About Those Banks…

News of the recent failure of two significant banks was enough to send chills down the spines of lots of Americans–especially those of us who are retired and dependent upon funds invested in the market. No matter how conservative our investment choices may have been, it’s like being on an ocean liner: if the entire vessel sinks, we’ll all go down, prudent stateroom choices or not.

As usual, Heather Cox Richardson could be counted on to produce the clearest explanation of the situation–not just the event itself, but the government’s (thankfully competent) response.

At 6:15 this evening, Secretary of the Treasury Janet L. Yellen, Federal Reserve Board Chair Jerome H. Powell, and Federal Deposit Insurance Corporation (FDIC) Chairman Martin J. Gruenberg announced that Secretary Yellen has signed off on measures to enable the FDIC to fully protect everyone who had money in Silicon Valley Bank, Santa Clara, California, and Signature Bank, New York. They will have access to all of their money starting Monday, March 13. None of the losses associated with this resolution, the statement said, “will be borne by the taxpayer.”

But, it continued, “Shareholders and certain unsecured debtholders will not be protected. Senior management has also been removed. Any losses to the Deposit Insurance Fund to support uninsured depositors will be recovered by a special assessment on banks, as required by law.”

The statement ended by assuring Americans that “the U.S. banking system remains resilient and on a solid foundation, in large part due to reforms that were made after the financial crisis that ensured better safeguards for the banking industry. Those reforms combined with today’s actions demonstrate our commitment to take the necessary steps to ensure that depositors’ savings remain safe.”

My immediate reaction was to give thanks that the challenge posed by these bank failures was being handled by the knowledgable and competent people in the Biden Administration, rather than by the Keystone Kops assembled by Trump.

Of course, the obvious next question was: how did this happen?

Most of us think of bank failures as harbingers of Depression, so I was surprised to read that a few banks fail every year, although Richardson reports that these are the first two  during  Biden’s presidency. (There were sixteen during Trump’s four years in office, eight of which preceded the pandemic).

Silicon Valley was the go-to bank for tech start-ups, which typically begin with a lot of cash from investors and IPO’s, and don’t need much in the way of loans.

So, rather than balancing deposits with loans that fluctuate with interest rates and thus keep a bank on an even keel, SVB’s directors took a gamble that the Federal Reserve would not raise interest rates. They invested in long-term Treasury bonds that paid better interest rates than short-term securities. But when, in fact, interest rates went up, the value of those long-term bonds sank.

Then, because SVB concentrated on start-ups, they had another problem. As interest rates go up, investors want faster returns than most start-ups can deliver. That meant that SVB’s depositors began to withdraw their money.

So SVB sold securities at a loss to cover those deposits. Other investors panicked as they saw SVB selling at a loss and losing deposits, and they, too, started yanking their money out of the bank, collapsing it. Banks that have a more diverse client base are less likely to lose everyone all at once.

There is–as you have probably guessed–a larger lesson here. The “libertarians” (I’m looking at you, Peter Thiel!) who have been vocal opponents of government regulation of the banking industry and  government relief for student loans–or really, pretty much anything government does that doesn’t benefit them personally– immediately insisted that in this case, the banks should be bailed out.

Richardson points out that in 2018, under Trump, Congress “weakened government regulations for banks like SVB and that SVB’s president had been a leading advocate for weakening those regulations.” Had those regulations been in place,  SVB would probably have remained solvent.

The Biden administration had been considering tightening the banking regulations that were loosened under Trump, and it seems likely that the need for the federal government to step in to protect the depositors at SVB and Signature Bank will make it much harder for those opposed to regulation to keep that from happening.

Was this a “bail out”? There’s an argument that making depositors whole while letting the shareholders eat their losses isn’t a bailout. The intervention was clearly needed to contain the potential for an economic collapse that would hurt everyone. Whether this is considered a bailout or not, at least the banks, and not the  taxpayers, are on the hook.

Getting rid of the hypocrisy is probably an unattainable goal….


  1. Once again, the Democrats have to clean up the stinky mess that the elephants leave behind. Good Job Joe Biden 🙂

  2. Before we start the GOP bashing, HCR is an apologist on par with our local “Paul the Apologist” regarding capitalism.

    SVB was about FRAUD—Sam Brinkman-Fried fraud within the crypto-community. Sam was a huge donor for the DNC, and if you want the best Wall Street Reporting for fraud and corruption, head over to Pam Martens on Wall Street on Parade.

