Wednesday, March 15, 2023

Ex-FDIC Chief: Haircuts Instead of Bailouts for Banks

 Former FDIC Chief Sheila Bair slammed the bailouts for Silicon Valley and Signature Banks on the pages of the Financial Times this week: 

Preventing “systemic risk” was repeatedly used as a rationale for bailing out Wall Street during the 2008 financial crisis. The 2010 Dodd-Frank Act was supposed to have fixed all of that by strengthening regulation and banning government bailouts. Yet, 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..... Rest of essay.

Ms. Bair is right.  Why should Roku be made whole because it was dumb enough to park half a billion dollars at one bank?  Why should we bail out SVB when it was dumb enough to have 60% of its portfolio in bonds while the average bank only has 25%? 

Yeah, yeah, I know.  There is no bailout.  The shareholders are wiped out and everyone loses their jobs, blah, blah, blah.  Make no mistake, this is a bailout.  The financial aid will require the banks to pay more fees.  Hmmm..... do you think the banks are going to just eat those higher fees? Nope.  They will just pass them on to me, you, and everyone else who uses a bank.  


Anonymous said...

"Too big to fail." Translation: These banks are huge donors to dem PACs.

Anonymous said...

I think we now who exactly is the repetitive 'haircut guy' on all the PERS threads.

Anonymous said...

2005 Bankruptcy Abuse Prevention and Consumer Protection Act...derivative claims have "super-priority" over all other claims, secured and unsecured, insured and uninsured, which in English means the derivative counter-party creditors can seize all the money in your checking account, IRA, CDs, savings accounts...and you'll just have to get over's "the law". Three guesses as to why this law was put into place. However, according to the World Economic Forum, you'll be much happier when you own nothing.

Anonymous said...

Our government learned a long time ago to keep the cash flowing no matter the costs.

It's the best way to keep the citizenry in line and committed to you.

Anonymous said...

In 2015, when SVB was approaching the threshold ($50B) for “stress tests” as a “systemically important” asset under Dodd-Frank legislation after the 2008 financial fiasco the CEO at the time, Gregg Becker, and others lobbied to have the limits for stress tests raised, but little progress was made. It wasn’t until 2018 that Congress increased the limit five-fold to $250B. SVB is under this threshold. These loosened restrictions are a contributor to the failure, though the greatest may have been the folks at Theil’s Founders Fund who advised their clients to withdraw their funds, with the same effect as shouting “fire” in a crowded theater, causing a run on the bank. Over $40B was withdrawn in twenty four hours and the stock plummeted as well. Failed that stress test! Thanks Mr. Theil!

Anonymous said...

We aren’t in any better shape than China who recently suffered several bank runs and collapses. The difference between China and the USSR is that the Yuan Renminbi has become a global reserve currency. This is a very special status that the ruble never had. Also, the Biden’s have a rather large holding of Yuan Renminbi.

What's In YOUR Wallet? said...

"...the derivative counter-party creditors can seize all the money in your checking account, IRA, CDs, savings accounts..."

Who, exactly are 'the derivative counter-party creditors"?

Put it in lay-terms this time. You're not in a board meeting sitting against the back wall hoping to get a spot at the table.

Anonymous said...

So, you are an early stage tech company and you raise $50 million. Are you really going to open 200 checking accounts to make sure your deposits are safe? Antiquated system, it needs fixing. Shareholders lost everything as indeed they should.

Anonymous said...

5:13pm please back up this claim with facts, state and support your claim, if they are real in fact, but of course you won’t.

“The Biden’s have a rather large holding of Yuan Renminbi.“

Anonymous said...

Shakespeare today would advise shooting the lobbyists before the lawyers.

Anonymous said...

@7:49 - Shakespeare was woke long before woke was a thang.

Advising that *anybody* be shot, today, would immediately invoke the 'violation of community standards' rule and subject one to 30 days in cyber imprisonment.

Anonymous said...

Poor Sheila must have dementia or Alzheimers.
Frank-Dobbs Act was a reinstatement of banking and stock market regulations gutted in Reagan and Bush administrations.
Act's provisions no longer exist just like McCain's campaign reform no longer exists. The last remnants were gutted in 2018.
The GOP gets the blame for making laws that existed for decades that made a distinction between banks and investment.
Frank-Dobbs restored the differences that once exi Savings and Loans could invest and banks were to safeguards that required banks to use due diligence in loaning money. They weren't to gamble on the Stock Market.
The Stock Market has always been a high risk game to play in hopes that high risk will result in high returns. It restored regulations for businesses seeking to be traded on the Stock Market.
The gutting of regulations means that a prospectus for investors ( info about a company seeking to get you to invest) is no more than a sales pitch and information that would clarify risks can be withheld.
Bad things happen when you elect people that don't know what the hell they are doing and don't bother to learn the "details" of their job.

