Dissecting the Silicon Valley Bank Debacle - WhoWhatWhy Dissecting the Silicon Valley Bank Debacle - WhoWhatWhy

Silicon Valley Bank, Brad DeLong, Dean Baker
Photo credit: Adapted by WhoWhatWhy from CEPR / Wikimedia (CC BY 4.0), Minh Nguyen / Wikimedia (CC BY-SA 4.0), and Genevieve Shiffrar / Wikimedia (CC BY-SA 3.0).

Two eminent economists unravel the truth behind Silicon Valley Bank’s collapse, its causes, and vital lessons for future financial stability.

It has been a momentous week for banks and markets. What some have dubbed an “extinction-level event” was, at its core, the failure of a couple of banks.

To help us put all of this into proper perspective, we are joined on this week’s WhoWhatWhy podcast by two distinguished economists, J. Bradford DeLong and Dean Baker.

DeLong served as deputy undersecretary of the treasury in the Clinton administration and is currently a professor of economics at the University of California, Berkeley. He is also the author of the substack Grasping Reality and the recently published book Slouching Towards Utopia: An Economic History of the Twentieth Century.

Baker co-founded the Center for Economic and Policy Research. His areas of research include housing and macroeconomics, intellectual property, Social Security, Medicare, and European labor markets. He has been credited as one of the first economists to have identified the 2007–08 United States housing bubble, and, in 2006, Baker predicted that “plunging housing investment will likely push the economy into recession.”

Together, they discuss the venture-capitalist libertarian overreaction to the event, as well as the way it has been massively misrepresented by all of the press, including the mainstream press.

They detail the differences between this event and the 2008–09 banking crisis, the power of contagion and rumor in the digital and social media age, and what actually transpired during the 36 hours the bank was shut down by the FDIC.

We discuss what this means for both small and regional banks, and for the “too big to fail” banks, which are now suddenly in favor.

While the whole story could be forgotten in a matter of weeks, the implications and downstream effects will be with us for quite some time.

iTunes Apple PodcastsGoogle PodcastsGoogle PodcastsRSS RSS


Full Text Transcript:

(As a service to our readers, we provide transcripts with our podcasts. We try to ensure that these transcripts do not include errors. However, due to a constraint of resources, we are not always able to proofread them as closely as we would like and hope that you will excuse any errors that slipped through.)

Jeff Schechtman: Welcome to the WhoWhatWhy podcast. I’m your host, Jeff Schechtman. In one week, it seems that every cliche about the economy has been trotted out. We had a run on banks that was the 21st-century equivalent of It’s a Wonderful Life; we re-litigated the 2008-2009 bailouts; people talked about TARP, a word long forgotten; tech bros became synonymous with bank failure; Cassandras continued to predict a financial apocalypse; billionaires were under attack and suddenly, too big to fail became a good thing; and libertarians were screaming for government bailouts.

And all of this is taking place in the frame of inflation, potentially more interest rate hikes, and the political polarization that seems to mark virtually everything today and a market in need of Xanax. To help us understand all of this and put it in proper perspective this week, I’m joined by two distinguished economists, J. Bradford DeLong and Dean Baker. Brad DeLong served as deputy undersecretary of the Treasury in the Clinton administration and is currently a professor of economics at U.C. Berkeley. He’s the author of the Substack Grasping Reality, and his recent book, Slouching Towards Utopia: an Economic History of the Twentieth Century, is a must-read for anyone interested in economics and money.

Dean Baker cofounded the Center for Economic Policy Research. His areas of research include housing and macroeconomics, intellectual property, social security, Medicare, and the European labor markets. Dean has been credited as one of the first economists to have identified the 2007-2008 housing bubble. And in 2006, Baker predicted that plunging housing investment would likely push the economy into recession. It is my pleasure to welcome Brad DeLong and Dean Baker here to the WhoWhatWhy podcast. Dean, Brad, thanks so much for joining us.

Brad DeLong: Thank you very much for inviting me.

Dean Baker: Thanks for having me on, Jeff.

Jeff: Well, it’s a delight to have you both with us today. One of the things that we’ve heard this week amidst all the craziness since the Silicon Valley Bank failure last Friday is that this was an extinction-level event. I think a couple of people have been quoted as saying that. I want to talk about that first. Dean, let’s start with you.

Dean: Yes. It was very, very far from an extinction-level event. [Laughter] I think the story, well, two things. One, you had mentioned the libertarians begging for a government bailout. Well, that’s exactly what they were doing. And these were prominent people with access to the media, big Twitter followings; so they blew this up out of all proportion. Also, I should say, the media really deserves a huge heap of derision for the way they misreported what was happening.

