Patterico's Pontifications

3/15/2023

The Bailout of the Silicon Valley Bank Makes Biden’s Student Debt Forgiveness Totally Cool, Right? [UPDATED x2]

Filed under: General — JVW @ 6:36 am



[guest post by JVW]

UPDATE II – Well, this story just gets more and more fun. From Susan Shelly’s column at the Los Angeles News Group:

In the chaos of the first year of the pandemic emergency, at a time when the Legislature was working remotely, or not at all, Gov. Gavin Newsom had the idea to change financial regulation in California.

Don’t take my word for it. Straight from the horse’s mouth is this “background” from the website of the Department of Financial Protection and Innovation (DFPI):

“In an effort to strengthen consumer financial protections in California, Governor Gavin Newsom proposed an initiative to modernize and revamp the current Department of Business Oversight (DBO), including an increase in staff and authority, to enhance its regulatory scope and become a national model for consumer protections.”

[. . .]

This adds up to a formula for greater political control of financial institutions in California. It means the regulatory terrorism familiar to so many other businesses in the state could now be applied to banks that failed to meet certain goals of “encouraging” innovation or “engaging” identified communities.

At the same time, the new laws opened the opportunity for some banks to curry favor with politicians by funding “innovation” that non-political number-crunchers had already rejected as a bad bet.

[. . .]

In California, banks could face administrative penalties from the regulatory agency run by an appointee of the governor if they fail to meet their obligation to “encourage” innovation and “engage” vulnerable communities.

By coincidence, or maybe not by coincidence, immediately after the DFPI’s new regulatory powers became effective on Jan. 1, 2021, Gov. Newsom asked Silicon Valley Bank to donate to the nonprofit California Partners Fund founded by his wife, Jennifer Siebel Newsom.

The bank didn’t say no.

The first $25,000 payment was made on Jan. 8, 2021. Three more payments of $25,000 each followed before the end of the year.

I’ve written in the past about the brave Mrs. Siebel Newsom, who overcame a childhood of privilege and tony private schools to become a documentary filmmaker who most certainly does not trade on her husband’s power to grant favors in order to feather her own nest. Nosiree. How we suffer these people is mystifying to me.

UPDATE – Oh, lookee here: it turns out that Greasy Governor Gavin Newsom lobbied the White House to bail out SVB, and probably didn’t disclose his own conflict of interest:

California governor Gavin Newsom lobbied the White House to bail out Silicon Valley Bank (SVB) and later celebrated the decision after it was made public, without mentioning that the firm is a backer in at least three wine companies he owns.

The Biden administration “acted swiftly and decisively to protect the American economy and strengthen public confidence in our banking system,” the governor noted in an official statement released on Monday.

“Their actions this weekend have calmed nerves, and had profoundly positive impacts on California,” Newsom added. “California is a pillar of the American economy, and federal leaders did the right thing, ensuring our innovation economy can continue to grow and move forward.”

[. . .]

However, The Intercept revealed Tuesday that the governor failed to note in his official remarks that at least three wineries owned by Newsom – CADE, Odette, and Plumpjack – are listed clients of SVB. Newsom further glossed over his personal banking ties with the now-defunct firm and the fact that his wife, Jennifer Siebel, was the recipient of a $100,000 charitable donation from SVB in 2021.

The potential conflict of interest did not appear to be on Newsom’s mind when the governor’s office acknowledged over the weekend that he had been in touch with the White House and was directly involved in discussions over the failing bank.

“Over the last 48 hours, I have been in touch with the highest levels of leadership at the White House and Treasury. Everyone is working with FDIC to stabilize the situation as quickly as possible, to protect jobs, people’s livelihoods, and the entire innovation ecosystem that has served as a tent pole for our economy,” the governor’s office said in a statement.

Somehow we just knew that a sleazy operative like Newsom would be lurking somewhere behind the scene, didn’t we?

—- Original Post —-

Those who have been following the whole Silicon Valley Bank collapse (two great explanations of what has happened are provided by David Bahnsen and at The Rational Walk, the latter of which is not behind a firewall) know that right now the blame game is going on in earnest. Were the financial issues caused by Trumpian deregulation and the reluctance of Republican Administrations to fully oversee (i.e., meddle in) the banking and financial services industry? Was it a matter of Silicon Valley entrepreneurs who mostly support Democrat politicians and progressive goals taking advantage of the chumminess of crony capitalism and the Valley’s close ties with the Obama/Biden machine? Was the real problem ongoing inflation, an aftershock of the pandemic which has likely been exacerbated by the reckless economic policies of the Biden Administration? No matter the cause, this bank collapse has caused a great deal of angina in the financial industry as high-strung bankers wonder if this is the first falling domino in what could stir bad memories of 2008.

But that won’t stop various halfwits in the media and political world from hot-taking the crisis to their own ridiculous ends. Enter now CNN gasbag John Harwood who rides into battle to score a partisan point:

I’m not going to make the effort to pick apart the mindless inanity of this question since Charlie Cooke has already effortlessly dispatched with it:

[T]here is a general-welfare claim here in a way that simply does not apply to President Biden’s illegal student-loan order — which, if we’re drawing analogies, is akin to the Treasury deciding on a whim to bail out the healthiest banks in the land. The purpose of the federal government’s intervention with Silicon Valley is to prevent a broad-based run on the banks that ends up severely damaging, or even destroying, the economy. The purpose of Biden’s student-loan play is to give money to people who spent a lot of cash on a consumer product that they received in full, and who, for entirely selfish reasons, would now like to have both the product they bought and the money they spent obtaining it.