    It’s quite a contradiction to the propaganda:


  3. It is time to restore Glass-Steagal. When the repeal of that Bank safety measure took place I was a republican and worked in finance. Even I thought then it was dumb to open that well thought out closed door. At the very least fully restore Dodd-Frank.

  4. Todd. I read your link and am just trying to understand because this is beyond my area of expertise. Is HRC wrong when she says that if bank regulations had not been eased during the Trump administration that SVB would probably have remained solvent? And if her statement is correct doesn’t that support laying blame on the Republicans who eased those regulations? Aren’t the regulations designed to prevent this kind of fraud?

  5. Copied and pasted from News Nation: “President Joe Biden called on Congress to strengthen regulations against banks while also promising to hold bank managers accountable. He helped organize the response to guarantee all deposits at SVB and Signature Bank as well as set up a lending program to make sure the banks have the cash to meet their needs.”

    Claims from both parties, and Todd, that both parties have politicized this current bank failure; spreading fears of a return of “Grapes Of Wrath” life styles to Americans can be expected during any election year. Our Democratic President, along with the federal level financial systems in our government have stepped in to support our faith in the banking system. They have not accused or blamed the opposition party but have brought the American government’s Acts and Laws into action to maintain or restore our trust in our personal banking systems.

    As Sheila states; “The intervention was clearly needed to contain the potential for an economic collapse that would hurt everyone. Whether this is considered a bailout or not, at least the banks, and not the taxpayers, are on the hook.”

    “Getting rid of the hypocrisy is probably an unattainable goal….”

  6. I wish I could remember where the article I read about this yesterday was published. Bottom line: the FDIC currently has $128 billion to cover deposits and the deposits at SVB are at least $156 billion. Deposits are only supposed to be insured for up to $250K per depositor per bank. However, some (maybe many) had deposits in the millions and they are going to get ALL of their money back even though they knew it wasn’t insured.

    The article went on to state that total costs or losses could be more than $170+ billion. Where is all of the money coming from to cover those losses if the FDIC only has $128B? The government hopes to make up the difference by selling SVB’s assets, but the sale may not make up the difference. That is when we, the taxpayers, will be charged. Yep, the entire story isn’t really being told and the govt is hoping that by the time we have to pay for those losses that it won’t even hit the news.

    Once again, if you are already wealthy you are going to receive preferential treatment and will not suffer financially for risky decisions or investments. The depositors that chose to risk millions at that bank should not be bailed out.

  7. Copied from Robert Hubbell’s Newsletter on this past Sunday:

    “The second major point is that the ‘run on the bank’ that caused the collapse may have been precipitated by venture capital funds in Silicon Valley advising their clients to withdraw funds from the bank-creating a ‘liquidity crisis.’ The resulting ‘run on the bank’ was potentially devastating to hundreds of tech startups in which those venture funds held substantial ownership positions. The venture funds then demanded that the federal government step in to protect their startup clients by providing emergency funding to cover their clients’ deposits. This, in turn, indirectly protected the investments of the very venture firms that caused the run on the bank in the first instance.
    “Agreeing to the rescue demands of the venture funds might have been the right decision for the economy-or not. It is too early to tell. But the hypocrisy is ripe! The masters of Silicon Valley are at the head of the line when it comes to lecturing the government about the ‘moral hazard’ of forgiving student loan debt-claiming that freeing students from their debt will allow them to ‘unfairly’ profit from their decision to finance their educations.
    “If ‘moral hazard’ is a legitimate ground for policymaking (and I don’t think it is), the same moral hazard applies to creating a run on a bank and then demanding that the federal government step in to protect your investments threatened by the bank’s collapse.”

    If these observations from Hubbell about the venture capital funds are correct, there truly was a “bailout” afoot for the venture capitalists, not so much for the startup companies.

    Hypocrisy abounds and it knows no limits in the world of finance.

  8. Jeff: “It is time to restore Glass-Steagall.” I agree.

    My history teacher friend said when the 1999 Congress repealed the Glass-Steagall Act, he reminded his students of the Depression-era (1933 Banking Act) rationale for passing Glass-Steagall, i.e., to prevent banks from again placing depositors’ balances in riskier, higher-return, investments.

  9. Our economy is a mixture of socialism and capitalism. Both approaches to organizing institutions to manage worker efforts to produce our wealth of goods and services have strengths and weaknesses.

