Reviews | If the banks want a federal bailout, they should accept federal regulations


Question: What is a socialist?

Answer: A libertarian techno brother who had money at Silicon Valley Bank.

There is nothing funny about the second biggest bank failure in the country’s history, which shook financial markets at a time when the economy is already in turmoil. It is very ironic, however, to hear tech luminaries, after years of complaining that “big government” was the problem, suddenly calling for massive federal intervention and largesse.

I’m talking about people like David Sacks, an entrepreneur and venture capitalist who was part of the so-called PayPal mafia, a group of founders and early employees that includes explosive anti-government billionaires Elon Musk and Peter Thiel. On TwitterSacks railed against “overspending and money printing from Washington” and the evils of what he calls “Bidenomics.”

But on Friday, Sacks was frantically calling on big government to come to the rescue of Silicon Valley Bank. He tweeted“Where’s Powell?” Where is Yelen? Stop this crisis NOW. Announce that all depositors will be safe. Place SVB with a Top 4 bank. Do it before Monday’s open or there will be contagion and the crisis will spread.

And I’m talking about people like another Musk confidant, investor Jason Calacanis, who was tweet in the same direction Saturday, but in all caps: “YOU SHOULD BE ABSOLUTELY TERRIFIED RIGHT NOW – THIS IS THE APPROPRIATE REACTION TO A BANKING RUN & CONTAGION. @POTUS & @SecYellen MUST GO ON TV TOMORROW & SECURE ALL DEPOSITS UNTIL $10 M OR IT WILL FLY INTO CHAOS.

Short version: I want my bailout from big government, and I want it now.

Federal Reserve Chairman Jerome H. Powell and Treasury Secretary Janet L. Yellen acted decisively on Sunday, assuring depositors of the failed bank that they would have immediate access to all their funds, and not just the $250,000 guaranteed by the Federal Deposit Insurance Corporation.

It was the right decision, and together with a range of other measures it has succeeded – so far – in preventing what could have been a catastrophic run on regional banks. But these measures could only have been taken by a very large government with enormous resources and the will to use them for the common good. Turns out, “overspending and printing money” isn’t always such a bad thing after all.

And neither does prudent and effective government regulation. In 2010, in the wake of the financial crisis and the Great Recession, President Barack Obama signed into law the Dodd-Frank Act establishing a comprehensive set of new rules for how banks could operate and how they would be controlled. In 2015 Greg Becker, the chief executive of SVB – who he was until last Friday when the bank collapsed and he was fired – joined lobbyists calling on Congress to weaken mandatory safeguards for “medium-sized” banks like his. Congress complied by passing a deregulation bill signed by President Donald Trump in 2018.

In a letter to Becker this week, Sen. Elizabeth Warren (D-Mass.) wrote that if the original Dodd-Frank rules had still been in place, the SVB crisis might not have happened. The bank “would have been required to maintain higher liquidity and capital requirements and conduct regular stress tests which would have required SVB to consolidate its business,” Warren wrote.

Years earlier, Becker had told Congress that SVB should be exempted from undergoing annual stress tests by federal regulators because the bank had hired “highly trained risk professionals” to spot any signs of trouble on the balance sheet. But for eight months before the bank’s collapse, according to Warren, SVB didn’t even have a chief risk officer. Whatever type of risk analysis the bank might have performed was clearly inadequate.

Dodd-Frank has mandated the strictest scrutiny, including annual stress tests, for banks with assets over $50 billion. The 2018 Deregulation Act raised that threshold to $250 billion, meaning SVB, which had assets of around $200 billion when it collapsed, was exempt.

In retrospect, from Becker’s perspective, what would have been better for SVB: bearing the extra expense and hassle of an annual risk exercise by federal examiners, who might have seen the problem with long-term bond holdings term of the bank before it becomes an acute crisis? Or dash blindly towards the cliff until it’s too late to stop?

It’s a rhetorical question. Congress should quickly reinstate the tougher Dodd-Frank oversight regime, which would give our financial system a better chance of recognizing the next hidden financial landmine before it explodes.

The moral of this story is that when individuals are threatened and shaken by forces beyond their control, it is the government’s duty to step in and help. That’s what progressives have been saying all along.

Leave a Comment