But the part that Harwood seems to overlook is that it just might be the Biden Administration who is playing politics with this decision. Harwood should be asking a more interesting question: Is the Biden Administration’s willingness to bail out the Silicon Valley Bank an attempt to justify his dumb plan for student loan forgiveness? Can’t you hear the President and his supporters arguing, “How can we possibly make whole the bank’s depositors but not the poor students trying to pay for their education?” There is actually an emerging consensus that saving SVB is a bad idea, with opposition coming from rightists and leftists in one of those fleeting moments of agreement when the two parties’ activist wings unite against the Washington establishment. It’s all for naught anyway, since the Biden Administration has decided to go through with the bailout. In his typically clueless way, the President insists that neither the taxpayer nor the bank’s depositors will bear the burden since the money will come from the Deposit Insurers Fund, a fund built on fees assessed to banks on a quarterly basis whose costs the banks somehow magically absorb and do not pass along to their customers.

Biden fans who try to justify the Treasury Department’s move by comparing this to the TARP bailouts of 2008 should stop and remember that those bailouts were enacted via legislation submitted through Congress and not ordered into existence by an increasingly autocratic Chief Executive. Also, the banks eventually paid back those bailout sums. When the Supreme Court blocks President Biden’s blatantly unconstitutional attempt to unilaterally cancel student loan debt there will naturally be pressure on Congress to “do something,” but I hope the GOP stays resolute and tells them to go pound sand.

– JVW

74 Responses to “The Bailout of the Silicon Valley Bank Makes Biden’s Student Debt Forgiveness Totally Cool, Right? [UPDATED x2]”

  1. They are trying to Cloward-Piven the nation. Only way to get their goals.

    NJRob (19ffc2)

  2. Thanks for this informative post, JVW.

    When the bailout was announced, I was curious whether this decision by Biden sets a precedent for other mid-size banks, and just read this commentary by former FDIC chair Sheila Bair:

    Banking regulators have now decided that the failure of two midsized banks, Silicon Valley Bank and Signature, pose systemic risk, requiring the Federal Deposit Insurance Corporation to pay off their uninsured depositors. At combined assets of $300bn, these two banks represent a minuscule part of the US’s $23tn banking system. Is that system really so fragile that it can’t absorb some small haircut on these banks’ uninsured deposits? If it is as safe and resilient as we’ve been constantly assured by the government, then the regulators’ move sets dangerous expectations for future bailouts. The uninsured depositors of SVB are not a needy group. They are a ‘who’s who’ of leading venture capitalists and their portfolio companies. Financially sophisticated, they apparently missed those prominent disclosures on the bank’s websites and teller windows that FDIC insurance is capped at $250,000. Some start-ups that banked at SVB argued they needed their uninsured deposits to make payroll. But under the FDIC’s normal procedures, they should have received a sizeable dividend this week to help with their cash flow needs.”

    Dana (1225fc)

  3. It’s a political question, and Charlie Cooke draws his analogies with finger paint.

    A better analogy for the student loan bailout is Vinnie the Juice lending money to Joey the Kid to bet with Vinnie’s friend Harry the Horse. The Kid did spend the money, but he got no product. He made a bet and he lost. And Harry thanked Vinnie and said keep it coming.

    nk (88e8b5)

  4. And, yeah, Joey would have been better off if he had used the money to buy a tow truck and go to work, but Harry’s cousin Jimmy the Fix at the DMV would not let him have a license until he was 21. Ignoring the collusion between the academic racket and the government racket is what annoys me the most in this whole student loan debate.

    nk (88e8b5)

  5. The purpose of the federal government’s intervention with Silicon Valley is to prevent a broad-based run on the banks that ends up severely damaging, or even destroying, the economy.

    It’s the stated purpose. Is there a word for when someone gives a reason for something but that reason doesn’t match the actions?

    There is actually an emerging consensus that saving SVB is a bad idea

    SVB wasn’t saved. The VCs using it as a piggy bank were saved.

    The purpose of the federal government’s intervention with Silicon Valley is to prevent a broad-based run on the banks that ends up severely damaging, or even destroying, the economy.

    We’re well into the “making it up as we go” phase of the republic. Notice how no one wastes time talking about the rule of law anymore?

    Is the Biden Administration’s willingness to bail out the Silicon Valley Bank an attempt to justify his dumb plan for student loan forgiveness?

    He better hurry up. There’s a good chance the economy implodes before he can push this through.

    frosty (e56d0a)

  6. The uninsured depositors of SVB are not a needy group. They are a ‘who’s who’ of leading venture capitalists and their portfolio companies.

    Dan McLaughlin made the same point: the people who would be out of money are a bunch of Silicon Valley start-ups. But there’s plenty of VC money in the Valley, so if a startup was halfway promising they would be recapitalized. And the VCs who pushed start-ups into banking with SVB in the first place might be leaned on by the government to not take as much equity when they re-capitalize the companies. The proper scenario would be that VCs lose a bit of money in the venture, the start-ups lose a bit of money in the venture, and the banks are quietly allowed to fail.

    JVW (2700d0)

  7. Let’s just stop right here.

    THIS IS NOT A BAILOUT. At least not of SVB, whose stock is, and will remain, worthless. Nor is it a bailout of the bank’s management, who will — at best — have an opportunity to convince whatever buyer the FDIC can arrange to keep them on (hint: they won’t).

    What it is, is an attempt to prevent panic runs on banks. Fifty years ago, one had to go down to the bank and stand in line to get all your money out. Today, you don’t even have to get out of your pajamas. The SVB panic went viral on Twitter and $45 billion in withdrawal orders hit the bank in a few hours time.

    The concern was that the problem would extend to more banks and the panic would become widespread. In the past financial panics have brought economies low, and the ease at which it can be done now needs some out-of-the-box thinking. Making all the depositors whole ends most people’s concerns and makes this kind of flash mob panic unlikely in the near term. And really, most of them would get most of their money back anyway, just after some time — the bank was not broke, it was just unable to cope with the sudden financial demands.

    Now, most of this problem should be laid at Biden’s doorstep, since it was his insane stimulus stimuli that fueled the runaway inflation that the Fed is trying to stop. It seems that monetary policy is a blunt instrument and has reach a limit for now. It will be up to Congress now to apply fiscal policy to continue the fight.

