The failures at Silicon Valley Bank and Signature Bank earlier this month were surprising. Even more surprising is how our government twisted the law to bail out the wealthy people and corporations who stood to lose millions.
Bank failures are fairly rare nowadays, but they would have been very familiar to generations past. One-third of banks failed during the Great Depression, and this widespread loss of confidence and security is what led to the creation of the Federal Deposit Insurance Corp. — the FDIC — in 1933. In the 90 years since it has been one of the more popular and enduring parts of Franklin Roosevelt’s New Deal.
But, as we see in the SVB bailout, its original purpose has been changed somewhat — not through changes in the law, but through the whims of those administering it.
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You might recall commercials for banks from years ago that ended with the solemn pronouncement, “Member: FDIC.” In those days, there were many who still remembered the Depression and had been shaped by it. I recall a great-aunt of mine who, though not rich by any means, kept her savings scattered among a dozen banks across Northeast Philly, just in case those bad old days came to pass again.
But for most people, that FDIC guarantee was enough. When I was a bank teller, my nameplate had the FDIC’s emblem on it. The fine print reminded everyone who came to the window: “Each depositor insured to $100,000.” (It’s now $250,000.) It was an obvious reminder that, while rich speculators might lose their wealth in a crash, ordinary Americans could trust in banks because the government guaranteed them.
It also meant that regular people did not need to inquire too deeply into the financial health of their savings bank. The government did that for them and backed the results. The flip side of that is that rich people — those whose deposits exceeded the FDIC insurance limit — still had to be a little bit thoughtful about where they kept their cash.
Or at least that was the case until a politically powerful group of rich folks almost lost their shirts last week.
SVB is an unusual bank, but it is not a systemically important bank. Neither was Signature Bank. That means that their failures weren’t likely to set off a domino effect on the rest of the banking system, making them “too big to fail.” SVB failed because most of its clients had exceeded the FDIC insurance limit, and the value of its investments decreased to the point that, when investors started withdrawing cash, the bank fell short. A similar story happened at Signature, which was affected by the crypto crash. But neither of these reflects a widespread failure of the banking system, only particular mistakes by a few financiers.
So it was disappointing when President Joe Biden announced last week that the federal government would retroactively designate SVB and Signature Bank as systemic risks to the American financial system and would thereby guarantee all of the deposits. Rich investors who didn’t have the wisdom of our Depression-era grandmothers would nevertheless get protected by the government in a way those old folks never were.
With this action, Biden effectively demolished the $250,000 cap on deposit insurance. What’s more, he changed the law without the traditional democratic expedient of getting the legislature to agree with him. That’s what federal guarantees are made of now: a president’s whim.
Treasury officials have proclaimed that this action is not a bailout like the Troubled Assets Relief Program because, they say, no taxpayer funds will be used to buy up the stock of the failed banks.
That’s true. But even if the FDIC can cover the losses, it’ll likely do so by raising the fees it charges banks to be insured. Will those banks just make less money? Or will they raise fees and raise interest rates on loans? We know the answer. We may not be paying for it as taxpayers, but we’re all paying for it one way or another.
Rich corporations and individuals placed millions of dollars ($487 million, in the case of one client) in uninsured bank accounts that, through the magic of political influence, just became insured by the government. It’s like buying car insurance after you get in an accident. That sure sounds like a bailout in any normal use of the word.
Bending the rules to benefit powerful friends is sadly nothing new in politics, but this time it’s more blatant than usual. This is the sort of crony capitalist collusion that used to bother people on the left and, in truth, should bother everyone. The profits are private, but the losses are public.
“The profits are private, but the losses are public.”
It certainly didn’t hurt that the tech industry — where most of those being bailed out work — were profligate donors to federal politicians (with 98% of their contributions to Democrats, according to the Center for Responsive Politics.)
Will the next bank failure get treated the same way, with a blank check to rich depositors not clever enough to look after their own fortunes? Or will we go back to the rule of law once less-connected people are on the hook?
“Americans can have confidence that the banking system is safe,” Biden said last week. He’s at least partly right. Enormous bank deposits are perfectly safe — if you’re rich enough for the president to notice you.
Based in New York, Stephen Freeman is a Senior Editor at Trending Insurance News. Previously he has worked for Forbes and The Huffington Post. Steven is a graduate of Risk Management at the University of New York.