    Socialism emphasizes government’s responsibility to protect all citizens. Capitalism opens institutions to gamble on wealth redistribution up in exchange for increasing the flow in a stream of new innovative goods and services.

    When the gamblers loose, government has the responsibility to protect wealth producing workers from loosing but not gamblers.

  10. Nancy, “Yep, the entire story isn’t really being told and the govt is hoping that by the time we have to pay for those losses that it won’t even hit the news.” Succinctly stated Nancy.

    Another part of the SVB failure story that isn’t being told is that SVB CEO Greg Becker was from 2019, until the date of the SVB failure, a member of the San Francisco Federal Reserve Bank board of directors.

    Still another part of the SVB failure is that 90 percent of SVB’s deposits were not insured by FDIC. Independent Community Bankers of America (ICBA) opposes the SVB bailout because clearly, SVB is not a “community bank.” Community banks don’t want to pay through FDIC insurance to bail out SVB-type banks.


  11. I applaud the Biden administration for allowing country-club politics roam unabated in the open.

  12. We also need to redefine what a small business is. The 100 million dollar small business sounds as much a farce as it sounds.

  13. So, some people have tossed around the term “Fraud”.
    I don’t see any fraud here.

    The only material misrepresentation that I’m aware of is that the value of the government bonds were not marked to market – and thus the bank was undercapitalized. That evidently was legal and an accepted practice – but should have come to light in a stress test.

    Neither do I see this as “bailing out the rich”.
    Businesses put their money in a bank account. They should fully expect to get their money back. Only in a very twisted reading is that a bail-out. These depositors were not engaged in risky investments (with regard to their deposits).

    The bank made a series of missteps – but none of it fraud, or egregiously bad management.
    -They didn’t diversify their client base
    -They invested in long term government bonds, which although “safe” can depreciate and we all could see that coming.
    -The CEO has been rumored to have made some public comments about liquidity issues before having funding.
    -An influential investor got on social media and instigated a run on the bank

    The FDIC insurance fund will make the depositors whole. That fund is paid for by the banks themselves – not taxpayers.

  14. Under ordinary circumstances, most people would opt for a higher rate of return, but banks and other businesses , generally need a great deal more flexibility than a government bond or bill allows. The only people I might advise to buy a 30 year bond are grandma and grandpa, but only if they have recently remodeled their home and have no outstanding debt.

  15. The SVB bank still has lots of assets, just not liquid assets, so the bail out is not that big.

    I also I heard that this bail out is in the national interest in that since this bank funded startups and a lot of those start ups are into research and things like biomedical research, it would set private research back by a decade in the US.

  16. @Peggy Hannon,

    Long term bonds can be bought and sold on the bond market and are pretty liquid investments. The risk is that rates will rise and thus the bond will be sold at a loss if it’s sold during the time when interest rates are high. It’s the equivalent of being forced to liquidate stocks during a down market. A diversified bond portfolio would have reduced the losses, but even diversified bond portfolios had significant losses.

    The larger issue is that we had 13 years of artificially low interest rates (real rates were 0 or less).
    That created a massive bubble in all asset classes including stocks, real-estate, and “alternative investments” such as bitcoin. Normalizing interest rates needed to happen, but it’s going to cause some stuff to hit the fan as these assets get marked to market one-way-or-another. That’s already happened with crypto, stocks have taken a ~22% hit, real-estate is being slower to adjust.

    Banks should be stress tested. Note these two banks were state banks, and under state regulation. The FDIC was second in line for regulation – although they were the ones who were left holding the bag.

    We should get real about the $250k limit on deposit insurance though. Most businesses have far more than that in cash. If, in the end, we are going to make depositors with $5m in deposits whole, then we should raise the limit and charge an appropriate FDIC insurance premium.
    Would this run have happened at all if the FDIC limit was say, $5m?

  17. “I also I heard that this bail out is in the national interest in that since this bank funded startups and a lot of those start ups are into research and things like biomedical research, it would set private research back by a decade in the US.”

    That may be so, but picking and choosing sectors to make whole isn’t really a defensible policy.
    These businesses had not done anything wrong – they had not engaged in risky investments by putting their money in the bank. The defensible policy is that they should get their money back.