    Kevin M (1ea396)

  8. Is that system really so fragile that it can’t absorb some small haircut on these banks’ uninsured deposits?

    This is a good question, but it’s the wrong question. The problem is not that the depositors would get some small haircut, but that they would lose access to their money for an extended period of time while government wheels turned at government speed.

    If banks continue to fail anyway, and runs continue to happen, the maybe this new policy needs to be reconsidered, but if they don’t, if panic does not metastasize, then good for the FDIC.

    We don’t need another Lehman Brothers, where ideology trumped reality.

    Kevin M (1ea396)

  9. The real thing that needs discussing is “How do we fight inflation now?”

    If the Fed is forced to let up on its monetary policy for now, who can continue this fight in a way that does not stress the banking system?

    Only two things come to mind: Either the government spends less, or the Congress forces them to. Clawing back unspent stimulus funds from states is one approach. Many states have no clear need for it. Alternatively, Congress can order they do something with it that does not create demand, such as shoring up their pension systems.

    The GOP in Congress can also use this crisis to force deeper spending cuts, including ending wasteful and/or obsolete government programs in their entirety.

    Fiscal policy can be used instead of monetary policy. I wonder though if Congress has willingness to find the needed common ground.

    Kevin M (1ea396)

  10. I see that Leftbots are spreading Harwood’s “gotcha” question throughout the blogosphere.

    Kevin M (1ea396)

  11. If we stipulate that inflation is caused by too much money chasing too few resources, then one part of the solution to inflation is reducing the amount of money floating around.

    Allowing SVB’s large depositors (Roku, Hulu, etc) to contribute their funds to the bonfire seems like a good way to accomplish such reductions.

    Bailing them out leaves excess money still out there chasing “goods”. SVB is accused of over-buying low-interest, safe, Federal Bonds because there weren’t private enterprises worth buying into. They were sitting on un-investable cash. Let it burn.

    Pouncer (761acc)

  12. Imagine a scenario of a bank in Texas with primarily oil investors failing… getting the same treatment.

    Not bloody likely.

    Colonel Haiku (2601c0)

  13. A lot of Chinese start-up money there at SVB and we must make sure our enemy is taken care of.

    Colonel Haiku (2601c0)

  14. The House should immediately pass legislation unwinding the FDIC/Fed/Treasury decision to backstop all deposits, but they won’t.

    Rip Murdock (d2a2a8)

  15. It’s the stated purpose. Is there a word for when someone gives a reason for something but that reason doesn’t match the actions?

    I suggest the word “ostensibly.”

    felipe (77b190)

  16. List of SVB depositors.

    Rip Murdock (d2a2a8)

  17. As it turns out, SVB was a massive donor to Black Lives Matter and other social justice causes, to the tune of nearly $74 million dollars. $73,450,000 to be more exact.

    The figure comes from an extensive report dropped by the Claremont Institute on Tuesday. The report details $82 billion dollars in social justice/BLM investments by major American companies. SVB stands out as one of the larger donors, next to big donors like Apple ($100 million) and Comcast ($165 million). While at the top of the donation pool, those contributors do pale in comparison to donors like Blackrock ($810 million) and Citigroup ($1.1 billion). However, the group did pledge on their website to provide in total up to $11 billion dollars by 2026 for Diversity, Equity and Inclusion (DEI) programs and racial justice causes.

    SVB executives explained on their website the turbulent racial atmosphere following the George Floyd killing and protests prompted them to expand “opportunities for dialogue,” a calling that doesn’t seem too have much concrete investment return, but ended up taking $74 million dollars out of bank coffers anyway.“

    https://redstate.com/kiradavis/2023/03/14/silicon-valley-bank-spent-74-million-on-black-lives-matter-and-social-justice-causes-n716419

    Colonel Haiku (2601c0)

  18. It should be up to depositors to “know their banker” before depositing amounts that exceed the FDIC limits (which really should be ratcheted down anyway).

    Rip Murdock (d2a2a8)

  19. UPDATE – Oh, lookee here: it turns out that Greasy Governor Gavin Newsom lobbied the White House to bail out SVB, and probably didn’t disclose his own conflict of interest:

    California governor Gavin Newsom lobbied the White House to bail out Silicon Valley Bank (SVB) and later celebrated the decision after it was made public, without mentioning that the firm is a backer in at least three wine companies he owns.

    The Biden administration “acted swiftly and decisively to protect the American economy and strengthen public confidence in our banking system,” the governor noted in an official statement released on Monday.

    “Their actions this weekend have calmed nerves, and had profoundly positive impacts on California,” Newsom added. “California is a pillar of the American economy, and federal leaders did the right thing, ensuring our innovation economy can continue to grow and move forward.”

    [. . .]

    However, The Intercept revealed Tuesday that the governor failed to note in his official remarks that at least three wineries owned by Newsom – CADE, Odette, and Plumpjack – are listed clients of SVB. Newsom further glossed over his personal banking ties with the now-defunct firm and the fact that his wife, Jennifer Siebel, was the recipient of a $100,000 charitable donation from SVB in 2021.

    The potential conflict of interest did not appear to be on Newsom’s mind when the governor’s office acknowledged over the weekend that he had been in touch with the White House and was directly involved in discussions over the failing bank.

    “Over the last 48 hours, I have been in touch with the highest levels of leadership at the White House and Treasury. Everyone is working with FDIC to stabilize the situation as quickly as possible, to protect jobs, people’s livelihoods, and the entire innovation ecosystem that has served as a tent pole for our economy,” the governor’s office said in a statement.

    Somehow we just knew that a sleazy operative like Newsom would be lurking somewhere behind the scene, didn’t we?

    JVW (4a17a4)

  20. Everybody wins even in a failure.

    Rip Murdock (d2a2a8)

  21. Let’s just stop right here.

    THIS IS NOT A BAILOUT. At least not of SVB, whose stock is, and will remain, worthless. Nor is it a bailout of the bank’s management, who will — at best — have an opportunity to convince whatever buyer the FDIC can arrange to keep them on (hint: they won’t).

