"After the collapses of Silicon Valley Bank and Signature Bank, the Biden administration and regulators are trying to strike a balance that has eluded policy makers in the past: stabilizing the financial system without stirring popular backlash for bailing out banks.
President Biden emphasized Monday that executives of both banks would lose their jobs after the firms were taken over by the Federal Deposit Insurance Corp. Depositors will get all of their money back, but investors won't be protected. Administration officials also have avoided calling on big banks to help solve the problem by purchasing smaller rivals, as the U.S. did in 2008.
Those moves were informed, in part, by the experiences of the Federal Reserve, the Bush administration and the Obama administration during the 2007-09 financial crisis. Washington supported hundreds of banks and other financial institutions with federal money, and many senior executives at those banks kept their jobs. In addition, investors were saved from absolute losses while some of the biggest banks bought rivals and grew bigger.
Bailouts during the last crisis proved unpopular, especially when layoffs mounted and millions of households suffered under the weight of mortgage foreclosures. Politicians from both parties, including Sen. Elizabeth Warren, a Democrat, and former President Donald Trump, a Republican, accused the government of protecting elites while others suffered.
Mr. Biden has sought to cast his response to the latest panic as an effort to protect the little guy and the economy, while ensuring that people at the center of the crisis bear the brunt of losses.
Still, there are almost always trade-offs for policy makers when they try to strike a balance between doing what is popular in a crisis and what they believe is needed to stabilize markets. The administration's decision to guarantee that all depositors get their money back is one example of these trade-offs.
Many of the depositors being extended special protection from losses are tech companies and wealthy Silicon Valley investors who have accounts far exceeding the usual $250,000-per-depositor cap for FDIC insurance.
For example, Roku Inc., the streaming company founded by billionaire Anthony Wood, was one of SVB's largest depositors, with $487 million parked there, according to its filings.
The Biden administration faced a risk that firms with money deposited at SVB wouldn't be able to meet their payrolls and would lay off workers if they didn't have access to all of their funds. The administration was also concerned that depositors at other banks would pull their money if they saw that SVB's depositors lost their funds during the FDIC takeover, propagating a wider panic.
Now that the FDIC has assured depositors in SVB and Signature that they will get all of their money back, it will be hard not to extend that guarantee to everyone, a potentially costly proposition, said Thomas Hoenig, who was vice chairman of the FDIC from 2012 to 2018 after serving as president of the Federal Reserve Bank of Kansas City.
"If you bail out some of these depositors, you are going to have a hard time explaining yourself if you don't bail out others," he said. "That train has left the station."
Deposits in the banking system totaled $17.6 trillion as of March 1, three quarters of the value of all of their assets, according to the Fed.
FDIC deposit insurance is covered by fees assessed to banks. Those fees could go up if the cost of insuring deposits rises.
It is hard to know whether taxpayers will be affected until the scope of bank losses becomes clear.
Bank bailouts from 2008 proved less costly than initially expected. The $700 billion disbursed through the Troubled Asset Relief Program resulted in $31 billion of losses, according to Congressional Budget Office estimates.
On the other hand, 96% of $793 billion in 2020 federal Paycheck Protection Program loans have been forgiven, according to a committee set up to monitor the program.
Politicians and their backers are already blaming each other for the bank failures and the government's response.
"Organizations that can't manage risk should be allowed to fail, and taxpayers should not be forced to bailout the well-connected and wealthy," said David McIntosh, president of the Club for Growth, which supports Republicans.
Democrats have blamed Trump administration programs that rolled back bank regulatory policies enacted after the 2008 financial crisis.
"Silicon Valley Bank's collapse is the predictable and direct outcome of a furious 2018 effort by bank lobbyists to evade basic oversight, transparency and financial stability in favor of profit," said Rep. Pramila Jayapal (D., Wash.), chair of the Congressional Progressive Caucus." [1]
The administration's decision to ensure that all depositors get their money back protects against losses of the wealthy, who put money into these banks getting higher rewards for higher risks. It is precisely such rich people who are mainly to blame for the catastrophe of these banks. Poor Biden, he might not be helped by that horrible train ride through Ukraine. US voters are not known for their tolerance for moral turpitude among the wealthiest and their patrons in the state apparatus.
1. The Collapse of SVB: Policy Makers' Peril: Populist Backlash --- Biden tries to cast bank closures as effort to punish executives while protecting economy
Hilsenrath, Jon. Wall Street Journal, Eastern edition; New York, N.Y. [New York, N.Y]. 15 Mar 2023: A.5.
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