed’s new Bank Term Funding Program facility. Hence the need for a private bailout.
Before you say, “Well, even if there was time to figure out how to backstop payrolls, which there wasn’t, we had to go whole hag because contagion,” that is not a satisfactory answer. Because nearly all banks have sizable Treasury and/or agency holdings (First Republic was unusual), the new Fed interventions come very close to being a full backstop of uninsured deposits. That means vastly more subsidized gambling. There should be a great increase in supervision and regulation to try to prevent more sudden meltdowns, which one would expect to become more frequent otherwise due to even greater government backstopping:
As Georgetown law professor Adam Levitin put it:
….. the Bank Term Funding Program bears some consideration. No one in the private market would lend against securities at face, rather than at market. But that’s what the Fed’s doing in order to enable banks that have held-to-maturity securities avoid loss realization. The Bank Term Funding Program is a lifeline for banks that failed at banking 101—managing interest rate risk. The whole nature of banking is that it involves balancing long-term assets and short-term liabilities. Firms that can’t do that well probably shouldn’t be in the banking business.
Moreover, European banking regulators, regularly been criticized for last minute, kick-the-can interventions, are finding out how the US rules-based order of “we get to rewrite the rules when we feel like it” works in their arena. From the Financial Times:
Europe’s financial regulators are furious at the handling of the Silicon Valley Bank collapse, privately accusing US authorities of tearing up a rule book for failed banks that they had helped to write.
While the disapproval has yet to be conveyed in a formal setting, some of the region’s top policymakers are seething over the decision to cover all depositors at SVB, fearing it will undermine a globally agreed regime.
One senior eurozone official described their shock at the “total and utter incompetence” of US authorities, particularly after a decade and a half of “long and boring meetings” with Americans advocating an end to bailouts.
Europe’s supervisors are particularly irate at the US decision to break with its own standard of guaranteeing only the first $250,000 of deposits by invoking a “systemic risk exception” — despite claiming the California-based lender was too small to face rules aimed at preventing a rerun of the 2008 global financial crisis.
Mind you, the Europeans are not being hypocrites. They forced the unsecured depositors at Cyprus bank to take 47.5% haircuts in its banking crisis. Admittedly those were banks in a country seen as a money laundering haven, but it had a lot of British retirees banking there too. The EU also tried to get banks to use bail-in structures like co/cos bonds. The US was skeptical of them and as we predicted, they had perverse effects. But the point is the EU has made a much more serious attempt at renouncing bailouts than we have, even if they have yet to find the secret sauce.
And they are not shy about calling out who bears the cost. Again from the Financial Times:
The US has claimed SVB’s failure will not hit taxpayers because other banks will cover the cost of bailing out uninsured depositors — over and above what can be recouped from the lender’s assets.
However, a European regulator said that claim was a “joke”, as US banks were likely to pass the cost on to their customers. “At the end of the day, this is a bailout paid for by the ordinary people and it’s a bailout of the rich venture capitalists which is really wrong,” he said.
So not only are the bailouts an effect of rising wealth concentration, they are going to make it worse. Nicely played.
____
1 Skeptics please see a post by Georgetown law professor Adam Levitin which provides an overview of the asset mix of Silicon Valley Bank, Signature, and First Republic.
2 56% of Silicon Valley Bank’s loans were subscription lines of credit, as in loans to venture capital funds. We’ve repeatedly decried this practice in private equity, as in the bigger, more mature company cousin of venture capital. There subscription lines of credit are primarily a device to goose reported returns by allowing limited partners to have the fund borrow rather than make capital calls to buy companies. This is perverse: investors like CalPERS like to depict themselves as long-term, patient capital, which is not actually terribly true in private equity and subscription lines make that even less so. I have not started to investigate, but based on curiously-worded statements to the media, I am wondering whether the practices in venture capital were even worse, that subscription lines served to top up funds that wanted or needed more dough than they could raise from limited partners.
3 I’ve seen this repeatedly, first hand.
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Please indulge this finance neophyte, but depositors have no real way to assess a bank’s solvency, so there is no moral hazard involved or anything they can do. All that the insured amount cap does is lead the prudent ones to open as many accounts in as many institutions as possible to fall under the threshold for any institution, which is obviously inefficient and has costs for all involved. How does that reduce moral hazard for the bank managers, unless they are also forced to hold their own personal money in their own bank, so they would be at risk of losing their net worth if they mismanage it?
On the other hand, fully insuring deposits would make bank runs less likely to occur in the first place, and of course will require much more stringent regulation and compliance of the banks, which would not be a bad thing per se.
Sorry, this is not correct.