    As frosty, Dana, and I have mentioned in the comments, it’s indeed not a bailout of the bank. But it’s damn sure a bailout of the tech start-ups, who now won’t suffer at all for the stupid decision to keep all of their funds in a bank that was only FDIC insured for up to $250k per loss, and it’s damn sure a bailout of the venture capitalists who apparently encouraged them to use SVB as their only bank. And of course neither of them were monitoring what was going on at SVB, or else they might have seen that the bank was walking a tightrope. Why do the Silicon Valley bros deserve this sort of largesse from the taxpayer?

    JVW (398f23)

  22. The main reason to oppose “bailouts” is “moral hazard.” But moral hazard does not apply to SVB’s depositors, as they had little control over the bank’s banking decisions. The people who did — the stockholders, directors and management — were not saved by this bailout. In fact the bailout ended any hopes they might have of recovery.

    Now, to those that insist that “the customers should have recognized the danger and pulled their money out”, well they did, didn’t they? Assuming they were fast enough.

    Kevin M (1ea396)

  23. Imagine a scenario of a bank in Texas with primarily oil investors failing… getting the same treatment.

    I knew that the Trumpists would latch onto this kind of imaginary whaddabout. Banks failing are banks failing and they are all interconnected. This is like saying, after a Pinto gas tank explodes in California, that the feds would be slow to respond if it was a Pinto gas tank exploding in Texas.

    IOW, BS.

    Kevin M (1ea396)

  24. One of the most repulsive things about some commenters is the degree to which their entire worldview is seen through partisan glasses.

    Kevin M (1ea396)

  25. The House should immediately pass legislation unwinding the FDIC/Fed/Treasury decision to backstop all deposits, but they won’t.

    They won’t for 3 reasons:

    1. It’s stupid
    2. It’s actively harmful.
    3. Despite 1 & 2, the Senate won’t pass it and Biden won’t sign it.

    Kevin M (1ea396)

  26. 3. Despite 1 & 2, the Senate won’t pass it and Biden won’t sign it.

    That hasn’t stopped the current House from passing legislation on other issues.

    Rip Murdock (d2a2a8)

  27. As frosty, Dana, and I have mentioned in the comments, it’s indeed not a bailout of the bank. But it’s damn sure a bailout of the tech start-ups, who now won’t suffer at all for the stupid decision to keep all of their funds in a bank that was only FDIC insured for up to $250k per loss, and it’s damn sure a bailout of the venture capitalists who apparently encouraged them to use SVB as their only bank.

    It’s not really even a bailout of them, since any liquidation of the bank would have got them most of their money back anyway. This wasn’t Bernie Madhoff’s bank — the money was invested in perfectly legitimate and saleable securities. It’s just that the government made decisions that reduced the value of those securities, weakening the bank. The customers would ahve gotten about 90% of their money, over time.

    The reason it was done was to prevent runs. You suggest that they should have pulled their money out. Well they did, didn’t they — at computer speed — and THAT was what forced the issue. The bank had 15% cash on hand, as required by the FDIC, but customers wanted 20% and more last Thursday morning. Do this to BofA and it will fold, too.

    Tell me, if it’s the customer’s fault and they should deserve punishment, what could they have done that they did not do last week? Then tell me how runs on banks are healthy.

    Kevin M (1ea396)

  28. Let’s just stop right here.

    THIS IS NOT A BAILOUT. At least not of SVB

    Off to a good start but it is a bailout of a bunch of VCs who couldn’t be bothered to manage cash because they where working inside deals through SVB.

    What it is, is an attempt to prevent panic runs on banks.

    This is the talking point pushed by the VCs. Basically a bunch of VCs are saying that we’ve got to save them or everything crashes. Whether this is true is debatable.

    And really, most of them would get most of their money back anyway, just after some time — the bank was not broke, it was just unable to cope with the sudden financial demands.

    This is also questionable. The run didn’t appear out of nowhere. The run started because the bank announced they were underwater and needed to raise a lot of money, ie they were broke. Pretending they weren’t is just a version of telling the landlady you’ll have the rent by next Tuesday before you jump out of the back window with your stuff.

    This idea that this was to stop runs on other banks really is the oddest part of this. Paying above the FDIC limit to SVB depositors will likely deplete the FDIC insurance fund, or it should make people worried that it will. If you’re paying attention to that and you’ve got cash sitting in a bank the logical conclusion would be to hold that as t-bills, ie move your money out of the bank leaving the minimum amount. Or you move your cash to one of the big four “to big to fail” banks. Both of these situations represent runs on regional banks after the FDIC fund has been depleted. In other words the SVB situation should make everyone worried that the FDIC fund won’t be able to cover $250k deposits for any near term failures.

    The alternative would have been to pay the SVB up to $250k and then they take a loss. This would cause people to move money but it would be more likely that they would diversify across banks. Some companies might develop better cash management practices. A few banks might fail in that reorganization but those could be backstopped if the message is diversification.

    But hey, at least a bunch of VCs get to keep sleeping on mounds of cash and we’ll worry about other banks later right? And a bunch of startups you’ve probably never heard of get to keep burning money. Or maybe they don’t. I wouldn’t be surprised if after all this talk about how this is about startups making payroll for the working man these VCs start pulling this cash back to reduce risk and those working joes don’t get to keep making apps for consigere services for boss moms too busy to plan their kids birthdays (yes, this was a thread on twitter and it was hilarious).

    frosty (48bb1c)

  29. That hasn’t stopped the current House from passing legislation on other issues.

    Those have (mostly) been less pernicious.