Well, first off, we’ll just start with the depositors at the bank. The idea that the depositors at the bank were going to be wrecked is just… No reason to be polite, it’s a lie. Again, just to remind people: deposit insurance, 250,000, up to that, you’re completely insured. Now, I understand, you had a lot of wealthy people, a lot of businesses, they had millions, some had 10 millions. Roku, the internet company, reportedly had over 400 million. I think there was a hedge fund, if I remember correctly, had three billion. Again, I’m going by accounts in the media. I have no direct [unintelligible 00:03:39].

But anyhow, so the story was okay, so they’re going to have all this wiped out, everything above 250,000. That’s just not true. So what happens? And the FDIC that, of course, manages the insurance, they sent this out the same time that they were announcing the takeover of the bank; they were going to issue an advance payment to all the depositors that had money, and they’re over 250,000 this week. So that could well have been Monday or Tuesday. They wouldn’t be waiting months; they would be this week. Now, how much would it be? It wouldn’t be for 100% of their money.

What the FDIC would do is a quick look at what the assets were. They’d make a judgment: How much could be paid off at the end of the day, and then they’d give the bulk of that in an advance payment. So I’ll just throw some numbers out. Let’s say at the end of the day, the assets will cover about 85% of the uninsured deposits. So then the FDIC would probably say, “Okay, we’ll make an advance payment of 60%, maybe 70%.” And then what they’ll do is with the rest of the deposits, say that they make it 70%, they’ll issue a certificate for the remaining 30%.

How much will that be worth? Well, that will depend. They’ll sell off the assets over the next month, two months, three months, and then they’ll say, “Okay, so you get half of that 30%.” Now, will someone have to wait a month, two months, three months? No. All these investors will be happy to buy it up. Now, they won’t pay the full amount. They’ll discount it based on the uncertainty, based on the time, but they would get most of their money. So the idea that anyone was going to lose, you had someone with 10 million, they’re going to lose almost all of it, that was just complete nonsense. But that’s the way it was reported in places like The New York Times, National Public Radio.

Well, I mention this because these are good news outlets generally. They try to be careful, and they’re just totally irresponsible. So that was just misrepresented what was at risk. Now, what was the impact on the rest of the banking system? Directly, basically zero. This wasn’t a case where you had a bank that was hugely interconnected with other banks, and because I had my money at Silicon Valley Bank, I wasn’t going to be able to make my payments to this other company and it was… No, there’s no story like that.

There was a risk, which is very real, of contagion, where people get fearful. Now, whether that’s running reality or not doesn’t matter. So you have people say, “Oh my God, banks could go under. I could lose my money.” You had a lot of people that were running to their banks; they had 10,000, 15,000, 20,000 — it’s completely insured. There’s zero risk, but they didn’t know that; they were scared.

So you did have this real threat of contagion, and that’s what ultimately prompted the Biden administration to act and to come up with this backup fund and assure people that their deposits were safe, basically of any amount. So, as I said, this was totally taken out of proportion. The media, there was tremendous responsibility for just misrepresenting the fundamentals of the situation. And they made what was a relatively minor situation — it wasn’t that many people, really wasn’t all that much money in the scheme of things — into this disastrous event.

Jeff: Brad, I want to get your take on how big a deal this was.

Brad: Well, we did not think we would have something like this. That is, yes, over the past 15 years, the share of bank deposits that are formally insured by the Federal Deposit Insurance Corporation has been going down. As businesses and as rich people are keeping larger amounts of money in the bank rather than moving them out into interest-yielding investments because interest rates have been so low, there hasn’t been so much point.

And, yes, any bank whose deposits are not insured by something bigger than the bank is vulnerable to a bank run because when you give your money to the bank, the bank does not put it downstairs in the vault; the bank loans out your money to someone else, and it relies on the law of large numbers to keep able to pay out all the money for all the people who come in every day looking for money.

And most of the time, the law of large numbers works. Banks only get into serious trouble when people have good reason to think that they’re actually, well, bankrupt, that they actually have lost so much of their money and investments that they don’t have enough left. Then you get a run on the bank because the last people to get to the bank when it’s that situation won’t get their money out.

Jeff: And it was a bank that had significant assets. While, clearly, the people running the bank made some really very stupid decisions along the way in terms of duration misalignment and some of the other things that they did, this was a bank that had assets. They were short, sure, but before all this happened, it had a book value somewhere around 12, $13 billion. That’s questionable, but it wasn’t zero. Dean.

Dean: Yes. And this is, again, a total misrepresentation, mischaracterization. So there were any number of places comparing it to what went on 2008-2009. The story in 2008-2009, the banks really were bankrupt. You had a lot of banks… Well, basically, all banks had some amount of mortgages, mortgage-backed securities, various derivatives based on mortgages. The underlying asset, the houses, had lost much of their value. Nationwide house prices fell by around 30%. In many areas, they fell by 50. In the hottest areas, 60 or 70%.

