Something incredibly impactful happened over the weekend in Washington, and the short- and long-term effects are only being guessed at.
Trying to stop a politically disastrous run on banks as a result of the Silicon Valley Bank (SVB) and Signature bank collapses, Biden’s economic team devised a plan to keep a lid on the crisis and halt a good old-fashioned, 1930s-style bank panic.
What alarmed Biden’s team was the rapid drain of assets from regional banks that make up a large percentage of ordinary Americans’ deposits. So Biden okayed a bailout plan that no one is calling a bailout and, while he was at it, decided to radically transform the banking system.
Did I mention he forgot to ask Congress for permission?
The federal government would provide SVB’s depositors with access to all their funds, effectively averting painful financial uncertainty — and the threat of heavy losses — for thousands of venture-backed startups. Signature Bank, which had followed SVB into insolvency, would receive the same guarantee.
Even more critically, the Federal Reserve would provide a massive lifeline to the nation’s banks: It would singlehandedly give all other similar lenders access to funds designed to keep them afloat and quell the panic brewing across the country.
Even those deposits at SVB and Signature that weren’t guaranteed by law would be covered by this bailout.
The swift and forceful action to rescue depositors at the two failed midsize lenders rewrote crucial banking guardrails in ways that could reverberate for years. It put the Biden administration’s stamp — for good or ill — on the sector’s future financial stability, while sending a message about the government’s willingness to rescue private businesses in new ways. It also was done without passing a single new act of Congress or holding hearings among elected officials in recent days.
This is not how it was supposed to play out. Biden claimed, “investors in the banks will not be protected. They knowingly took a risk and when the risk didn’t pay off, investors lose their money. That’s how capitalism works.”
That’s how capitalism works, all right, but not in Biden’s America. Biden also claimed, “no losses will be borne by the taxpayers.” He said, “the money will come from the fees that banks pay into the Deposit Insurance Fund.”
That’s not entirely accurate.
The FDIC’s Deposit Insurance Fund normally guarantees up to $250,000 in deposits, which protects small retail customers including mom-and-pop businesses. Banks pay for this guarantee with insurance premiums, but the insurance fund isn’t intended to backstop deposits of bigger customers with more capacity to weather losses if a bank goes under.
Yet after venture capitalists (Democratic donors) and Silicon Valley politicians howled, the FDIC on Sunday announced it would cover uninsured deposits at SVB and Signature Bank under its “systemic risk” exception. Apparently, Silicon Valley investors and startups are too big to lose money when they take risks. They benefited enormously from the Fed’s pandemic liquidity hose, which caused SVB’s deposits to double between 2020 and 2021. SVB paid interest of up to 5.28% on large deposits, which it used to fund loans to startups.
Biden found himself in a bind. In order to protect the middle class from the fallout from the SVB and Signature Bank collapses, he had to bail out rich venture capitalists who also happened to be big Democratic donors. In what turned out to be a lucky synergy for Biden, he managed to do both.
“There’s not a way to help the people he wants without also helping the uninsured depositors who made a bad choice by putting too much money into a single bank,” said one adviser to the White House. “I have no doubt in my mind that he feels ambivalent about it. But he’s not willing to take a risk with this economy.”
Since some 90% of SVB’s deposits are uninsured, the FDIC’s guarantee to cover those deposits is going to cost average Americans a pretty penny. Even though the banks will be assessed more in fees to cover the bailout, banks will pass those costs onto consumers in the form of higher fees.
Biden has decided to eliminate the risk of dumb investments and idiotic policies causing a bank failure. And despite his “soak the rich” rhetoric, the president has given rich Democratic donors a lifeline when they didn’t deserve it. How this will play out going forward remains to be seen.
The Biden plan hasn’t given investors much confidence. Regional bank stocks are still falling. No doubt, Biden will use the old political saw, “it may have been worse!” if we didn’t act.
There’s no evidence of that, but who’s going to contradict him?