    Kevin M (1ea396)

  30. Good op-ed in WSJ by Nathan Myhrvold (original CTO at Microsoft and founder of Intellectual Ventures)

    The fundamental business model of banking is that the bank accepts money from depositors and then invests almost all of it. Banking laws state that a certain amount of depositors’ money, called reserve requirements—typically around 15% of the total—must be kept for redeeming customer accounts. The remaining 85% gets loaned out, often in long-term illiquid loans. If customers want to withdraw more than the bank has on reserves in a short time period, a death spiral may ensue.

    At that point, the bank has essentially two options. Option one is to raise money by selling investments. Selling investments at a loss, however, could push the bank closer to the point where it can’t honor customers’ withdrawals. Other clients who catch wind of this will understandably start to worry. Option two is to try to raise enough money to bridge its cash needs by selling equity in the bank itself. But doing that requires telling prospective investors details about the bank’s situation, which might paint a picture of an institution in trouble

    Silicon Valley Bank did both of these things. It sold $21 billion in long-term bonds, reportedly at a $1.8 billion loss. That sounds like a lot of money, but it was just under 1% of the approximately $209 billion it had in assets. SVB also attempted to raise $2.5 billion in equity investment to help cover that loss—and its executives appealed to the venture-capital community, representing a huge chunk of its customer base, for support. That turned out about as well as a wounded zebra appealing to the kindness of the local hyena clan. The result was a run on the bank.

    Kevin M (1ea396)

  31. The proper thing for the GOP to do about this, is to USE it to force big spending cuts in the current year’s budget as part of the debt limit increase. A US debt default now would spark a market collapse, and the need for spending cuts to reduce inflation (the Fed’s hands are tied for a while) is obvious.

    Kevin M (1ea396)

  32. This is the talking point pushed by the VCs. Basically a bunch of VCs are saying that we’ve got to save them or everything crashes. Whether this is true is debatable.

    OK, debate it. Preferably without bringing partisan dislikes into it. You’ve said this is a lie several times, but not one word of proof, just “I hate these people” as your argument.

    Kevin M (1ea396)

  33. Now, to those that insist that “the customers should have recognized the danger and pulled their money out”, well they did, didn’t they? Assuming they were fast enough.

    Despite the stereotype of bootstrapping nerds in garages, making up the rules as they go along, most Silicon Valley start-ups these days have experienced CFOs who have been to business school and who have worked in finance for banks and at other start-ups. So my point is that they should have seen the warning signs from the very beginning: “Gee, I’m going to put my whole $30 million Series A funding into one bank which will only guarantee $250k of it. Is that really a great idea?” And even if they proceeded to go forward with that, the fact that they then didn’t take a very keen interest in how the bank was managing their money and the degree to which it was not hedging its rate risk, the degree to which it was over-leveraged with demand deposits, the fact that the banks customers were grossly over-represented by one sector of the economy — all of this is the kind of thing that CFOs and VCs should have been paying attention to. And add in the fact that the VCs were complicit in the run on SVB once it became clear that the bank was faltering is yet another reason why it’s ridiculous to make them whole in this mess.

    JVW (71e8f0)

  34. A US debt default now would spark a market collapse…..

    It would of happened anyway without the bank failures. The GOP believes it can prioritize itself (paying the Chinese holders of US debt) out of a crisis. Good luck.

    Rip Murdock (d2a2a8)

  35. The proper thing for the GOP to do about this, is to USE it to force big spending cuts in the current year’s budget as part of the debt limit increase.

    Now there’s an interesting idea.

    JVW (c20b43)

  36. This is also questionable. The run didn’t appear out of nowhere. The run started because the bank announced they were underwater and needed to raise a lot of money, ie they were broke. Pretending they weren’t is just a version of telling the landlady you’ll have the rent by next Tuesday before you jump out of the back window with your stuff.

    Banks, believe it or not, do not hold all their money in the vault. Except for their required reserve (and the demands last Thursday exceeded that), they put it into loans and investments, most of which are ill-liquid.

    Because withdrawals had been increasing, they were going to sell some of these investments, and they were going to sell some stock (and bargain rates) to raise capital to meet expected losses on these asset sales. They never got the chance, as their customers panicked and, in the space of a few hours demanded over 20% of deposits be paid out.

    Just the thought of this happening elsewhere — and many banks have been stressed by this rapid interest rate hike after decades of low rates — should be enough to stop people from claiming letting banks fail is a good idea.

    Sadly, it isn’t.

    Kevin M (1ea396)

  37. most Silicon Valley start-ups these days have experienced CFOs who have been to business school

    AIUI, the VCs required them to use SVB for several reasons.

    Kevin M (1ea396)

  38. Sorry Kevin, but no dice.

    There were investors willing to buy out SVB. They just weren’t Biden’s preferred choices so he nationalized the bank.

    NJRob (4d32b1)

  39. The main reason to oppose “bailouts” is “moral hazard.” But moral hazard does not apply to SVB’s depositors, as they had little control over the bank’s banking decisions. The people who did — the stockholders, directors and management — were not saved by this bailout. In fact the bailout ended any hopes they might have of recovery.

    Now, to those that insist that “the customers should have recognized the danger and pulled their money out”, well they did, didn’t they? Assuming they were fast enough.

    Kevin M (1ea396) — 3/15/2023 @ 10:41 am

    I’m going to give you the benefit of the doubt on this one and assume you don’t know that in the case of SVB the depositors, the stockholders, the executives, and the people who lobbied for relaxed regulations are a Venn diagram with very little non-overlapping space. This is not a completely independent group of people.

    The idea that the biggest names in the VC field with combined assets in this bank of billions had “little control over the bank’s decisions” might be a theme you want to reconsider. Those same people had the ability to get their deposits covered over the weekend and have POTUS make the announcement Monday.

    frosty (48bb1c)

  40. There were investors willing to buy out SVB.

    Who?

    Rip Murdock (d2a2a8)


  41. There were investors willing to buy out SVB. They just weren’t Biden’s preferred choices so he nationalized the bank.

    Proof? Or just something that you heard on Fox?