A mortgage on a home that’s lost 70% of its value, particularly since many of these mortgages were 100%, they’d loaned the full value of the house… And they boasted about that. That’s not a secret: They boasted about it. A mortgage on a house that’s lost 70% of its value, it’s basically worthless. The effort involved in foreclosing and collecting, at the end of the day, you’re going to get almost nothing. So those banks back in 2008-2009, they really were bankrupt. They didn’t have money.

In this case, the story, it’s a fairly simple one. It’s a little amazing that they could have exercised such poor judgment. These are supposed to be smart people. They’re very well paid, I’ll say that. But in any case, the story is that they invested in long-term government bonds; they’re borrowing from their depositors and most of their investments went into government bonds. And a very straightforward story: When interest rates go up, the market value of a bond goes down.

So if you got a 10-year treasury back in 2020-2021 that might have paid, say, 1.5% interest. Well, today, the interest rate on 10 years’ treasury… I think it’s on about 3.5% and have been around 4%. So that means that treasury is going to lose 10%, maybe 15% of its value. So that was the story: They lost money on long-term bonds. Now, they didn’t go to zero. And, of course, all their money wasn’t in long-term treasuries.

So I don’t know; I don’t have their books, but let’s say that 40% of their money was in long-term treasuries, and on average they lost 10 to 15%; that’s 4 to 6% of their assets. That’s hardly trivial, and it may well have been enough to give them a negative net worth, but the point is they would have enough money to pay off the vast, vast majority of their deposits. So, yes, this is totally contrived as this horrible crisis. It just was not.

Jeff: Brad, talk about the fact that this was a bank that had assets, that it seems, to a large extent, they made some really horrible decisions.

Brad: Horrible decisions. Well, risky decisions, and decisions that certainly did not pan out ex-post. They made a big bet that interest rates would not go up very much, and interest rates went up a lot, which meant that the bonds that they owned went down in value a lot because when interest rates go up, the value of bonds that pay a fixed interest rate go down. You can buy another bond with a higher interest rate, so why not? But even though they had this loss in their portfolio of bonds, they were planning to hold all these bonds to maturity. And when maturity comes around, the bond pays off. The treasury bond, the mortgage bonds pay off in total.

So even though they’d gotten this loss on their portfolio, they had an offsetting future capital gain that they really could count on and that the accountants were allowing them to count on it in doing its books. Problem was that… And I’m still not quite sure what the problem was. Maybe the problem was simply that Peter Thiel tweeted to everybody, “Get your money out of SVB immediately.” And so on Thursday, $40 billion of Silicon Valley Bank’s $160 billion headed for the exits as people frantically tried to withdraw it, which is easily five times as much as I would have thought possible.

Even in this age of social media, I would not have thought that contagion and rumor spreading and so forth would produce even $10 billion of withdrawal on one bank that size in that day. And so $40 billion of SVB’s bank deposits vanished. It did not want to sell. In fact, it couldn’t sell the bonds that it was holding to maturity. And so on Friday morning, the California legislators took it over. Over the weekend, the Federal Deposit Insurance Corporation took it over. But now the Federal Deposit Insurance Corporation has guaranteed everyone’s deposits.

Federal Deposit Insurance Corporation’s taken over its assets. COD assets are a little bit underwater, yes. But they have this nice capital gain that will happen on the assets over the next five years as the bonds mature. So when all is said and done, the Federal Deposit Insurance Corporation, it doesn’t look like it’s going to suffer a loss from this. It looks like the FDIC is going to have a small gain because it paid zero for the bank, and it’s got the flow of the capital gain from the bonds that the bank owned.

Jeff: Dean, I want to talk about the regulatory environment here because while the bank may have made risk decisions that were inappropriate, the fact is that, to a certain extent, regulators signed off on it. These may not have been subject to stress tests, but they certainly were subject to regulation.

Dean: Yes. Well, they weakened regulation in 2018. This is just an amazing story because we had the Dodd-Frank Act passed in 2010 that tightened up regulation of banks precisely to prevent things like this. So it required that all banks with more than 50 billion in assets had to undergo regular stress tests and were subject to strict scrutiny by the Federal Reserve Board. So just to tell people what a stress test is. What that means is they take a look at the bank’s assets, the liabilities, and they say, “Okay, let’s imagine bad things happen.” They’re not crazy stuff, and they’re not going to say that the end of the world. Obviously, it goes out of business.

But what they say is, let’s suppose that you have an unemployment rate increase of four percentage points. I’m pulling these numbers out of the air, by the way. Or let’s say that inflation goes up by five percentage points, or interest rates go up by four percentage points, five percentage points. That would be part of any stress test. And they say, “Okay, what do the bank’s books look like if interest rates go up four or five percentage points?” And they almost certainly would’ve gone, “Oh, well, they hold all these bonds. And, yes, the price of the bonds is going to fall. Most of their liabilities are these short-term deposits that could flee in a second. That’s a problem.”

