Meaning | If banks want federal bailouts, they should accept federal regulation
I’m talking about people like David Sacks, an entrepreneur and venture capitalist who is a member of the so-called PayPal Mafia, a group of founders and early employees that includes bombastic anti-government billionaires Elon Musk and Peter Thiel. On TwitterSacks has lashed out at “profligacy and money laundering coming out of Washington” and the evils of what he calls “Bidenomics”.
But on Friday, Sacks frantically called for big government to come to Silicon Valley Bank’s rescue. He tweeted: “Where’s Powell? Where is Yellen? Stop this crisis NOW. Announce that all depositors will be safe. Place SVB with a Top 4 bank. Do this before Monday opens, otherwise there will be contagion and the crisis will spread.”
And I’m talking about people like another Musk confidant, investor Jason Calacanis, who was tweeting in the same direction on Saturday, but in all caps: “YOU SHOULD BE COMPLETELY READY RIGHT NOW – THAT’S THE RIGHT REACTION TO A BANK RUN & INFECTION. @POTUS & @SecYellen MUST GO ON TV TOMORROW AND GUARANTEE ALL DEPOSITS UP TO $10M OR THIS WILL SPIRAL INTO CHAOS.”
Shorter version: I want my big government bailout, and I want it now.
Federal Reserve Chairman Jerome H. Powell and Treasury Secretary Janet L. Yellen acted decisively on Sunday, assuring the failed bank’s depositors that they would have immediate access to all their funds, not just the $250,000 guaranteed by the Federal Deposit Insurance Corporation.
It was the right move, and with a number of other measures, it has succeeded – so far – in preventing what could have been a catastrophic attack on regional banks. But these steps could only have been taken by a big, big government with enormous resources and the will to use them for the common good. It turns out that “profligate spending and money printing” isn’t always so bad after all.
And it is not justifiable, effective government regulation either. In 2010, following the financial crisis and the Great Recession, President Barack Obama signed the Dodd-Frank Act, which established a comprehensive set of new rules for how banks could operate and how they would be scrutinized. In 2015, SVB CEO Greg Becker — who he was until last Friday, when the bank collapsed and he was fired — joined lobbyists asking Congress to weaken mandated safeguards for “mid-sized” banks like his. Congress complied by passing a deregulation bill signed by President Donald Trump in 2018.
In a letter to Becker this week, Sen. Elizabeth Warren (D-Mass.) wrote that if the original Dodd-Frank rules had still been in place, the SVB crisis might not have happened. The bank “would have been required to maintain stronger liquidity and capital requirements and conduct regular stress tests that would have required SVB to strengthen its operations,” Warren wrote.
Becker had told Congress years earlier that SVB should be exempt from having to undergo annual stress testing by federal regulators because the bank had hired “highly skilled risk professionals” to spot any signs of problems on its balance sheet. But for eight months before the bank’s collapse, SVB did not even have a risk manager, according to Warren. Whatever type of risk analysis the bank may have carried out, it was clearly inadequate.
Dodd-Frank mandated the most stringent scrutiny, including annual stress tests, for banks with assets of more than $50 billion. The 2018 deregulation law raised that threshold to $250 billion – meaning SVB, which had roughly $200 billion in assets at the time of the collapse, was exempt.
In retrospect, from Becker’s point of view, which would have been better for SVB: To bear the added cost and hassle of an annual risk exercise by federal investigators, who might have seen the problem with the bank’s long-term bond holdings before it became an acute crisis? Or hurtling blindly towards the cliff until it was too late to stop?
It’s a rhetorical question. Congress should quickly restore the stricter Dodd-Frank regulatory regime, which will give our financial system a better chance of recognizing the next hidden financial landmine before it explodes.
The moral of this story is that when individuals are threatened and affected by forces beyond their control, it is the government’s duty to step in and help. That’s what progressives have been saying all along.