The collapse of Silicon Valley Bank brings back memories on
Capitol Hill of rescuing the financial markets during the 2008 collapse,
raising concerns among lawmakers that taxpayers may have to pay to bail out
risky financial bets.
President Joe
Biden assured the nation that no taxpayer money will be used after lawmakers
warned over the weekend they will not support bailouts, which are unpopular
with voters.
The president said the money to cover depositors would come
from the fees banks pay into the Federal Deposit Insurance Corporation (FDIC)
and promised that managers at failed banks would be fired and stock-holding
investors would not be protected — sidestepping a fight with Congress.
Still, there is already disagreement over what constitutes a
bailout and the fund being used to pay depositors — including over the US$250,000
for standard insurance from the FDIC — is backed by the full faith and
credit of the United States government.
Some
conservative Republicans are already making the argument that covering
depositors above the FDIC’s regular US$250,000 deposit insurance limit is
creating a future moral hazard and could embolden risky behavior heading
forward.
A GOP aide predicted that more conservatives would push that
argument once they return to Washington and have more time to examine the
details of Biden’s intervention.
“I’m
sure there will be people who take the view that there shouldn’t be government
intervention on any of this,” the aide said.
Lawmakers on both sides of the aisle spent Sunday assuring
voters they were against a bailout.
Sen. Bob Menendez said, he was not ready to offer them
a bailout by any stretch of the imagination, while Rep. Nancy Mace said, “It’s
still very early. I don’t even think it’s been 48 hours. But at this time, I
would not support a bailout.”
Biden’s decision to intervene and pledge on Monday that no
depositors will lose their money was viewed as an effort to avoid repeat of the
panic that gripped the financial markets in 2008 after the Bush administration
decided not to rescue Lehman Brothers Inc., a major investment bank.
Former Sen. Ben Nelson, who was in the Senate when
Lehman Brothers collapsed, said then-Treasury Secretary Hank Paulson and other
senior administration officials were uncertain at first about how to respond to
the crisis.
“It isn’t quite déjà vu because it’s different. First of
all, Biden stepped forward and said this is what it’s going to be. It isn’t a
bailout, it’s going to be making sure depositors are covered,” Nelson said.
Nelson said Biden appears to have learned a key lesson from
the fall of 2008, the federal government must act quickly and decisively to
prevent fear from quickly spreading through the financial markets.
“I don’t know how many days it was, the secretary of the
Treasury was getting together with us trying what to do. There wasn’t any plan
that I can recall that came together right away as quickly as this did,” he
said, comparing the federal response in 2008 to today.
Liberals, meanwhile, are going on offense by blaming Silicon
Valley Bank’s collapse on a banking deregulation bill signed in 2018 under
President Trump.
“In 2018, Donald Trump signed a law to deregulate large
banks like SVB and Signature Bank. In opposing Trump’s decision to roll back
the toughest regulatory requirements in Dodd-Frank, I warned at the time
that this could create serious vulnerabilities and may make it more difficult
for regulators to spot a threat to financial stability from a larger bank while
increasing competitive pressures on community banks and credit unions, Sen.
Jack Reed, a senior member of the Senate Banking Committee, said in a statement
Monday afternoon.
The Economic Growth, Regulatory Relief, and Consumer
Protection Act, which passed the Senate with bipartisan support in 2018, scaled
back some requirements of the 2010 Dodd-Frank Act, which Congress passed after
the 2008 financial collapse.
Critics say it contributed to the downfall of Signature
Bank, which the FDIC took control of Sunday.
Together they mark the second- and third-biggest bank
collapses, respectively, in US history and kindled fears of runs on regional
banks across the country.
Shares
of San Francisco-based First Republic bank fell 62% on Monday while Western
Alliance Bancorp shares fell 47% and PacWest Bancorp shares dropped 21%.
“Let’s be clear. The failure of Silicon Valley Bank is a
direct result of an absurd 2018 bank deregulation bill signed by Donald Trump
that I strongly opposed,” Sen. Bernie Sanders said.
“Five years ago, the Republican Director of the
Congressional Budget Office released a report finding that this legislation
would ‘increase the likelihood that a large financial firm with assets of
between $100 billion and $250 billion would fail,” he said.
Sen. Elizabeth Warren wrote in a New York Times op-ed
Monday, “Had Congress and the Federal Reserve not rolled back the stricter
oversight, S.V.B. and Signature would have been subject to stronger liquidity
and capital requirements to withstand financial shocks.”
Some Republicans, on the other hand, blamed Silicon Valley
Bank’s downfall on a lack of proper oversight from the Federal Reserve Bank of
San Francisco. They argue that federal regulators have become too preoccupied
with climate and other woke issues to watch out for fundamental problems.
“There’s no mystery what transpired. They had 10% insured deposits;
they had massive unrealized losses because their portfolio was weighted in
long-duration debt so they had a liquidity mismatch. It didn’t matter what
artificial regulatory you put into place, you could not overcome the underlying
fundamentals of the mismatch and the high rate of uninsured deposits,” said a
second GOP aide.
“How the hell did the regulator miss this? That’s the whole
point of supervisory examination, to spot this type of thing,” the aide added.
The Republican aide argued that Silicon Valley Bank’s
collapse doesn’t call for a new wave of regulation because its circumstances of
its liquidity shortfall don’t affect the vast majority of other banks.
“There was no bank in the country with a larger liquidity
mismatch than SVB. Nobody else even comes close to the problem that this bank
had. That’s what makes it so astonishing that the regulators missed it,” the
GOP aide added.
Silicon Valley Bank reported in a December regulatory filing
that 95 percent of its bank deposits were uninsured.
Biden administration officials hastily convened a call with
Republicans and Democrats in the House and Senate Sunday evening to brief them
on the plans to insure the deposits at Silicon Valley Bank and Signature Bank.
The briefing was convened so quickly that only a few Senate
Republicans participated, including Sen. Mitt Romney (Utah) and Senate Republican
Whip John Thune’s staff.
The administration held a second briefing midday Monday to
bring Republican senators who missed the Sunday call up to speed.
The quick outreach appeared to pay off when Romney voiced
support for the administration’s actions during the Sunday call and then
tweeted his support.
Romney retweeted a statement from the Federal Reserve
announcing the plan to ensure depositors’ savings and praised it as the right
decision.
Democratic leaders on Monday applauded the Biden
administration for taking quick action and urged colleagues to look closely at
the failure of Silicon Valley Bank to weigh whether more regulation is needed.
“We are grateful that the Biden administration, Federal
Reserve and FDIC took swift action to safeguard depositors and maintain
confidence in the banking system,” Senate Majority Leader Charles Schumer and
House Democratic Leader Hakeem Jeffries said in a joint statement.
“Americans should have faith that bank regulators are doing
everything they can to protect consumers. In the coming days and weeks,
Congress will be looking closely at the causes behind the run on Silicon
Valley Bank and other banks and how we can prevent a similar
crisis in the future,” they said.
The vast majority of congressional Republicans stayed quiet
on Monday, with neither Speaker Kevin McCarthy nor Senate Republican Leader
Mitch McConnell commenting on the decision to cover the potential losses of
bank depositors.
McCarthy told Fox News Sunday that the administration had the
tools to handle the current situation but voiced hope that regulators would
find a larger bank to buy Silicon Valley Bank to cover the depositors.
“This bank is a unique bank, where they do have assets, they
have an amazing clientele, it’s something that could be very possible [for]
someone to purchase this bank,” he said, describing that as “the best outcome.”