They did a stress test that almost certainly would have come to light. They didn’t do a stress test for a simple reason: 2018, Congress passed a law, and President Trump signed it that we could Dodd-Frank so that banks that have less than 250 billion in assets don’t have to undergo regular stress tests. So guess what? Silicon Valley Bank is in that category. So prior to 2018, it would’ve been subject to stress tests. After 2018, it wasn’t.

So they didn’t have the strict scrutiny that the Fed had over the largest banks, and that allowed for them to do basically reckless investing policies with no one there to say, “Hey, you can’t do that.” And just to be fair, they are still subject to regulation but much, much weaker than what was provided for in Dodd-Frank.

Jeff: But Dean, it is remarkable that even with that legislation and even with them not being subject to the stress test that regulators still signed off on some of the practices: the duration misalignment they had, investments that they had that were questionable, that were not marked to market. There were a lot of things that were questionable that have come out about their practices, and regulators seem to be okay with that.

Dean: Yes, that is striking. And as I understand it, Congress is planning to do an investigation because… Obviously, it would’ve been best to have the stress test. You put it all down on paper and see what things look like. That would’ve been ideal. But even without that, it should have been impossible for regulators to detect a problem. Now, one thing that I’ll say maybe mitigates it, maybe not: This problem grew very quickly. So the bank basically tripled in size between 2020 and 2022. So if they had looked at their books in 2020, they probably didn’t look that bad. Things looked much worse in 2022 when it tripled in size.

That means that the problems might be relatively new. On the other hand, from the standpoint of regulators, you want to say, “Well, if a bank is growing very rapidly, you probably should take a look to see what’s going on there.” Remember many years ago, I was at a conference, an economist conference, and someone was going on about this ancient history, now long-term capital hedge fund that was led by two Nobel Prize winners in finance. And they were making money hand over fist. Anyhow, it ended up blowing itself up, and the Fed had to intervene to arrange for its orderly dismantlement.

So they were giving a talk; one of the Nobelists was giving a talk at the American Economic Association Convention, and the discussant was this guy Rajan at University of Chicago. He’s a conservative economist. And he said to him, he goes, “If what you’re doing isn’t risky, you should ask why.” “Use your Chicago common sense,” he put it, “and ask why the good Lord is being so nice to you.”

I thought, “That makes sense.” I don’t concern myself a University of Chicago conservative economist, but if you’re growing really rapidly, you should at least look closely and say, “Hey, is there something wrong here?” And you’d like to think the regulators would’ve said, “Wow, here’s this bank triples in size in the span of a year and a half. What are they doing?”

Jeff: Brad, when we look at the contagion here, the speed with which this unfolded, the way this played out with respect to regulation, should it give us some real concern about what would happen in a serious situation today, given a bank that was in more serious trouble or perhaps even a larger bank, when we see how fast a bank run can happen in the digital age?

Brad: Or even a bank that’s not in serious trouble. And in some ways, had we been smarter, and this is what one of the Federal Reserve staffers I was talking to over the weekend said, we would’ve… Remember GameStop? Okay. And also the movie company, was it A&E that also was in GameStop as well? Its price all of a sudden ballooned to 10 times as high as market value for no reason whatsoever, except possibly that Elon Musk tweeted “Gamestonk” as a single opaque tweet.

This is very much like that in reverse, but instead of a social media meme, let’s all pile into this particular asset just for the laugh. Let’s all run from this asset just because someone else has said it’s not safe to have your money in it. That social media contagion is happening orders of magnitude faster than people who are used to people actually having to call up their stockbroker and write out orders imagine that it possibly can.

So asset crashes that would’ve taken months back in the 1800s and weeks during the time of the Great Depression and even days 20 years ago, these things can happen in 30 minutes today, which means that regulators have got to think about how the system is going to need more buffers if people are going to read a tweet and then $40 billion of hot money is going to flow in one direction or another. That institutions need to be much better capitalized and procedures for dealing with situations can’t be made on the fly, but rather, we need to be prepositioned and ready for them beforehand.

Jeff: Dean, you were talking before about the way in which the bank grew. In many ways, it was reflective of the way Silicon Valley was growing at the time. When we had zero interest rates, the Valley was awash in cash, companies were growing at astronomical rates, and of course, on the company side, we’re seeing these companies downsizing because they also got caught up in too much hiring because of too much cash.

Dean: Yes. Again, it’s a mixed story. Obviously, you like to see people getting jobs as they were at that time, so a lot of sectors in the economy were doing very well. But again, it’s always reasonable, particularly tech. And it’s not the first time we’ve seen this. Tech had a huge boom in the late ’90s, of course, and then 2000-2001, it all crashed. In the late ’90s, anyone could come up with any idea, no matter how crazy, and run to Wall Street and get hundreds of millions of dollars on an initial public offering. No one wanted to go near those people a year or two later. So the idea that tech might be subject to boom or bust, that should not be a surprise to people, in particular, those who are regulating banks.