    Kevin M (1ea396)

  42. OK, debate it. Preferably without bringing partisan dislikes into it. You’ve said this is a lie several times, but not one word of proof, just “I hate these people” as your argument.

    Kevin M (1ea396) — 3/15/2023 @ 11:04 am

    I did. In that comment you quoted from. Covering 100% of the deposits at SVB increases the risk of future default because they’ve sent the message that the limit is no longer $250k and it increases the chances that the FDIC fund won’t be able to cover up to $250k in the near term because they’ve depleted the fund.

    What they’ve done doesn’t decrease the chance of future runs. If you are sitting on cash you can’t trust that the FDIC fund will be able to cover you in the near term and you should move that money into, at the very least, something like t-bills.

    frosty (48bb1c)

  43. If the president of SVB has not been so pig-headedly transparent, he probably would have pulled off the refi. But he let the news out BEFORE he had any investors signed up, and they all took one look at the immediate run on the bank and bailed.

    Kevin M (1ea396)

  44. What they’ve done doesn’t decrease the chance of future runs. If you are sitting on cash you can’t trust that the FDIC fund will be able to cover you in the near term and you should move that money into, at the very least, something like t-bills.

    Let me get this straight: The fact that the government WILL cover more than $250K increases the chance of runs because maybe the government won’t cover future failures?

    I’m pretty sure the average person’s logic is less convoluted. This worse than circular, it’s Mobius circular. The fact that SVB was IN T-bills doesn’t seem to faze you.

    Kevin M (1ea396)

  45. Banks, believe it or not, do not hold all their money in the vault. Except for their required reserve (and the demands last Thursday exceeded that), they put it into loans and investments, most of which are ill-liquid.

    Pretending people who disagree with you don’t know how banks work isn’t going to work.

    Because withdrawals had been increasing, they were going to sell some of these investments, and they were going to sell some stock (and bargain rates) to raise capital to meet expected losses on these asset sales. They never got the chance, as their customers panicked and, in the space of a few hours demanded over 20% of deposits be paid out.

    This is simply not true. Your sequence of events is backwards. They didn’t decide to sell assets in the face of increased withdrawals. They announced they needed funding because the value of their assets had dropped. Investors and depositors both concluded that they wouldn’t get the funding they needed. This triggered the run. No one wanted to have money parked in a bank that was clearly about to go into receivership.

    Just the thought of this happening elsewhere — and many banks have been stressed by this rapid interest rate hike after decades of low rates — should be enough to stop people from claiming letting banks fail is a good idea.

    Sadly, it isn’t.

    Kevin M (1ea396) — 3/15/2023 @ 11:14 am

    Having your cake and eating it is a good trick. Our chance to fix this problem passed us by a long time ago. It’s not a question of letting banks fail at this point.

    frosty (48bb1c)

  46. JVW: The proper scenario would be that VCs lose a bit of money in the venture, the start-ups lose a bit of money in the venture, and the banks are quietly allowed to fail
    KevinM THIS IS NOT A BAILOUT. At least not of SVB, whose stock is, and will remain, worthless

    Given the Biden family nest feathering, I’m wondering why some of Bidens biggest bundlers had to be bailed out. I am against both the “bailout” of the two Banks, and the Student loans even though it is apples and oranges. The Bank action arbitrarily circumvents rules and laws in place using the “too big to fail” excuse. Biden is claiming the bank bailout will use (cost?) no taxpayer money but Biden is a serial liar. My question would be “How so?” I think I know how they might try to do it. The banks pay for FDIC insurance, so technically the bank paid for that and then passed the fees on to the consumer/taxpayer in some fashion; fair enough, value received. What about the other, larger portion of the loss? That is where I see smoke and mirrors for the taxpayer.

    This bails out a bunch of Biden donors VC money. VC invested money was in SVB accounts of start ups they’d funded. The VC’s were looking at their suddenly, soon to be, cash strapped start ups and in order to protect their investment into the start ups, they’d have a few options. Do nothing, take the losses. Do nothing and let some vulture capital in that dilutes the hell out of their investment. Throw more of their own money in and dilute their own investment. Or ding ding, as Democrats who fed 100’s of millions to Democrat PAC’s and bundled huge amounts for Biden and have direct access to DNC intermediaries, Senators and maybe Joe himself, get on the phone and tell him what they want, and how to do it.

    Here is a basic take on what happened from PBS:

    The longer answer begins during in the pandemic, when SVB and many other banks were raking in more deposits than they could lend out to borrowers. In 2021, deposits at SVB doubled.

    But they had to do something with all that money. So, what they could not lend out, they invested in ultra-safe U.S. Treasury securities. The problem is the rapid increase in interest rates in 2022 and 2023 caused the value of these securities to plunge. A characteristic of bonds and similar securities is that when yields or interest rates go up, prices go down, and vice versa.

    The bank recently said it took a US$1.8 billion hit on the sale of some of those securities and they were unable to raise capital to offset the loss as their stock began dropping. That prompted prominent venture capital firms to advise the companies they invest in to pull their business from Silicon Valley Bank. This had a snowball effect that led a growing number of SVB depositors to withdraw their money too.

    Within that arc of a story, SVB still holds bonds that are underwater. Those bonds need to be sold at a loss to maintain funds available to depositors and to fund bank operations, so bond losses should continue. Where is the money going to come from to make that bond problem and the $1.8 billion loss go away? Maybe private money, but they won’t get involved unless their investment is guaranteed by the US government because it currently pencils out as a loser, or some type of government investment/equity stake that will magically be profitable.