First, someone with more than $250,000 in a bank account is doing a bad job of investing and risk management, or alternatively, values convenience more than risk reduction.
There’s no reason to have that much at a bank unless you are a huge monthly spender, and even so, someone in that position can presumably afford a secretary or money manager to transfer funds. They would also presumably have access to credit, like large personal credit lines and credit cards with large balance limits, eliminating the need to rely on bank account balances as the sole source of funds.
Rather than holding over $250,000 in a bank, the most obvious prudent option is to put the excess in an investment account, in Treasuries and agencies if you want something bank-like in risk and return, in a mix of funds and ETFs if you want more return.
Second, there are brokered deposit products which for a modest fee will break up big deposits into smaller amounts and spread them among banks. They’ve been around for decades. They are highly automated. But again, there’s no compelling reason for individuals to have that much in bank accounts.
Third, it is possible to evaluate banks. Most don’t bother, or get in a good small bank that gets bought by a bigger stoopid bank and lose patience.
Having said that, credit unions are an alternative. The issue with them can be service levels. They are even more variable than in commercial banks.
I think lots of people simply don’t know any better.
We all specialize in different things, and this last week has been an education for me in how much more I need to learn about finance/banking. Personally, I would have wondered about the $250K limit, but I’m highly risk averse.
If I were the sort of risk taker who was running a new startup as a young person out of college, I would have focused on my product and would have followed the advice of those who lent me the money, since they clearly had more experience than me in that field. I.e. I’d have done what the VCs told me, and put the money in SVB.
On a completely different topic, I find it fascinating that the full might of Western sanctions seems to have done less damage to Russia’s banking system than the Fed increasing interest rates has done in the West. There were some (gleeful) stories about bank runs in Russia in Feb/March 2022 in the Western media when the sanctions were first introduced, but since then, I haven’t heard anything. One would think the Western media would be all too happy to report such things if they were happening.
I also had vague thoughts about people being fiscally irresponsible by having so much money in a single institution. Even I know better than to do that, not that I have millions lying around in cash.
Then I learned that not only did the VC’s steer companies to use SVB, but SVB required exclusivity from some clients. Kind of like when we lived in Florida and our homeowner’s insurance was canceled, and to get anyone else to take us we had to move our auto policies to them as well.
So what were they supposed to do? Their VC’s were telling them to use SVB. And they couldn’t get access to SVB without putting all of their money in SVB. Here’s an article about it: https://www.cnbc.com/2023/03/12/silicon-valley-bank-signed-exclusive-banking-deals-with-some-clients.html
At least that is now over. Surely no one will ever agree to that kind of a requirement again!
Well, this may be true, but now the FDIC has set a precedent and will now be insuring all deposits regardless of size. Taxpayers (FDIC) should not be in the business of offering free insurance policies.
SVB is now an “FDIC Fund Hog”, since (as Ellen Brown has said) the Fund that SVB is tapping into (without having made much contribution) backstops only 2% of insured deposits (around $9 trillion). Uninsured deposits are now (because of the wealth accumulation and concentration you point out) are now upwards of $8 trillion. So, suddenly, the FDIC fund backstops only around 1% of total deposits–now all defacto insured.
So, the casino is like a lot of little players, with small stacks of chips, playing conservatively, and a few very big players with huge stacks of chips, playing recklessly and trying to move big bets from one table to another. Arguably, this increased volatility–and therefore increased risk–provides an risk-based argument for progressivity in FDIC insurance rates. Sock it to the big players. They are creating risk for everyone else.
Oh, and the insurance should be based on total money a given depositor has in the whole U.S. banking system, not in a specific institution. Probably the BIS or some other global regulator should set a uniform standard and require uniform insurance of deposits everywhere. Oh well, I’m an economist–can’t I assume that a decent can opener exists somewhere amidst all this uneaten, untaxed canned food around (rich deposits) while everyone else is starving?
To be clear, SVB depositors (via SVB’s insurance premium payments to the FDIC) actually did “pay” for the $250,000 level of guaranteed deposit coverage. I say “pay” because the deposit insurance is a mandatory cost of doing business as a bank so it’s not apparent that the premiums can be directly attributed to depositors. Still, the bottom line is that the FDIC owes SVB depositors this coverage as part of essentially an insurance contract.
Moreover, the recently announced additional “excess insurance program” (for lack of a better general description) is not supposed to put the FDIC insurance fund in play for more coverage than the $250,000 coverage. It seems the idea is that the Federal Reserve member banks will be assessed charges for the excess coverage above that $250,000 level, and that money will be given over to the FDIC to replenish the insurance fund. (The result of this arrangement probably, in my opinion, will be elevated costs for financial services, so all bank customers might be on the hook to a degree.)