Jeff: I guess the bigger question is not just what happens to tech because they’re all going to be fine, and all the investors and all the depositors and Silicon Valley Bank will be fine. The bigger question is what happens to smaller banks, regional banks? There was a story today that $15 billion has inflowed into Bank of America alone since this all happened. What happens to regional banks in all of this, given the fear and the contagion?

Dean: It’s a really good question. And it will really depend whether that settles down. People move their money; I don’t know if they’re going to move it back. My guess is probably for the most part not, but I think what you have to hope is that people calm down because as I said, you had a lot of people, they had 10,000 and 20,000 in a bank. Obviously, no one wants the risk of losing everything they have, which for many people that would be everything they have, but it really wasn’t at risk.

What you have to hope is people calm down and say, “Hey, the federal government is backing up our money.” And I guess a lot of people don’t trust the federal government, but again, not much we could do about that. That’s why the Biden administration moved because I’m quite certain that their original inclination was: “Look, these people –” because you’re talking about wealthy… If you had 20/30/40 million, you’re a pretty wealthy person. I realize some of those are business accounts. Many of them are business accounts.

But the point is, you could say that “Alright, you might lose 10%. You should have had your eyes open. You’re supposed to be a smart, savvy business person, and you didn’t pay attention to the bank, you didn’t pay attention to the fact that the insurance limit was only 250? Eat it.” I think that was their inclination. That was my inclination. But they saw that people were fearful; they were moving money from other banks, and they really had no choice. They had to say, “Okay, we’re going to cover this.”

What you have to hope, or at least I would hope, is that people calm down and they go, “Okay, our money is secure. It doesn’t have to be at JPMorgan, the biggest bank in the country. It could be in our community bank or our regional bank and the government is going to cover it. We don’t have to worry about that.” I hope that will be the case. We’ll see in coming days whether things have calmed down or not.

Jeff: Brad, talk a little bit about your concern as an economist, as a former Treasury official, about what this is going to do to smaller banks, to regional banks.

Brad: Well, it concerns me to the extent that we continue to elect Republicans: Lael Brainard, the vice chair of the Federal Reserve; Michael Barr, who was vice chair for supervision at one point at the Federal Reserve.

The Democratic worthies back in 2018 when this latest round of banking deregulation was going through the Congress were warning very stridently that the banks that they wanted to exempt from special supervision, banks between 50 billion and $750 billion in assets, that those banks actually did need extra supervision because if one of them did suddenly collapse, then it would be bad to force everyone with their money to simply say, “You can’t have your money for a month or two while the bankruptcy process works its way out.”

Indeed, when SVB failed, there’s the choice. You could either say, “All right, the bank is bankrupt; here, you can have half your money on Monday. For the rest, you have to wait two months until the bankruptcy process works out, but here’s a certificate for your money for whatever of your money comes out of the process. Maybe you can sell that off to someone.” That was what it looked like might be happening over the weekend, if normal procedures were followed, if the procedures created by the 2018 “deregulatory reform” bill were followed.

And Sunday morning, various hedge funds were wandering around Silicon Valley saying, “We’ll pay you 60 cents on the dollar for your SVB certificates when they emerge.” It actually might have been, or at least one of the scenarios that we were gaming out on Saturday night and Sunday morning was that happens. Certificates are issued, and then someone who really wants Silicon Valley Bank depositors, someone like Bank of America, say, or maybe JPMorgan Chase, simply gives a general announcement: “Hey, I know you only have half your money; I know you’re getting your certificates tomorrow. Bring your certificates over to us tomorrow afternoon, and we’ll buy them from you at par. We’ll take the risk that you won’t get all your money back in the long run, and we’ll give you access to your money immediately on the grounds that the goodwill you get, and the value of the depositors you get from that action that then sticks to your bank that those are going to be profitable people to have as your customers.” It’s highly possible that one of the big banks or more of the Bank of Americas and the JPMorgans would’ve done that.

If only because Silicon Valley Bank probably, you’re probably going to get all your money back; it’s probably not going to be a loss for the FDIC, and there is value to be gained in grabbing the franchise that is SVB’s customers. But that’s not the way they decided to go. Instead, the Treasury, the Federal Reserve, and the Federal Deposit Insurance Corporation decided that they would use the power Congress gave them to declare a systemic risk exception and so say the government will backstop.

The government in the form of the FDIC in its ability to levy taxes on banks will backstop any losses to depositors, which I don’t think there will be any long losses to depositors, but they would’ve been too uncomfortable. And we’ll argue back and forth over the next month or two without whether the market solution was actually there and whether this was a better solution, given that the market solution would tend to have made bigger banks even bigger, increased concentration, and decreased competition to some degree in the banking sector.

Jeff: How do you imagine the big banks are going to react to this newfound power, the idea that too big to fail is suddenly a good thing again?

