The Silicon Valley Bank fallout continues

NEW YORK –

Can Washington come to the aid of the depositors of the bankrupt Silicon Valley Bank? Is it even politically possible?

It was one of the growing questions in Washington on Sunday as policymakers grappled with whether the US government — and its taxpayers — should bail out a failed bank that largely served Silicon Valley, with all its wealth and power. .

Prominent Silicon Valley figures and executives have pressed the giant red “PANIC” button, saying that unless Washington comes to the rescue of Silicon Valley bank depositors, more bank runs are likely.

“The government has about 48 hours to correct a mistake that will soon be irreversible,” Bill Ackman, a prominent Wall Street investor, wrote on Twitter. Ackman said he had no deposits with Silicon Valley Bank, but was invested in companies that did.

Some other Silicon Valley personalities have been even more explosive.

“On Monday 100,000 Americans will line up outside their regional bank to claim their money, most won’t get it,” Jason Calacanis wrote on Twitter. Calacanis, a tech investor, has been close to Elon Musk, who recently took over the social media network.

Silicon Valley Bank went bankrupt on Friday as fearful depositors withdrew billions of dollars from the bank within hours, forcing US banking regulators to urgently shut down the bank in the middle of the workday to stop the panic banking. It is the second largest bank failure in history, behind the collapse of Washington Mutual at the height of the 2008 financial crisis.

Silicon Valley Bank was a unique creature in the banking world. The 16th-largest bank in the country largely served tech startups, venture capitalists, and high-paying tech workers, as its name suggests. For this reason, the vast majority of deposits at Silicon Valley Bank were in business accounts with balances well above the insured limit of $250,000.

Its failure sent more than US$150 billion in deposits into receivership, meaning startups and other businesses may not be able to access their money for a long time.

Staff at the Federal Deposit Insurance Corporation – the agency that insures bank deposits of less than $250,000 – worked all weekend looking for a potential buyer for the failing bank’s assets. There have been several bidders for the assets, but since Sunday morning the bank’s corpse has remained in the custody of the US government.

Despite the Silicon Valley panic, there are no signs that the bank’s failure could lead to a crisis like the one in 2008. The country’s banking system is healthy, holds more capital than it has never held in its history and has undergone multiple stress tests which show that the system as a whole could withstand even a significant economic downturn.

Also, it looks like the Silicon Valley Bank bankruptcy appears to be a unique situation where the bank’s executives made bad business decisions by buying bonds just as the Federal Reserve was about to raise rates. interest rate, and the bank was uniquely exposed to a particular industry that has experienced a severe contraction over the past year.

Investors are looking for banks in similar situations. Shares of First Republic Bank, a bank serving the wealthy and tech companies, fell nearly a third in two days. PacWest Bank, a California-based bank that caters to small and medium-sized businesses, plunged 38% on Friday.

In a sign of uncertainty for these mid-sized banks, First Republic Bank sent an email to its customers on Sunday to tell them that it was well capitalized and had no liquidity problems that could impact the bank.

Although highly unusual, it was clear that a bank failure of this magnitude was cause for concern. Treasury Secretary Janet Yellen and the White House ‘watched closely’ developments; the Governor of California spoke to President Biden; and bills have now been proposed in Congress to increase the FDIC insurance limit to temporarily protect depositors.

“I worked all weekend with our banking regulators to design appropriate policies to deal with this situation,” Yellen said on “Face the Nation” on Sunday.

But Yellen made it clear in her interview that if Silicon Valley expects Washington to come to its rescue, it’s wrong. When asked if a bailout was on the table, Yellen replied, “We’re not going to do it again.”

“But we are concerned about depositors and we are working to meet their needs,” she added.

Sen. Mark Warner, D-Virginia, told ABC’s “This Week” that it would be a “moral hazard” to potentially bail out uninsured depositors in Silicon Valley. Moral hazard was a term often used during the 2008 financial crisis to explain why Washington should not have bailed out Lehman Brothers.

The growing panic tale among tech industry insiders is that many companies that have stored their operating cash at Silicon Valley Bank won’t be able to make payroll or pay office expenses within days. or weeks to come if these uninsured deposits are not released. However, the FDIC said it plans to pay an unspecified “advanced dividend” – that is, a portion of uninsured deposits – to depositors this week and said more advances would be paid as and as the assets are sold.

The ideal situation is for the FDIC to find a single buyer of the Silicon Valley Bank assets, or perhaps two or three buyers. It is just as likely that the bank will be sold piecemeal over the next few weeks. Insured depositors will have access to their funds on Monday, and all uninsured deposits will be available as the FDIC sells assets to make depositors whole.

Todd Phillips, consultant and former FDIC attorney, said he expects uninsured depositors to likely get back 85% to 90% of their deposits if the sale of bank assets goes through in an orderly fashion. He said Congress never intended to protect corporate accounts with deposit insurance — the theory was that businesses should do their due diligence on banks when they store their money.

Protecting bank accounts to include businesses would require an act of Congress, Phillips said. It is unclear whether the banking industry would also support higher insurance limits, as FDIC insurance is paid for by banks through ratings and higher limits would require higher ratings.

Philips added that the best thing Washington can do is communicate that the entire banking system is safe and uninsured depositors will get most of their money back.

“People in Washington need to forcefully counter the narrative on Twitter coming from Silicon Valley. If people realize they’re going to get 80% to 90% of your deposits back, but it’ll take a while, it’ll do a lot to stop a panic,” he said.