The great irony is that it seems that Dodd-Frank may have limited the risks that biggest banks can take that would threaten depositor security. In comparison, the smaller banks are less regulated (like SVB) and able to play more games. This fact suggests that FDIC rates should be lowest at the biggest banks (!).
Finally, I would also note that market-rate deposit insurance has to be based around the institution where the money is held. The specific details of a bank’s risk profile determines the appropriate premium. If $1 million is held in a very conservative, well-run bank, that premium should be relatively low because there’s minimal risk of loss, even though there’s $1 million at stake. If $500,000 is put in a poorly run, risk taking institution, the premium there probably should still be higher than the $1 million coverage because there’s more actual risk.
In fact, it seems to me one of the complications of market rate deposit insurance for banks is that a risky bank, by virtue of being risky, will have higher rates than safer banks and public knowledge of such elevated insurance rates could actually trigger its own bank run, either due to depositors sensing more risk or because the rates might cause the bank to become less competitive (e.g., paying less interest on deposits).
>”Third, it is possible to evaluate banks.”
Yes. Keep on eye on the stock price of your bank. Dividend-paying banks ought to trade like utilities. In other words, sleepily, with no dramatic moves (>2% in a day let’s say) to the downside. The interested and concerned depositor would be well-advised to reconsider his or her bank if this very approximate guideline is breached.
Mildred. Credit Unions do not have “stock prices”.
I see my credit union is now offering an 18 month CD with a 4.8% rate. I wonder if I should be concerned?
I’m not sure I’d be concerned. If you have less than $250,000 with the credit union, that’s insured so there’s no immediate reason to be concerned.
If one has more, then the 4.8% is not extraordinary but could indicate some issues. At the moment, big banks sometimes still pay very little on their CDs (e.g., Chase offers a LAUGHABLE 0.05% for 18 months according to their website).
However, U.S. Treasury Bills (aka T-bills), which are the short term (< 1 year) bonds issued by the U.S. Treasury, recently have been returning around 4.5-4.7% (with a fall in the most recent auctions–possibly due to flight to safety after SVB), and the last 2 year Treasury Note (medium term U.S. bonds) returned around 4.6%, so the 4.8% indicates a desire to attract secure money. Somewhere around 4.5-4.7% is probably the "risk free return rate" that banks should be exceeding because at lower rates basic financial logic says to park your extra cash in essentially risk-free federal debt (whether directly–treasurydirect.gov lets individual citizens easily buy federal debt of all types–or indirectly through a money market account, money market fund, or government bond ETF).
(Side note: Recent U.S. Treasury debt auction results can be looked up here: https://treasurydirect.gov/auctions/announcements-data-results/)
The above is a long way of saying that 4.8% for 18 months is a reasonable rate for an institution that actually wants to attract customers and ensure that their money is locked in for a while. With that said, compared to many banks out there, it is probably high (though not impossibly so–the online only Discovery bank is offering 4.75% for 18 months).
They are smart by not being greedy. Banks are getting money from mortgages at 7%-9%, Home Equity Lines Of Credit (HELOC) rates at 9%-14%, loans to businesses at 11%-25% and more and auto loans at 7%-11% ( in some cases even more based on your credit rating/score) so they could easily afford to pay depositors and CD holders more in interest but don’t – why? GREED
It’s an interesting question. I do think in the past there was more attention paid to long term prospects of bank (might as well add in insurance) business. Maybe an assumption that gov’t is managing risk. March is condo/home owner association annual meeting month here. Was at my homeowner annual meeting this week and our capital reserve of $9 million is at a single bank. Don’t see it’s reasonable to split that into $250k chunks, and I’m not sure the BOD competency is to invest it, though I doubt our bylaws allow that.
Your association should evaluate whether the IntraFi services are appropriate for its needs: https://www.intrafinetworkdeposits.com/
The idea behind the IntraFi services is that the service will divide a large sum of money (>$250,000) into $250,000 chunks and place these amounts in separate banks on behalf of the original depositor (this can be done in bank accounts or CDs). The end result is all of the funds are insured.
People here and elsewhere have pointed out that this option (sometimes still referred to by its CD service “CDARS”) has existed for years to enable larger depositors to protect themselves. It should not be obscure to people who are responsible for large sums of cash and so I view it as another reason to question this 100% backstop approach.
I clicked the link above to the article by Adam Levitin (more particularly, the What’s going on with First Republic). It’s a very well written column and not filled with too much of the gobbledygook one can often find elsewhere. For me, I find gobbledygook interesting when discussing duration mismatch and managing the risk profile of a financial institution.