  18. Kurt, I appreciate your educating everyone on this bank failure. It’s easy to stoke fear and anger when an event like this occurs. What’s difficult is to step back and evaluate what went wrong to minimize the likelihood of its recurrence.

  19. For those not worried about FRAUD:

    Pam Martens writes, “Let’s pause right here for a moment. This is far from the first time that the CEO of a questionable bank was sitting on the Board of a Federal Reserve Bank. As Citigroup CEO, Sandy Weill, was burying the bank under off balance sheet vehicles that would eventually crater the bank in 2008; send its stock price to 99 cents in early 2009; and require the largest bank bailout by the Fed in U.S. history, Weill was also serving on the Board of Directors of the New York Fed. And while Jamie Dimon was CEO of JPMorgan Chase and it was losing what eventually grew to $6.2 billion of bank depositors’ money in wild derivative bets in London, Dimon was also sitting on the Board of the New York Fed. Even when there was a big public uproar over Dimon’s presence on the New York Fed Board as the London Whale derivatives scandal came to light, Dimon remained in place.

    Oh, and by the way, the Fed member banks in each of the 12 Federal Reserve Districts that can choose to be regulated by the Fed, literally own their regulator. That’s right, they own the stock in their regional Fed bank, which is a private institution, unlike the Federal Reserve in Washington, D.C. which is an “independent” federal agency. (See, for example, These Are the Banks that Own the New York Fed and Its Money Button.)

    As the first crypto-related bank failure occurred on Wednesday (Silvergate Bank) and the second largest bank failure in U.S. history occurred on Friday (Silicon Valley Bank) and the third largest bank failure in U.S. history occurred on Sunday (Signature Bank), President Joe Biden attempted yesterday to reassure the public, stating that “Americans can rest assured that our banking system is safe.”

    But by the close of the stock market yesterday, two more banks whose primary regulator was a Fed regional bank had lost more than 40 percent of their market value – in one day’s trading session. (That doesn’t sound to us like things are under control.) Western Alliance Bancorp (ticker WAL), which is also supervised by the San Francisco Fed, lost 47 percent of its market value by the closing bell. Metropolitan Commercial Bank (bank holding company ticker is MCB) lost 43.78 percent of its market value yesterday. It is supervised by the New York Fed.”


  20. @Todd,

    What is your point exactly – that the foxes are watching the hen house? Perhaps.
    But I think you are trying to twist the facts to fit your own narrative – not that different from what FOX is doing by blaming it on “wokeness”.

    Ineffectual regulation is different than fraud – which both the common and legal understanding of the word means that someone is materially misrepresenting something.

    What’s clear is that these regional banks should have been stress tested. I don’t know if they weren’t because of changes to the law that would have required it – or if it’s because the state was not capable, or if there was a political reason.

    At this time, I’m not seeing fraud, I’m not seeing gross malfeasance, I’m not seeing excessive risky behavior – such as crypto. I’m seeing an environment where – due to rapidly rising interest rates – a bank found itself undercapitalized (given its customer base) and then someone yelled “fire” in a crowded theater.

    You can argue that regulators should have moved in faster. You can argue that these banks should be stress tested. But so far, fraud isn’t the issue.

    The shareholders of the bank should rightly be the one to ultimately pay the price, not the depositors who did nothing wrong. That’s the price of the missteps by the CEO.
    Again, we need to get real about FDIC insurance also. $250k isn’t enough for business depositors to prevent a run on a bank.

  21. ya might have mentioned pete theil runs pay pal. ive ended my pay thru with them and opted for a call to pay some other way.his support of trump and AZ political masscree is typical of venture capitalists. over my span of 68 years,ive found banks today,worthless short of having a savings account and loans in the way of 100% collateral on demand. if you wonder how and why you cant
    get trucks to haul stuff, one reason is banks.start farming again,banks,, they dont even loan for trucks,and if they do its 20% down its a new truck,at $250K. sounds like a student loan eh? except the gamble there is gov support. trucks are not. venture capitalists have now become the norm,and or,those apps to keep ya in debt. so whats the purpose of a bank today? check cashing and a record of your legal trans.
    a fall of a bank gets my same face as a,as Robert Cray says, a boat load of lawyers just sank. (nothing personal all) . im reflecting on banks. as a working class i would amuse the idea that yea, i can buy a home,etc, but help ya start a buisness without one,that aint happening. (egg or chicken here)ive been with my small town bank for decades. never a missed anything,balance,savings etc. they dont talk to me because i dont own land and farm. but then again,land rich and money poor is the republican way here. in a decade or two, the ferderal reserve will be replaced by the rich who have horded untold amounts of money and will be allowed to then, bring that off shore money back.(remember that one) and we will pay or be jailed again as insolvent by lack of job security and flat wages,designed,signed and initated by those who serve us in goverment. finacial authoritarianism anyone?