Brad: Yes, yes, yes, yes, it is indeed. When you’re too big to fail, you have a guarantee from the government that you have not paid for, which is why the government is relatively unsympathetic when the big banks say, “We really, really would like less regulation.” Because the government says, “We’re already giving you something of enormous value, and we really do not want ever to be in a situation like we were in 2008 when we opened up all of your books and discovered that you’d been doing a lot of things you really should not have been doing at all, so we’re going to watch you extremely closely and put you in quite a substantial straitjacket.”

And I think that JPMorgan Chase is probably going to ask for a temporary waiver of some of the requirements, that it keep reserves on hand, or it’s going to be telling people at the end of this week, “Sorry, the government won’t let us accept any more deposits from you.” I don’t think anyone really wants that to happen, for the government to be blamed for people unable to deposit money in JPMorgan Chase.

We already know that banks with more than $750 billion in assets that your deposits in them are absolutely safe. Now we have evidence that you put your money into a smaller bank that even if the bank does not look bankrupt on Thursday morning, it may be bankrupt by Friday morning without any significant change in news. And who needs that as an extra headache? If you are the chief financial officer of a small or a medium-sized business, and you have a choice between JPMorgan Chase and bank X, and you put your money in bank X, and then something like this happens, people then look at you funny, and you probably lose your job.

Back when it was SVB, you could at least say that they understand our business and they are a very good bank for those of us in the tech industry. But unless the FDIC sells off Silicon Valley Bank as a whole, and its brand continues, that reputation is gone, and then what advantages do you have in order to bid for this now $120 billion of deposits against the Bank of Americas and the JPMorgan Chases that say, “We are obviously now all too big to fail. No one can criticize you for giving your company’s money to us”?

Jeff: Dean, I want to come back to something we talked about earlier, which is the way in which this entire story has been essentially misreported and what, if anything, we can do, the banking industry can do, or the media should do to sort all that out.

Dean: Well, I have my blog, Beat the Press, that comments on economic reporting. And I’ve been doing that in one form or another for, I guess, about 25 years now. And I like to think you could educate economics reporters. And in fairness, I think in general they are much better today than they were when I first started. Not because of my blog, I’m not making that claim, but I think they do a much better job, and you do have some very good economics reporters, but you still have these stories that are just painfully ill-informed. And when they’re coming out at places like The New York Times, National Public Radio, and again, I’m picking on them because they’re the best — it’s really painful.

And I don’t know if they don’t care, and I don’t think they’re deliberately trying to spread misinformation, but they have people at the papers or at National Public Radio who do know better. All I could say is they just don’t feel the need to check because they have reporters, I gathered, they don’t understand the issue, who just misreport it. And sometimes it’s clear you’re doing it like it’s a human interest story.

So I picked on NPR on Twitter. I did a Twitter thread about this particular NPR story where they talk about this Black woman, mid-40s, who started a business, and she had her payroll money in Silicon Valley Bank. They won’t say how much it is, but it was over the 250, or at least I presume it was, and they say, “Oh, she doesn’t know when she’ll be able to get her money or how much.” Well, the FDIC had already issued the statement saying that they would make an advance payment the next week.

So they’re doing this as this human interest story that this woman’s been trying to build up a business, and she might suddenly go under, or she doesn’t know what she’s going to do. Well, that was not true. And the person, obviously, didn’t do enough homework to simply find out “Okay, what are the facts here?” And again, it was easily preventable, but obviously, they didn’t care. Their editor, I don’t know exactly how they process their stories at National Public Radio, but whoever it went through didn’t think to say, “Oh, what are the facts here?” And as a result of that, they seriously misrepresented the situation to their audience.

Jeff: The other thing about this situation, and it relates to the reaction to how it’s been covered, and it relates to the bank run that we saw, is that all of this is speeded up to such incredible proportions in the digital age. We look at past bank runs, even going back to Washington Mutual: It took days and days for that to play out. This played out in 24 hours: $42 billion came out of the bank.

Dean: That’s exactly right. And a lot of that was deliberate, that you had, not that they were trying to push the bank run, but you had people — Bill Ackman is a well-known hedge fund guy, he had money in the bank; he was out there pushing it. Peter Thiel, another venture capitalist, he was out there pushing this. So they were out there pushing the line. They have Twitter followings, they have other social media outlets, and of course, they have access to the media itself. They’re prominent figures; what they say carries a lot of weight. So they were very much pushing this.

Thiel may have gotten all his money out, I’m not sure, but in any case, they wanted the bailout. So they wanted to make this into a crisis. And they had the means to do it because they could get on Twitter and say whatever they want and get a lot of people to follow it. And again, also, these are people what they say gets reported in major media outlets, so they could get their story out there. And their story wasn’t true, but that didn’t matter. They could get it out there.

Jeff: Brad, talk about your sense of how this story was covered as it unfolded.