Lots of discussion this morning, on TV, about the upcoming weekend and potential bank merger activity. There does seem a legitimate chance for a single, or a handful, of quick trigger bank acquisitions that are blessed by the regulators at OCC, FDIC and / or the Fed. In moments of crisis, the weakest entities are usually culled or seemingly on the verge of being culled.
The optics of all this is horrid as well – right when the Supreme Court and GOP AGs are arguing average Americans don’t deserve $10k off their student loans, the government has no issue bailing out rich people.
Socialism is only bad when it applies to the unwashed masses.
Look, I agree completely. That is why, admittedly in perhaps too long-form a manner, I am debunking the canard that saving SVB was to rescue tech companies. That is what I call narrowly accurate but substantively misleading. It was much much more about protecting the VCs and their wealthy fellow travelers.
Which I suppose in a roundabout way is really just more crony capitalism whereby the Democrats service their donors?
My husband has a saying “it is completely true without being truly complete”.
It is reassuring to have a sugar daddy clean up the messes you make.
They were getting bailed out one way or another. Turns out it was also considered a major national security issue.
https://www.defenseone.com/business/2023/03/pentagon-mobilized-support-tech-startups-after-bank-failure/384033/
Fascinating, though with moment’s reflection, completely unsurprising.
Horrid you said it. Because time has come for us to realise what the hell is “PMC” and how they behave. A very big complex of superiority they have. Their ideas are converted automatically into rules: sanction the deplorables below and rescue the equals. In Spain it has been very common to see the bosses behaving in this way from well before I entered the job force loooong ago. Have seen lots of public humiliations for no good reason but demonstrating their caste superiority, to make it clear who makes the rules and how to obey. This is not the way to operate even for the brightest of them. A good example of this behaviour was recently seen when some congress-critter was interrogating Taibbi and Shellenberger for not obeying their rules. The mob of the millionaires they are.
Going to take a stab at this story. We all know how corporations optimize their production which concepts like just-in-time delivery. I may be wrong here but from what I have read, it sounds like that these banks had over-optimized their operations to squeeze out maximum profit – but at the expense of having no ‘slack’ in the system for any unforeseen eventualities. So when it came about that there was a form of bank run on Silicon Valley Bank, they simply did not have the planned reserves there to meet any such eventuality because they had never planned for this to happen. Same with Signature Bank too for that matter. So in spite of having scores of billions in assets behind them, they were actually very brittle structures.
I posted a speculation yesterday that, not only was there no slack in the system, but that the bank was deliberately set up to fail. You can’t get a bailout unless you orchestrate a panic in the Fed big enough to deserve (or seem to deserve) the “systemic risk exception.” They took off (or let expire) by late 2022 all of the interest rate hedges they had in place in 2021. They conveniently got rid of their Chief Risk Officer in April 2022. They gave lower level staff their bonuses just before the blow-up to incent them to stay loyal and quiet while this was going on (many must have known what was going on). Will the Fed’s “investigation” of SVB reveal this? Count me skeptical that this will be an honest investigation into malfeasance. I think it will, rather, be blamed on “stupidity,” which is the MSM line right now. VC are NOT stupid. They are top-of-the-food-chain predators, and they know how to fleece the system. Ethics or laws can be no impediment to profit with these guys.
So, the “systemic risk exception” actually is a huge incentive for a large mid-sized bank to blow up the system. The FDIC insurance cap of $250K creates a huge incentive for large depositors “in the know” to be first in line to pull their funds out when the bank is in trouble. Our regulatory system creates risk in this crazy casino. It’s another way that wealth accumulates, because wealth is constantly getting bailed out.
(Dons Tinfoil Hat):
The entire “Silicon Valley ecosystem/business model” needs a fed funds interest rate under 2% in order to survive and under 0.25% in order to thrive.
The Fed will only change course and take rates back down if something “dreadful” happens.
A banking crisis is something dreadful enough that might work.
So why not try?
When all that money concentrates at a faster rate than it can be absorbed by new investment opportunities it’s a classic case of opportunity banging on the door. There should be a Nature Fund to hold all these forlorn profits securely and use them to repair environmental disasters until a better opportunity comes along. A home for stranded money. And as luck would probably have it, the investment in good old fashioned, boots on the ground reclamation might actually create really good long term investments and spin-offs. This is a no-brainer. What’s wrong with us and our pearl-clutching mentality these days?
The CEO had acknowledged pre-failure that they knew they had to be prepared for net outflows rather than the massive net inflows they had had in 2021 when startup funding soared. He considered buying long term bonds (treasury and MBS) and not hedging for interest rate risk a conservative way to handle a potential need to the money. This was at a time when inflation had been rising and the talk of the town was when would the FED raise rates. And when the FED began to raise rates, they apparently bought the line from Yellen that the inflation was transitory. So instead of quickly selling and minimizing their mistake, they borrowed $15 billion from the San Francisco FHLB. When they finally were forced to sell $22 billion of their long term bonds the losses were much larger.