    My last thought on this is that SVB and Signature are not likely to be the only banks that have bond problems caused by massive pandemic cash inflows put into bonds that went underwater due to interest rates. Biden and a whole host of Democrats won’t get re-elected if they bleep up on inflation, high fuel prices and bank failures so they will gladly throw taxpayer money into it to stay in power. They’ll lie and paint it as Trumps fault, unforeseeable etcetera and ultimately will be portrayed as having taken “brave and necessary actions”

    steveg (0d86e3)

  47. “Businessmen, they drink my wine, plowmen dig my earth
    None of them along the line know what any of it is worth”

    Colonel Haiku (2601c0)

  48. Let me get this straight: The fact that the government WILL cover more than $250K increases the chance of runs because maybe the government won’t cover future failures?

    I’m pretty sure the average person’s logic is less convoluted. This worse than circular, it’s Mobius circular. The fact that SVB was IN T-bills doesn’t seem to faze you.

    Kevin M (1ea396) — 3/15/2023 @ 11:35 am

    You seem to be fixated on the run being the problem. The run is a symptom.

    When the next bank fails and there’s no money in the FDIC insurance fund because we overpaid SVB depositors what happens?

    If unrealized losses are systemic paying SVB depositors 100% doesn’t do anything to fix that. If unrealized losses aren’t systemic there’s no risk of runs on other banks and SVB depositors don’t need to be paid above the limit to prevent them.

    But paying 100% of the deposits at SVB does create a moral hazard. Claiming it doesn’t with respect to SVB depositors specifically and therefore, by implication, depositors generally and banks generally doesn’t hold up.

    SVB’s problem wasn’t t-bills it was long term bonds and the question of whether t-bills would have saved SVB as opposed to it being something that might save individual cash holders from issues at their bank are two very different things.

    frosty (48bb1c)

  49. My last thought on this is that SVB and Signature are not likely to be the only banks that have bond problems caused by massive pandemic cash inflows put into bonds that went underwater due to interest rates. Biden and a whole host of Democrats won’t get re-elected if they bleep up on inflation, high fuel prices and bank failures so they will gladly throw taxpayer money into it to stay in power. They’ll lie and paint it as Trumps fault, unforeseeable etcetera and ultimately will be portrayed as having taken “brave and necessary actions”

    steveg (0d86e3) — 3/15/2023 @ 11:50 am

    The FDIC estimates that US banks are sitting on $600 billion in unrealized losses.

    frosty (48bb1c)

  50. The responsible parties are those that lowered interest rates to zero and spent a mountain of borrowed money, using COVID and lockdowns as their excuses.

    With inflation, unsustainable green schemes, fiduciary responsibilities given much less importance than reconfiguring society/resolving social issues, this result was wholly predictable.

    Colonel Haiku (2601c0)

  51. If the president of SVB has not been so pig-headedly transparent, he probably would have pulled off the refi. But he let the news out BEFORE he had any investors signed up, and they all took one look at the immediate run on the bank and bailed.

    Kevin M (1ea396) — 3/15/2023 @ 11:31 am

    He let the news out to the investors he was trying to sign up. That’s what triggered the run.

    Being less transparent and more sleazy still needs a plan that had a chance of working.

    frosty (48bb1c)

  52. Colonel Haiku (2601c0) — 3/15/2023 @ 12:16 pm

    The truth on this one is going to be painful for everyone

    frosty (48bb1c)

  53. You know what the difference is between the management of SVB and the management of the DoD?

    Nothing.

    DCSCA (e73b36)

  54. 53… yes, it is. I have a few faves that will hopefully suffer a scalping rather than a haircut.

    Colonel Haiku (2601c0)

  55. Were the financial issues caused by Trumpian deregulation and the reluctance of Republican Administrations to fully oversee (i.e., meddle in) the banking and financial services industry?

    All that the 2018 bill did was place SVB in the same category as smaller banks.

    Supervision was by the San Francisco Fed on which the CEO of SVB was a member of the board.

    Was it a matter of Silicon Valley entrepreneurs who mostly support Democrat politicians and progressive goals taking advantage of the chumminess of crony capitalism and the Valley’s close ties with the Obama/Biden machine?

    That helped get some help, but it didn’t cause the problem, and the bank itself is out of business. It’s its depositors, who probably got higher interest, who are OK.

    Was the real problem ongoing inflation,

    No. It was the decision of the Federal Reserve Board to fight inflation by raising interestrates that was the cause.

    an aftershock of the pandemic which has likely been exacerbated by the reckless economic policies of the Biden Administration?

    The inflation affected the entre world except maybe in Japan ehere they are keeping interest rates low.

    Sammy Finkelman (02a146)

  56. There is no regulation that would prevent bank runs.

    Sammy Finkelman (1d215a)

  57. The secret worry is that closing any bank for one day, even if depositors get their money, would cause bank runs.

    Sammy Finkelman (1d215a)

  58. Even the Swiss aren’t adverse to a government bailout.

    Rip Murdock (d2a2a8)

  59. Even the Swiss aren’t adverse to a government bailout.

    Yeah, it turns out that banking is kind of important to the Swiss economy. That and chocolate. Who knew?

    JVW (f4a5ea)

  60. @57 Give it time. We’ll see what these new “reforms” I keep hearing about are all about

    frosty (651f30)

  61. Wow, that’s some update regarding Newsom’s involvement.

    Dana (1225fc)

  62. Wow, that’s some update regarding Newsom’s involvement.

    Dana (1225fc) — 3/15/2023 @ 4:21 pm

    So far, everyone I’ve heard make the “100% depositor bailout or the whole system falls” argument for SVB had a financial interest. It’s be a reliable indicator. It’s almost as if they were all on the same conference call and got the same talking points.

    frosty (3207f6)

  63. They wouldn’t do that, frosty! It’s only Trump and Republicans that ruin life in America for everyone.

    Colonel Haiku (2601c0)

  64. Shards of Silicon Valley Bank Are for Sale, but No One Is Buying Yet

    Five days after seizing control of Silicon Valley Bank, federal regulators were still in the process of auctioning off its remaining parts, but no single buyer appeared willing to take on everything.
    ……..
    Before SVB collapsed, it made a slew of loans to technology companies, venture capitalists and wealthy individuals — debt that should still be seen as valuable.

