Mar.14

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Who Broke the Bank?

As most readers have heard by now, the United States' 16th largest bank, Silicon Valley Bank, collapsed late last week. While it had over $200 billion in assets, the bank's management engaged in a number of unwise investment decisions. When the news came out that the balance sheet was in terrible shape, there was a run on the bank, and it was effectively dead within 48 hours.

In circumstances like these, the federal government has two options:

• Bail the Bank Out: Allowing a major bank to collapse has two very serious downsides. The first is that it means that uninsured depositors take a beating. That, in turn, has a ripple effect across many sectors of the economy. The second downside is that collapses of big banks, in particular, tend to frighten Wall Street and other financial centers. And with the economy, perception is often reality. More than one U.S. panic/recession has started with a bank collapse, most notably the Panic of 1873, which was triggered by the failure of Jay Cooke & Co., then the country's largest bank. If the federal government steps in when a bank fails, then these potentially severe consequences can possibly be avoided.
  
  
• Let it Burn: The other option is to allow an irresponsible bank, its irresponsible leadership, and irresponsible depositors whose holdings exceeded the FDIC insured limit to reap the whirlwind that they have sowed. This saves the government a lot of money, and it also sends a message that banks that engage in bad behavior should not expect to be saved by the feds.

Over the weekend, both Joe Biden and Secretary of the Treasury Janet Yellen said there would be no bailout this time. One wonders why they bothered wasting that oxygen. No presidential administration, Democratic or Republican, wants to deal with the consequences of a major bank failure. So, the government always ends up bailing the bank out. And that's exactly what happened here. The money is going to come from the FDIC's reserves, and is going to be replenished by increasing the assessment on banks that didn't, you know, run themselves into the ground. So, the responsible banks will pay the toll for the irresponsible banks (in addition to Silicon Valley Bank, the feds have already stepped in and shut down the smaller Signature Bank).

And now it's time for the finger pointing. Biden blamed the Trump administration, saying that the rollback of Dodd-Frank allowed this to happen. The Frank in that is former representative Barney Frank, and he said he disagrees with Biden, and that the real cause was the crypto panic. Of course, since Frank left Congress, he found work serving on the boards of banks, and was on the board of the now-shuttered Signature Bank. So, he might not be a totally dispassionate observer.

Meanwhile, Republicans are finding all sorts of scapegoats here. Sen. John Kennedy (R-LA), among others, blamed the collapse on the Biden administration's management of the economy. Sen. Tim Scott (R-SC) said it happened due to the administration's willingness to hand out money to anyone who wants it. Sen. Josh Hawley (R-MO) and Rep. Marjorie Taylor Greene (R-GA) took a long and careful look at the whole mess, and decided the problem was... wokeness. That really is an all-purpose bugaboo, isn't it?

All of this posturing is really kind of silly. Again, whatever party is in the White House is going to bail out any major bank that fails. And the other party is going to complain about it. That's how the script goes. And that is why the person who has impressed the most with his response is House Financial Services Chair Patrick McHenry (R-NC), who said he understands and supports the choice to bail the bank's depositors out. As a reminder, he also gave far and away the best speech by a Republican during the speaker election soap opera earlier this year. He's someone worth keeping an eye on.

This story is likely to dominate a few more news cycles. But there probably isn't too much mileage for either side to squeeze out of this. Biden doesn't want to do too much bragging about handing $200 billion to (mostly) corporate depositors and Republicans don't want to talk too loudly about how they really don't like helping corporate America. That may send the wrong message to their generous supporters in corporate America. (Z)