The venture capitalists knew of the sale and loss and also of the bank trying to do a stock issuance to raise cash. They advised their clients to pull out.
Both Silicon Valley Bank and Signature Bank should not have been allowed to operate as they did since they had too homogenous a client base. One startup concentrated, and the other crypto firm concentrated.
And also important is that SVB CEO Greg Becker was among those who lobbied Congress (Becker even hosted a fundraiser for Mark Warner) to remove the requirement that banks from $50 billion to $250 billion be stress tested by the FED. The FED would have caught the issue with a large unhedged long term bond portfolio had Republicans (with some support from Democrats like Mark Warner) not decided that it was too much of a burden on banks like SVB to be undergo regular checks from the FED.
Were the Bank Bailouts the Result of Rising Wealth Concentration?
YES! but can also be regarded as a by product, or blowback from outrageous policies implemented by bill clijnton.
Trump was the president who signed off on not having required FED “stress tests” on banks the size of Silicon Valley Bank.
Does anyone make pitchforks anymore? And even if so would many know how to use them?
I mean, where is the outrage?
It is seething within every single post about the bailout of SVB, and the ongoing theatrics of this veritable clown show we like to call USA. I think it was yesterday, that a comment (not a post actually) about the potential loss of a family owned dairy farm which generated a lot of feedback. So goes to show, the little people just don’t matter quite as much. The wealthy, elite and donor classes do matter.
I’m thinking go long pitchforks and maybe a steady lumber supply for some, er, chopping devices.
Thank you! I get that there is outrage hereabouts but what about out there, in corporate mediaville. I don’t own a tv so I don’t have any sense about it. In France, Macron raises the retirement age by two years and strikes and protests shut the country down. But here?
I don’t think that most people understood that when statusquObama told the banksters that he was the only thing between them and the pitchforks, that he was saying he was on the banksters side. Maybe I’m wrong about that.
It technically was a bailout of SVB uninsured depositors. The bank is gone unless someone buys it.
There wont be any outrage against the banks.
If outrage occurs, it will be in the form of people against people.
Banker and the rich will always make out like bandits.
The poor are poor for a reason.
The founder of Silicon Valley Bank is outraged. He wants and investigation. Of the FED. Apparently he missed that his former loan officer that he promoted to CEO blundered horribly.
I am from Canada and have difficulty grasping problems elsewhere with banks. We have 6 large banks that dominate banking in a county of 38 million people. They are tightly regulated. They also make high profits due to the lack of competition. Foreign banks are de facto banned (not sure how exactly) although occasionally one makes the error of trying to establish itself here then eventually gives up and sells out to a Canadian bank. Shadow banking which created major problems in the US and Europe in the 2007-8 period was de facto banned by regulation (shadow banks needed the same capital ratios as regular banks).
Just after the 2008 financial crisis Paul Krugman noted that regulation and oligopoly had allowed the 6 Canadian banks to emerge unscathed and that in the US this would amount to 25 large banks. Observing the periodic panics and semi-panics elsewhere in banking I don’t understand what’s wrong with our model. Not saying fees couldn’t be regulated lower or other customer friendly things couldn’t be done, probably via regulation.
I’ve never had trouble with service with either CIBC or TD but I do remember that Yves had a serious problem with a TD branch in New York City half a dozen years ago. As a small shareowner (1000 shares) I wrote the CEO complaining that it was unacceptable to me that a customer should be so badly treated but never got an answer.
Canada — making the world safe for oligopolists since 1867. It’s in our banks, our telcos, our energy sector, our grocery industry … I could go on, but you get the picture.
@eg
Yes, quite so.
Yet I am happy I don’t have to worry about my bank going bust tomorrow because bank management screwed up somewhere in Canada, or worse, the rest of the world where I would have no idea what was going on.
Of course the downside is that our country is largely run for the banks (the Liberals) and the oil and gas industry (the Conservatives). This would bother me more if I saw other western countries actually run for their peoples but I don’t.
“Of course the downside is that our country is largely run for the banks (the Liberals) and the oil and gas industry (the Conservatives).”
That’s the story of the Americas from North to South.
@Mikel
Sadly I agree.
Although for the U.S. I would add the military industrial etc. complex
I question whether Canada’s banks are really all that well run. They dodged 2008, but the gigantic housing bubble will eventually blow up and I suspect that is going to make a mess of the Canadian banks, just as it did in the U.S. before. (Investors who probably took out low-cost debt to buy housing, thereby causing the bubble, are not necessarily going to want to hold underwater properties, and so on.)