Anonymous said...

5:38 am I would so love to see your test scores in school on Shakespeare.
Most of you still think " first we kill the lawyers" is a condemnation of lawyers. Nope, it's from the mouths of villains in the play! You know...the bad dudes.

Anonymous said...

@8:30 a.m. on 3-16-23: Thanks for posting the truth. Republicans think it is more important to regulate drag queen shows than banks and hazmat trains operating in our neighborhoods.

Anonymous said...

Why do you leftists have to be such degenerate liars?
Child drag shows are the only drag shows that Republicans are concerned with
And name one regulation that Republicans blocked that would’ve stopped that train derailment?
Perhaps something you contracted has rotten your brain?

Anonymous said...

@9:59 - different poster, but I’ll bite. The ECP brakes regulation that was enacted under Obama was removed by Trump. I’m not sure that regulation would have applied to the specific train that derailed in Ohio, but it’s something that we obviously need to improve safety and the regulation should be applied even more broadly than the initial plan did. Then you have the issue of the rail labor strike that congress voted to end. That was both the republicans and the democrats who didn’t listen to their concerns about safety and lacking resources for basic inspection and maintenance.

The right does seem to overly focus on unimportant causes that they think can get their base riled up and angry. It’s very much identity politics, and that’s why they come across as so out of touch and hypocritical to me. Have you noticed how every other word out of Desantis’ mouth is woke? Were the safer brake systems for trains too Woke for the right? Were the bank failures because they were woke? Is social security and Medicare woke? Does anyone even know a definition for woke?

Anonymous said...

This bank gave $73 million to Black Lives Matter...let's start there for irresponsible decisions. SVB was more about DEI than actually making financial sense. It's laughable those on the left want to blame Trump's rollback of Dodd Frank. Frank was actually on the board of failed Signature Bank. Many of the depositors, board members, etc were super donors to the Democrats and their agendas. This is about a bank who was more like a social club doing things with their depositor's money that no other bank does, but the people were cool with it because they had the same social agendas.

Anonymous said...

Gov Newsome has 3 businesses that are supposed to be in a blind trust, all with money in SVB. He lobbied the Biden admin ( without mentioning his total conflict of interest) for us taxpayers to bail SVB out…and they are.

SVB officers took $24mil in bonuses before the bank went belly up.

SVB donated $73mil to BLM

They had ex Obama administration Treasury, Mary Miller on the board

They did not unwind their LT Treasury position, even when Powell telegraphed the move to them nine months in advance.

They did not have a compliance officer.

SVB had a bunch of loans on venture capitalist funded startups that are shaky loans at best.

SVB’s core business over the past 2+ decades has been to lend (usually with equity kickers) to VC-backed tech companies and they did it very profitably for a long time. Those are the “sketchy” loans you are referring to. Do you really think that their core business was a significant contributor to this situation? It wasn’t.

One thing SVB was very good at - better than anyone else in the market- was developing relationships with the VC’s. As a result, they did well at getting out of bad situations. Probably better than any other lender in the space. The VC’s needed them as much or more than SVB needed the VC’s.

Add to that the fact that VC-backed tech companies generally seek funding for a year or more at a time - not doled out in drive and drabs - so short-term funding is generally already in the bank. That is exactly why such a high % of SVB’s deposits were not FDIC insured - they had lots of clients with 7, 8, and even 9 figure deposit balances.

And on the bond front - the thing about bonds is that, when you hold them to maturity, you get paid par. Meaning you do not take a loss. It was the loss on the bond portfolio that was SVB’s undoing.

It is only when a bank is upside down AND forced to liquidate the portfolio prior to maturity that a loss occurs. Had there not been a run on deposits, SVB would not have had to liquidate at a loss which is what broke the bank. The bonds otherwise would have matured at various future dates and the bank would have received par.

The low yields cause by investing too long during a time of interest rate volatility would have adversely impacted profitability in the interim (and I do agree that was a strategic mistake by SVB’s corporate treasury), but that at most should cause a decrease in the stock price.

But in this case irrational fear among a couple of very well-known VC’s and group think within the industry became a self-fulfilling prophecy by causing a run on deposits and forcing the early liquidation of the bond portfolio at a $1.8Bn loss, and it killed the bank.

Anonymous said...

The right does seem to overly focus on unimportant causes that they think can get their base riled up and angry. It’s very much identity politics, and that’s why they come across as so out of touch and hypocritical to me.

Doesn’t sound much different from Democrats scaring promiscuous leftist females into thinking GOP boogeymen are going to somehow make birth control illegal.

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