The U.S. economy just escaped a 2008-crash-like moment of the pandemic era – a near-collapse of the banking system – because regulators swiftly chose a bailout option for Silicon Valley Bank.
Government officials faced two stark choices after the bank failed last week.
Option #1: Concoct a creative rescue for the bank’s numerous depositors with accounts exceeding the $250,000 insurance cap. It’s a group that includes some of the nation’s cutting-edge companies and wealthiest individuals.
Option #2: Play it by the book and pray gigantic losses on uninsured deposits didn’t spark a run on the nation’s banking system – particularly smaller, regional institutions.
Why choose to save people from their mistakes? Because government officials really had no choice.
The cure, technical actions wrapped within bureaucratic lingo, was actually an unprecedented rescue designed to prevent a broader catastrophe. Let’s ponder some of the questions regulators likely faced as they considered their few, bad alternatives.
Q. Why not play hardball?
A. The bank failed because it made bad bets on the bond market. Discovery of those losses in the bank’s financial statements spooked depositors into pulling out their money, draining the bank’s cash.
So legally speaking, Silicon Valley Bank depositors with more than $250,000 there were in trouble. They were initially warned after the bank was closed by regulators that their funds could be tied up for months in a bank liquidation.
Practically speaking, if losses were the regulators’ final verdict, then bank customers with large deposits everywhere else would rethink where they placed their cash.
This was really about corporate checking accounts for businesses, big and small, that exceeded deposit insurance limits. This money funds payrolls, pays vendors and powers financial services.
Silicon Valley Bank’s uninsured sums were eye-opening. Streaming device maker Roku had $487 million. The bookkeeping service provider Bill Holdings had $300 million. Online gaming’s Roblox had roughly $150 million.
Yet this bank is by no means an outlier, and if a nation’s worth of corporations believed the cash that runs their business was at risk, they would have acted quickly. The result: a good old-fashioned run on banks.
Regulators knew this. They even took proactive action and shut down another shaky bank, Signature Bank of New York.
Q. It’s a free market, right?
A. Regulators have tried to let market forces work their magic, mostly with bad results.
Go back to the 1980s, when the nation’s mortgage-making savings and loans were allowed to linger near death for far too long. It was a regulatory bet that time and deregulation would cure losses.
Sadly, those years of delay only exploded the eventual cost to taxpayers when the industry collapsed.
In 2008, hands-off logic nudged regulators to let Wall Street giant Lehman Bros. implode from massive real estate losses.
The brokerage’s failure didn’t directly cause the global financial crisis. But the Lehman fallout complicated the monetary mess that become the Great Recession.
And this weekend, regulators were thinking outside of banking, too. Having Silicon Valley Bank’s demise balloon nationwide would also have been a huge hit to the overall economy.
Q. Who can you trust?
A. That’s the issue. Banking at its core is about believing your money is safe and that others act in good faith.
So how could mismanagement at the 16th largest bank in the nation almost topple the banking system?
It wasn’t the size of its financial mess. It was the question Silicon Valley Bank raised among some of the nation’s richest folks: Where is my money safe?
Every chief financial officer had to rethink cash management systems. And if regulatory words weren’t just right, a major monetary shuffle could have crippled numerous financial institutions.
So going “free market” and seeing what might occur wasn’t a bet worth taking.
Q. What about “moral hazard”?
A. If there’s no financial pain, this logic goes, we become irresponsible with our money.
Clearly, the Silicon Valley Bank bailout invalidates the “play with fire and you may get burned” messaging.
Unfortunately, banking history too often tells us “financial pain” is primarily for the small fry. Big institutions, or places with big clout, frequently get better treatment.
Financial heavyweights are consistently perceived as too important to the financial psyche. You know, the “too big to fail” thinking.
But it’s not just depositors who got the wrong message. Bank executives, too, get misdirected messages that their mistakes will go largely unpunished.
And that just encourages more risk-taking.
Q. Who pays?
A. Simply stated, what regulators did with Silicon Valley Bank creates almost unlimited deposit insurance at the nation’s banks.
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This is a world where huge sums of money can move almost instantly. You wonder if this weekend’s patch job will morph into a more permanent status.
And by using some bureaucratic accounting tricks, government officials can say no taxpayer funds were involved.
Yes, bank shareholders are getting crushed. And this theory says losses incurred stabilizing what’s left of Silicon Valley Bank and Signature Bank will be borne by the nation’s banking industry.
Add to that math some new rules that shove some losses to the Federal Reserve, the nation’s central bank.
Of course, it’s also a good bet that some of those bailout costs will somehow be passed along to the general public.
Jonathan Lansner is the business columnist for the Southern California News Group. He can be reached at jlansner@scng.com