It seems these large depositor bailouts are a new step toward a “too big to save” situation. By guaranteeing all deposit with no haircuts, the Fed has signaled they will provide further backstop to risky investment practices in the banking industry. Moody’s has taken notice, fwiw, downgrading the US banking industry a notch. But where does it end? Moral hazard reigns today, and with TBTF CS wobbling, what are the derivative risks there, and everywhere else for that matter. Who knows when the day of reckoning will come. History says nations and governments which become captured by special interests (the 0.1% usually), soon crash admist an inabilty to act other than to benefit those interests. Inevitably there is a conflict between ever growing accumulation of wealth and the health, if not survival of said societies.
Today humans face more stressors than in the past. Climate will contribute to crop failures, resource shortages are already impacting inflation, and war is an ever growing threat to stability.
The greed of the 0.1% will certainly continue, even as it threatens their own assets. Other than eventual collapse, I am not sure I see alternative outcomes?
> But where does it end?
In German it’s called friedhof – freedom yard.
Friedhof literally translated is “peace yard” or “quiet yard”, not “freedom yard”.
Like “graveyard,” maybe?
Well, “Friedhof” means “graveyard”, or “cemetary”. Just like graveyard, it is a compound substantive, literally meaning “peace yard” — because that’s the place where one rests in peace…
I don’t think these failures will not cause banks to take a look at what they are doing. The customers are saved. The employees and stock holders and bond holders are not. Although, having said that, the C-suite is so overly compensated these days that they don’t ever have to work again, so they may not be as disturbed about this as one would hope.
I have long cast a gimlet eye upon the ill effects plutocrats inflict upon democracy — I suppose it shouldn’t surprise me that their outsized heft causes gravitational distortion in other institutions?
I’m no expert but the scenario as I understand it is:
1)Dodd Frank re-regulated the banking industry as little as it could possibly get away with after the Great Recession banking panic.
2) Trump allowed the little regulation of Dodd Frank to be weakened for smaller banks in 2018.
3) Michael Hudson pointed out that banks were allowed to decide which federal agency among several to be their regulating agency. (i.e. the most captured agency)
4) In 2020 the Fed decided that the banks were so well regulated that they reduced the reserve requirement from 10% to 0%.
Is this roughly correct? How much of the recent bank failures is due to the reduced Fed reserve requirement?
2) would have prevented this (and Silicon Valley Bank CEO Greg Becker lobbied for 2) because Silicon Valley Bank had made a foolish bet that interest rates would stay low for over 10 years. The regulation that the Republicans and some Democrats weakened, and Trump signed, was to raise the asset size at which a bank would need to be required to be subject to regular stress tests by the FED.
I think this Bank failure was caused by mismanagement and a concentrated customer base learning of their problems.
To the pernicious effects of wealth accumulation: The small regional bank we patronize was recently bought out by a medium sized regional bank operating out of Atlanta.
First, the monthly fees went up from $5 USD per account to $8 USD per account. Then we started being badgered by the tellers about “signing up for wonderful new services” when we did business at the tellers counter. Then the main branch, previously a wonderful instance of 1960’s Modernist architecture was “remodeled.” Now it is a warren of small offices. The escalator was replaced by plain stairs. All the paintings, mainly regional, previously gracing the walls of the public spaces are now ensconced in the upper management’s private offices. Suddenly, the opening page of the bank’s online portal has a quarter page sized ad for “8 Month CDs. 4.75% APR. Minimum balance: $25,000”
The writing is on the wall. Our previously sedate local bank is now “officially” a ‘Predatory Lending Institution.’ Time to take a serious look at the local Credit Unions. About which, we have seen a mini-wave of consolidation in the Credit Union ranks lately. Any other reports about that trend?
“Gresham’s Law” used to be considered a financial issue. Now it permeates the entire society. The only problem with that is that it tends to continue until full collapse.
Stay safe. Keep Prepping!
Happy hunting on your way to a more contented relation with your financial institution of choice. Smaller banks have been on the firing line, even moreso, following the Dodd-Frank act; I got a front row seat to this activity in the Dallas markets starting about 2011. Bigger is not always better in this case, but a bigger bank can spread the compliance and regulatory costs over a larger total asset base. My front row seat became an exit row in 2012, but such is life. Absent a Federal government bailout, I managed to land on both feet!
I’d encourage a wee effort of research on credit unions. Starting with the website for the NCUA, the national regulator ( admittedly it is possible that knowledge is already in place ). This might serve as a good thread on those open WC afternoons, come to think of it.