    It also held stakes in venture capital firms and venture-backed companies and operated a fledgling investment bank of its own. Despite the market tumult since the bank’s collapse, those investments could collect a tidy sum, if the F.D.I.C. can find buyers, and defray the cost of paying out depositors.
    ………
    After SVB’s collapse, JPMorgan and Bank of America received new entreaties to take on pieces of the bank’s loans and investments, but stood pat. Among their reasons: JPMorgan’s chief executive, Jamie Dimon, has been outspoken about harboring difficult memories of the bank’s last major intervention in a rival’s fall — its 2008 government-orchestrated takeover of Washington Mutual. That went so poorly that JPMorgan later sued the F.D.I.C. for unpaid bills, litigation that was eventually settled.

    Bank of America, too, is so much larger than SVB — it has nearly $2 trillion in deposits, versus under $200 billion for SVB — that it decided the bank wasn’t worth taking on, a person familiar with the decision said.

    Goldman Sachs, still grappling with the aftermath of its own misadventures in consumer banking, has also thus far passed on making an offer…….
    ………
    (SVB’s) British subsidiary, a tiny part of the bank’s operations, was sold on Monday to HSBC for one British pound.
    ……….

    Rip Murdock (d2a2a8)

  65. Wow, that’s some update regarding Newsom’s involvement.

    The formal excuse coming from Sacramento is that Newsom’s assets are held in a blind trust, and therefore he had no idea of SVB’s involvement in his wineries. But of course Newsom had been dealing with SVB apparently since his entrepreneurial days (if one can characterize raising money from your buddies in the Getty Family as entrepreneurship) so there can’t be any way that he didn’t know that his companies still had accounts there. He’s the worst sort of liar.

    JVW (edc32b)

  66. UPDATE II – Well, this story just gets more and more fun. From Susan Shelly’s column at the Los Angeles News Group:

    In the chaos of the first year of the pandemic emergency, at a time when the Legislature was working remotely, or not at all, Gov. Gavin Newsom had the idea to change financial regulation in California.

    Don’t take my word for it. Straight from the horse’s mouth is this “background” from the website of the Department of Financial Protection and Innovation (DFPI):

    “In an effort to strengthen consumer financial protections in California, Governor Gavin Newsom proposed an initiative to modernize and revamp the current Department of Business Oversight (DBO), including an increase in staff and authority, to enhance its regulatory scope and become a national model for consumer protections.”

    [. . .]

    This adds up to a formula for greater political control of financial institutions in California. It means the regulatory terrorism familiar to so many other businesses in the state could now be applied to banks that failed to meet certain goals of “encouraging” innovation or “engaging” identified communities.

    At the same time, the new laws opened the opportunity for some banks to curry favor with politicians by funding “innovation” that non-political number-crunchers had already rejected as a bad bet.

    [. . .]

    In California, banks could face administrative penalties from the regulatory agency run by an appointee of the governor if they fail to meet their obligation to “encourage” innovation and “engage” vulnerable communities.

    By coincidence, or maybe not by coincidence, immediately after the DFPI’s new regulatory powers became effective on Jan. 1, 2021, Gov. Newsom asked Silicon Valley Bank to donate to the nonprofit California Partners Fund founded by his wife, Jennifer Siebel Newsom.

    The bank didn’t say no.

    The first $25,000 payment was made on Jan. 8, 2021. Three more payments of $25,000 each followed before the end of the year.

    I’ve written in the past about the brave Mrs. Siebel Newsom, who overcame a childhood of privilege and tony private schools to become a documentary filmmaker and most certainly does not trade on her husband’s power to grant favors in order to feather her own nest. Nosiree. How we suffer these people is mystifying to me.

    JVW (0b0cf3)

  67. Sh*tty Fed policies, printing trillions of dollars and mindless spending have all helped to create the worst inflation in several decades. The chickens are finally coming home to roost and this will continue for the foreseeable future.

    Colonel Haiku (2601c0)

  68. Pretending people who disagree with you don’t know how banks work isn’t going to work.

    Well, then stop pretending you don’t know how banks work.

    Kevin M (1ea396)

  69. You seem to be fixated on the run being the problem. The run is a symptom.

    No, it’s not.

    Kevin M (1ea396)

  70. Well, then stop pretending you don’t know how banks work.

    Kevin M (1ea396) — 3/15/2023 @ 7:40 pm

    Did/do you have a financial interest in SVB?

    So far the only people I’ve seen driving this “run” narrative as hard as you are have all had an interest in SVB and I’m wondering if you are the exception?

    frosty (3207f6)

  71. You seem to be fixated on the run being the problem. The run is a symptom.

    No, it’s not.

    Kevin M (1ea396) — 3/15/2023 @ 7:41 pm

    What do you think caused the run on SVB? Do you think it was an irrational response to SVB being underwater? Do you think it did not have a cause?

    frosty (3207f6)

  72. @64 I’m expecting the bank run crew to propose limits on bank transfers and withdrawals soon. Well, at least for the banks they’re not using.

    frosty (3207f6)

  73. SVB collapse: Moody’s flags six other banks with concerning credit ratings
    …………
    Following (the SVB) collapse, Moody’s placed First Republic Bank (FRC), Zions (ZION), Western Alliance (WAL), Comerica (CMA), UMB Financial (UMBF) and Intrust Financial on review, meaning the banks are now perceived as more risky investments by lenders.

    “Today’s rating action reflects First Republic Bank’s high reliance on more confidence sensitive uninsured deposit funding, its high amount of unrealized losses in its available-for-sale and held-to-maturity securities portfolios, as well as a low level of capitalization relative to peers,” the firm said of the First Republic Bank rating.

    “If it were to face higher-than-anticipated deposit outflows and liquidity backstops proved insufficient, the bank could need to sell assets, thus crystallizing unrealized losses,” Moody’s said of First Republic.
    ………….

    Rip Murdock (3eea61)


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