Brad: They’re in the business of sensationalizing things in order to get readers, so they can sell them ads and have always been. There are lots and lots of real weirdnesses around this. From my perspective, it’s “Oh, that’s very interesting. 25% of a bank’s deposits, $40 billion can vanish in an afternoon.” Even if everyone looking at the bank is saying, “Yes, capital is impaired right now, but they have this nice expected capital gain. And, yes, shareholders are very unhappy they made these bets.” But a bank is a bank, and it has time to figure out what it’s going to do with its current situation.

It has time to figure out to bargain with those people who it might want to raise capital from on exactly what terms they will commit their money to the bank and how much of an ownership share they will get. And those negotiations were ongoing. It’s said Goldman Sachs bought two-and-a-half billion of SVB’s impaired bonds, I think Wednesday night, at a reasonable price. And that’s they said: “We’re doing you a favor. You can’t all sell this large chunk of bonds at one fell swoop, so we’re going to take a healthy commission, but we’re doing you a favor.”

And I’m told that SVB got within 20 minutes of issuing another $2 billion of stock on Thursday before everyone turned and ran away on the grounds that things were going south extremely rapidly, and if they’d gotten that two billion or if Kleiner Perkins and a16z and Founders Fund and others had expressed a willingness to say, “We are willing to make a capital injection into SVB in the event that it turns out to be useful.”

Though I thought to the extent I thought at all that those things would happen over the course of the next several months instead of everything having to happen immediately and everyone being thankful that markets then closed for the weekend. And we then had 56 hours between the formal close of markets in New York on Friday and the opening of Asia Monday morning in Asia to actually figure out what to do.

I’m still surprised that no one bought up SVB whole. The British government seized its British subsidiary and sold it to Hong Kong and Shanghai Bank for £1. Even Hong Kong and Shanghai Bank is now extremely happy A) because it now has this nice capital gain on its books that’s going to flow in over the next five years as the bonds go back to par and B) because Hong Kong and Shanghai Bank SVB Britain subsidiary is now their entry into the business of financing tech in Britain.

Jeff: It does make you wonder about how this stuff plays out, and if something really far more serious than SVB comes along in this Twitter age, this digital age of money moving so quickly, that the consequences could be a lot worse even in a real serious situation than even we saw in 2008-2009. Dean, your thoughts about that?

Dean: Absolutely. It really is a concern. And again, we’ve seen this obviously in other contexts and most immediately with the pandemic where you had this mass paranoia, hysteria, whatever term you want to use, created about the vaccines. And it literally made no sense. I’m saying it literally made no sense because you had multiple vaccines. You had a Pfizer vaccine, you had a Johnson & Johnson vaccine, you had a Nova. vaccine, so there were a number of other vaccines.

So if you could ever get anyone just to be specific: “Okay, which vaccine are you saying has these horrible effects?” People go, “Okay I’ll take one of the other ones.” But in any case, you had this crazy hysteria, and you had millions of people, maybe tens of millions that didn’t get vaccinated because of hysteria. People may have not wanted to get vaccinated for, I don’t know if I’d call them good reasons, but probably they just don’t like to put things in their body. I don’t agree with it. I understand it. But they were convinced that these vaccines were horrible for them, and they didn’t get protected against the virus. Many of those people end up dying.

So it is a real problem that you could have misinformation spread. And we see this in finance, just as in other areas. And, yes, there are real effects to it.

Jeff: Brad, misinformation notwithstanding, were there things that we didn’t know what was going on inside SVB with respect to the economics of the bank that really might have had an impact had they been properly reported?

Brad: One of the things slowing things down over the weekend was exactly how much money has SVB loaned out to winemakers, and exactly how valuable is all this collateral in the form of wine that they now own? Is this real collateral, or is this not? What are these other assets? If they were bad judges of interest rate risk, does this mean that they were also playing fast and loose with the collateral they were taking on their loans? There are five or six banks that have substantial losses, and should not just be getting facilities but should be raising capital right now. And I’m sure the government is talking to them all about the terms under which they’ll do that so that they can avoid what happened to SVB.

But then again, who can avoid? How can you avoid it? Right? That’s Citibank. Only 15% of Citibank’s commercial bank deposits are insured. If the same contagion that struck SVB strikes Citicorp, up to 85% of its deposits could flee the same way 25% of SVB’s did on Thursday. And absolutely no bank can withstand that. There’s no way you can sell off enough of your assets that close to their small tranche liquid value to survive that.

Jeff: And finally to you, Brad, what is your big takeaway from this? Now that we’ve talked about all the aspects of Silicon Valley Bank, large banks, small banks, what’s the big takeaway from this, do you think?

Brad: Well, the big worry, as so often, is electing Republicans. That you break the functioning of the government and then say government doesn’t work is a very strange business model. But that, coupled with an obsequious willingness to dismantle guardrails whenever they constrain your current bunch of rich contributors is a hell of a political business model, although it’s a successful one, but it’s not clear to me it’s one we can afford over the long run.