“…badgered by the tellers…”
As a former very unwilling badgering teller, if it keeps happening, I would go straight to the branch manager or higher up and tell them you’ll be pulling all your accounts if you get accosted one more time at the teller window. The tellers will quite likely thank you for it.
When I worked for WAMU were were required to do the same and actually had to submit a punchcard or something similar to our managers showing how many people we’d contacted, and if we didn’t meet the minimum requirement, we wouldn’t receive the full monthly bonus payment which was the only thing that made working there doable as the base pay was far from a living wage.
The branch I worked at had the same customers every day and there are only so many times you can ask the same person the same question and expect to get a different answer. When I mentioned this to my manager, he told me that I was a smart enough guy and should be able to figure out what to do in order to get my bonus – basically just go ahead and lie about it.
So if you’d rather not complain and pull your accounts, maybe next time you head up to the teller window, just preemptively tell them to skip the spiel put you down for a half dozen new product contacts. They’ll thank you for that too, and you’ll both get a good laugh out of it.
News I can use! I will institute your subversion plan the next time I go to the bank. Thank you!
On a related note. Two or three years ago, one of the younger tellers I dealt with at the bank suddenly disappeared. As usual, no one knew anything about it. A month or so later, I encountered this person at a local Thrift shop.
“How are you doing?” I enquired.
“Fine,” was the response. “I’m now a manager for this chain. Life is so much better.”
LOL. When I worked for Waldenbooks, we had to solicit email addresses from customers. I quickly learned how to cheat. Every time I got a spam email at home, I copied the address, and submitted it to corporate.
I got a great annual review. But I probably p*ssed off a lot of Nigerian Princes.
Wonderful! The Great Circle Jerk of Life!
By contrast, the 1987 crash, the result of leveraged buyouts producing a stock market bubble, didn’t do lasting damage, and neither did the later leveraged buyout collapse and large-scale workouts o LBO loans
~~~~~~~~~~~~~~~~~~~~~~~
My dad loved, loved, loved the stock market. You could tell what kind of mood he was in if the market was down or vice versa up.
He was the king of a myriad of essentially gambles on the future in puts, pops was.
So my parents are in Hong Kong when the deal goes down in 1987 and he frantically calls me and wants to know the skinny, and truth be said I had tried to ignore stocks as much as possible, completely toten hosen compared to my stock in trade, but I could tell he was beyond nervous with no capability to do anything in the world as it then existed, and what could I discern in LA besides the weekly news magazines, daily newspaper, tv news a few hours a day, or via radio somewhat instantaneously.
The fact is I had no idea what to tell him aside from the same thing 242,299,999 other Americans were getting from precisely the same outlets as me pretty much~
You can panic real quick on the internet, just saying.
Thanks Yves for this insight. I wonder if Powell and the Fed even considered how this would be seen among banking regulators outside the U.S. I wonder if he was even aware of this dimension of the fallout.
Mustn’t “unlimited insurance” be the international standard now? How else will European and other international banks be able to compete with U.S. banks? What would keep rich depositors abroad from moving their deposits to U.S. banks for that free U.S. deposit insurance? The genie is out of the bottle.
I wonder if Powell will need to resign? He seems to be the latest to live up to Cipolla’s five laws of stupidity.
“Mustn’t “unlimited insurance” be the international standard now? How else will European and other international banks be able to compete with U.S. banks? What would keep rich depositors abroad from moving their deposits to U.S. banks for that free U.S. deposit insurance? The genie is out of the bottle.”
My exact question; Why would Joe European Billionaire keep any money in an EU bank?
Won’t this crash the EU banks?
Yes, wealth concentration and basic incompetence in risk management. As has been pointed out here, there are perfectly legal ways to spread out one’s deposits to stay below the FDIC limits, and these are NOT new methods. Not that I will ever have to worry about that particular problem.
What’s more worrying is that these are the oligarchs in charge of our economy.
Hoisted From Comments: Greater Liquidity Produces Instability
Posted on May 7, 2008 by Yves Smith
Below is a provocative line of thought from an anonymous reader. It supports a gut feeling that I have been unable to prove, namely, that lowering of boundaries between markets (ranging from the large number of global macro hedge funds to the large number of retail currency speculators in Japan) is destabilizing. I’ve found the occasional supporting bit of empirical evidence (for instance, Kenneth Rogoff’s and Carmen Reinhart’s recent paper on financial crises, which found that greater financial integration was correlated with crises) but no theories. Conventional economic wisdom would tell you arbitrage is always and ever good (it supposedly improves price formation which leads to better allocation of capital), and inefficiencies are bad. However, complex systems theory provides a very different perspective:
Perhaps a lesson to be learned here is that liquidity acts as an efficient conductor of risk. It doesn’t make risk go away, but moves it more quickly from one investment sector to another.
