What happened over the weekend is bigger than Silicon Valley Bank; once again the wealthiest, most politically connected companies and executives are proving the rules don’t apply to them.
Eventually these excesses will have to be unwound, gradually or suddenly. When they are, you can bet that all the people who have made fortunes from cheap cash for the last 15 years will be reaching into someone else’s pockets to save themselves – just as they did over the weekend.And the only pockets left will be the federal government’s.
In other words, yours.
Back to the banks.
For a few hours on Sunday, they fooled me.
At 6:15 p.m. Sunday, the government and Federal Reserve announced they would guarantee all deposits at the two big banks they’d closed, Silicon Valley Bank and Signature Bank – removing the $250,000 limit on insured accounts to help prevent a bank run.
Taxpayers would not be on the hook for any losses, they said. The banking industry would pay for the extra insurance.
I didn’t think the deposit insurance should be extended at all.
When banks failed in 2008, we didn’t have unlimited deposit insurance, and we didn’t have widespread bank runs on healthy or unhealthy institutions. Very few individuals have more than $250,000 in their plain vanilla bank accounts (as opposed to brokerage accounts where they are saving for retirement).
So extending the limits at taxpayer expense to protect very wealthy depositors and – in the case of Silicon Valley Bank – venture-capital backed companies didn’t seem fair.
And we have limits on government backed deposit insurance for good reason. Without it, large depositors have every reason to chase the highest possible interest rates on their money, even at badly managed banks. Why? They know that even if the bank squanders their deposits on bad loans, they’ll get their money back.
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This risk is not theoretical. In the 1980s, many savings and loans crashed after offering high-yielding deposits. As financial historian and journalist Roger Lowenstein explained yesterday in the New York Times:
When the Federal Reserve, under pressure of rising inflation, began to jack up rates, S.&L.’s had to pay higher rates to attract deposits…
Many switched to riskier assets to juice their returns, but as these investments soured, their problems worsened. Roughly a third, or about 1,000, S.&.L.’s failed.
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But venture capitalists – led by David Sacks, a good friend of Elon Musk – spent the weekend screaming that bank runs would be inevitable if the government didn’t guarantee all depositors.
Many if not most of these folks had not-at-all hidden conflicts-of-interest – either personal deposits at Silicon Valley Bank or investments in companies that had deposits there. Nonetheless, they insisted that they were warning about bank runs solely because they wanted to save ‘Merica from bank runs!
Whether or not they were trying to worsen the crisis, their warnings certainly did. They essentially forced the government’s hand.
My old friend and colleague Jesse Eisinger (I guess he’s now a ex-friend, thanks to my reporting on Covid and the mRNAs, but that’s a story for another day) captured the dynamic nicely:
Be seeing you
MCViewPoint 