At the second level, we really need to say that bank deposits are bank deposits, and you really do not have to worry about your bank deposits. And we make up the fact that people aren’t worried about their bank deposits and so head for the banks that offer higher interest rates and better service. We make up for the potential moral hazard that creates through increasingly stringent and strict regulation of banks: The demand every bank have a plan for what it will do in order to get out of a mess should what happened last Thursday to SVB happen to it someday.

And I think the examiners did quite a good job in figuring out what was going on in real time, and we should be proud of them. We see this quite awhile. My first was Mexico in 1994, then East Asia in ’97 and ’98, Turkey in 2001, and then a bunch of others. Then 2007 to 2009. Then also there was the Great Plague financial crisis. This is close to being business as usual or at least business every half-decade. And so far as financial blow-ups occur, this is a very small one, although a weird one and an unexpected one.

And I think we are probably fortunate that it happened, that the connection of social media, an economic community that’s unable to have any degree of self-organization for its own collective prosperity, and the vulnerability of banks to interest rate rises, we’re lucky that this is just a canary in the coal mine, rather than an ostrich or a giant [unintelligible 00:44:50] or whatever.

Jeff: And finally to you, Dean, is it your sense that given two or three weeks’ time, the media just moves on to another story? That this will just settle out and be long forgotten.

Dean: I think that’s most likely the case. But again, you can’t rule out that something else will happen and get the fears going again. Silicon Valley Bank was uniquely situated for this sort of disaster, both in that almost all their assets were in government bonds had lost value. Hadn’t gone to zero. Just to be clear, they hadn’t gone to zero. They might have lost 5, 10, even 15% their value in some cases.

So, one, their mix of assets was very bad. The other part of the story is that they were hugely dependent on uninsured deposits. The numbers I’ve seen on the order of 95%. A typical bank, 20, maybe 30% of their liabilities would be in the form of uninsured deposits. My reason for emphasizing that is those are the ones that are most likely to flee. If you have an insured deposit, you have no reason to flee. Maybe you still would, but you have no reason to.

And the other liabilities, typically banks have issued a lot of bonds. Bondholders are unhappy if the bank might be in trouble, but that’s not the bank’s problem; that’s a bondholder’s problem. They don’t have to pay off the bondholders because they’re unhappy, or they have certificates of deposit. Same thing; that’s a one-year, two-, whatever. These banks, this one I’m mentioning, Signature is the other one in New York that also went under, they were unusually situated in that they had a very large share of their liabilities in these uninsured deposits.

So I don’t anticipate we’ll see other runs like that. But again, you could find out that this bank or that bank was doing something totally crazy and now they’re insolvent. That could happen again. Again, I don’t rule it out. I’m hoping it’s not. And if that doesn’t happen, then, yes, I suspect in two or three weeks, this will be history.

Jeff: Of course, the other side is if the media moves off this story, and their hysteria about it goes away, there’s no question that politicians on both sides for political advantage will keep it alive for a while.

Dean: That’s right. And I know there were a lot of Republicans who are dumping on the Biden administration saying it was a bailout, which I think it was. How much consequence that will have? How much money it will actually mean? Likely very, very little. But we were helping out. It wasn’t the bank, so the Biden administration is absolutely right. They’re not bailing out the bank. The bank went under. The shareholders were zeroed out. The top execs all lost their jobs.

So the bank wasn’t bailed out, but the people who were bailed out were people like Bill Ackman, these wealthy people who had a lot of money at the bank. Otherwise, had the federal government not stepped in, they might have had to take a haircut. Maybe had lost 3%, 5%, 10%, I don’t know. And it might have taken them a little while to get all their money, whatever that came to, back. So those were the people bailed out. It was not the bank.

Jeff: Dean Baker, Brad DeLong, I thank you both so much for spending time with us today here on the WhoWhatWhy podcast and helping clarify what’s been a complicated week-long story. Thank you both.

Brad: You’re welcome. You’re welcome.

Dean: Thanks a lot for having me on.

Jeff: Thank you. And thank you for listening and joining us here on the WhoWhatWhy podcast. I hope you join us next week for another radio WhoWhatWhy podcast. I’m Jeff Schechtman. If you liked this podcast, please feel free to share and help others find it by rating and reviewing it on iTunes. You can also support this podcast and all the work we do by going to whowhatwhy.org/donate.


Author

  • Jeff Schechtman

    Jeff Schechtman's career spans movies, radio stations, and podcasts. After spending twenty-five years in the motion picture industry as a producer and executive, he immersed himself in journalism, radio, and, more recently, the world of podcasts. To date, he has conducted over ten thousand interviews with authors, journalists, and thought leaders. Since March 2015, he has produced almost 500 podcasts for WhoWhatWhy.

    View all posts

Comments are closed.