From a complex systems theory standpoint, this is exactly what you would do if you wanted to take a stable system and destabilize it.
One of the things that helps to enable non-linear behavior in a complex system is promiscuity of information (i.e., feedback loops but in a more generalized sense) across a wide scope of the system.
One way you can attempt to stabilize a complex system through suppressing its non-linear behavior is to divide it up into little boxes and use them to compartmentalize information so signals cannot easily propagate quickly across the entire system.
This principle has been recognized in the design of software systems for several decades now, and is also a design principle recognizable in many other systems both natural and artificial (c.f. biology, architecture) which are very robust with regard to exogenous shocks. Stable systems tend to be built from structural heirarchies which do not share much information across structural boundaries, either laterally or vertically. That is why you don’t die from a heart attack when you stub your toe, your house doesn’t collapse when you break a window, and if your computer crashes it doesn’t take down the entire internet with it.
Glass-Steagall is a good example of this idea put into practice. If you use regulatory firewalls to define distinct investment sectors and impose significant transaction costs at their boundary that will help to reduce the speed and amplitude of signals which will propagate from one sector to another, so a collapse in one of them will be less likely casue severe problems in the others.
It worries me that we’ve torn down most of these barriers in the last several decades in the name of arbitrage, forgetting that the price we paid for them in inefficiency was a form of insurance against the risk of systemic collapse. This is exactly what I would do if I wanted to take a more or less stable, semi-complex system and drive it in the direction of greater non-linearity.
I think this was to some degree inevitable – it is a symptom of the decay and loss of trans-generational memories from our last great systemic shock in the 1930s. I suspect that something like this is bound to happen every 3-4 generations as we unlearn the lessons our grandparents and great-grandparents learned to their cost.
Thanks for this insight. More firewalls are needed to ensure resilience of a complex system. Another metaphor is water-tight compartments to keep big passenger liner afloat after a major hull breach.
All this “deregulation” has made the whole system more brittle. There are positive feedbacks such that risk propagates and amplifies.
Does Congress–which must build more resilience into the financial system–understand what they’ve done over the past several decades, and what they need to do to fix it?
I doubt it. Even if they did, Congress is so dysfunctional it can’t fix anything.
“via rising wealth inequality creating new levels of hot money that can slosh in and out of banks, making many of them fundamentally less stable?”
Getting close there to observations that wealth inequality on steroids is a HUGE driver of inflation.
No, no, no.
Wealthy people do not have a high propensity to spend. They invest or compete for status goods like art.
This inflation is largely the result of supply issues, due to Covid labor shortages, special situations like avian flu producing super high egg prices, and sanctions blowback, plus admitted price gouging by companies.
I’m thinking more of the effects of something like gentrification. Maybe I should just refer to it as that instead of using the word inflation.
While the more well-to-do don’t spend as much as a percentage of their income, their spending could still be the driver of consumption on a level that could contribute to situations like supply chain issues.
One could argue that since basing the economy on finance capitalism as opposed to industrial capitalism then wealth would invest in “Wall St” gentrificaton of rental housing and then jack up rents, or PE buying healthcare/utilities/services and jacking up costs.
My basic understanding of finance capitalism is that if wealth creation is no longer based on creating “widgets”, then wealth creation is based on the financially creative destruction of existing wealth, be that blowing up companies, or fee based extraction from average Americans, or making health care very expensive. Or I suppose, using the Fed to vastly inflate the value of homes, and stocks.
And with monopolization/consolidation, prices can be left higher for a longer period of time.
Which leads to the observation that one of the best tools to use in ‘deflating’ bloated corpses, corporeal or otherwise, is the lowly pitchfork. As any farmer or animal husbandry worker can tell you; pitchforks are also excellent tools to use in carrying out programs of “decrapification.”
In “cleaning house,” Heracles, he thought big. We, not being semi-divine culture heroes, must needs begin small and work up. We must begin by poking at the problems. As has been the case so far, the perfect ‘poking’ tool is, you guessed it, a pitchfork.
O tempore, O anti-mores!
Thanks for this. Yet more privatization of profits and the socialization of loss and risk. Like the offshoring of manufacturing, all good for elite profits and the citizenry can go hang. Cockroach capitalism.
The government code has all these magic numbers that aren’t indexed to inflation. What is $250,000 supposed to represent? How did they come up with it and why isn’t it going up every year? Although it does go up. It started at $5000 in 1935 ($109,795.62 in today’s dollars). Went to $250,000 in 2010.