  22. Kurt:
    what you do see is the same issues that gave us 2008 into every home. again,the money did as
    it pleased,again. powell did issue the rise of percentage,he obviously didnt care about whos doin what,and if he did didnt care who. any time walls street wants to bend rules with trumps league will find a way,it will screw everyone else who works..

  23. Glass-Steagall, and Dodd-Frank are much needed, as is evident by way of one crisis after another, and the cries against
    gov’t regulation of banks and/or business, in general, are needed. Greed, and its drive for “More!” will always find a way
    to screw things up if left to their own devises.
    Biden is governing, TFG would have simply looked for the best camera angles.

  24. Glass-Steagall will not be reinstated; Wall Street and the big banks will not permit it. Bank stockholders who have been making out like bandits will not see their investments saved. Depositors, on the other hand, will not suffer a penny’s loss. Taxpayers will pay nothing in connection with these bank failures.

    I look for a redefinition of regional banks since they are in fact national banks. So-called regional bank failures do not often make the news when they fail. Regulators swoop in, take them over, discharge management, and quickly sell or merge them into functioning banks.

    One of the few failures of the Clinton years was the end of Glass-Steagall, which I think added tons of risk to banks’ investments. Its ending might not have been so bad had it been accompanied by more stringent regulations designed to reduce risks. Dodd-Frank’s stress tests should have had application to so-called regional banks who were thought to be so small as not to pose any threat to the system, but which were in fact national banks and, as we are seeing, do pose a threat to the system.

    We should have listened to Elizabeth Warren, who has been warning us for years that banks are taking on excessive risk with the demise of Glass-Steagall, a demise engineered by Wall Street and big banks. We didn’t, and are paying the price with fearful depositors and tanking bank stock values both here and around the globe. What to do? Ignore Wall Street and big bank propaganda in re overregulation and listen to Liz. Carefully.

  25. Bankers and businessmen ; Jackpot!

    The folks of East Palestine ; Go Die!

    I love this administration!

  26. Ian; it wasn’t this administration which deregulated all but a few logical, common sense, intelligent regulations to protect all of us. Two years hasn’t been enough time to get to all of them and the deregulation of funding and staffing requirements which brought about the East Palestine and two other Norfolk Southern Railroad derailments began six years ago…surely you remember what happened to this nation six years ago…as it is still happening in some vital areas.

    It always takes longer to clean up shit than it does to produce it.

  27. “It always takes longer to clean up shit than it does to produce it.”

    It certainly does!

    Not only is this administration mostly competently dealing with a tremendous amount of crisis: global climate change, war in Ukraine, Covid, Inflation, economy, China, etc. It’s also having to fix the damage done by previous administrations.

  28. Kurt, yes they can be bought and sold on the secondary market, but in times like these their value is questionable at best, something SVB found out recently I guess. Even before the Fed started raising interest rates, they weren’t offering that big a difference in return to make it worthwhile.

  29. I think about these people who chose to put more money into this bank than is covered by insurance. They took a risk, probably for substantial banking benefits that they enjoyed. (It’s great to be rich!) The infuriating aspect is that a lot of these libertarian bank clients would have been decidedly against student loan forgiveness. After all, considering waiving a few tens of thousands of dollars for poorer people threatens apocalypse, but it’s perfectly fine to provide hundreds of thousands (and maybe millions) to rich people.

  30. @John H.
    “I think about these people who chose to put more money into this bank than is covered by insurance…”

    This is a commercial bank.

    A business – even a small business – can have millions in cash for operating capital, payroll, reserves, etc. They did not put money into the bank for the purpose of “getting substantial benefits” other than simply the standard benefits that are provided by a commercial bank.

    Don’t make this into a wealth/class issue. It’s not.
    The money for the business went into the bank. They should be able to get their money back.

  31. Oh,yes. This is a class/wealth issue. As was the Biden administration’s lack of urgency wrt their response to East Palestine. This is a gift to the business class. BTW where’s my $600 ?

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