Three banks have failed in less than a week, and panic set in on Wall Street and Washington DC. As markets closed on Friday, Silicon Valley Bank was seized by the FDIC, Silvergate lay in tatters, and we'd learn by Sunday that Signature Bank in New York was done too. Venture Capitalists fanned fears of bank run contagion throughout the weekend, begging for a bailout from the Feds, and they got what they wanted.
Like 2008, the failure here wasn't the bust of banks but the lead-up. In a capitalist system, we expect bank failures. Every day, businesses rise and fall in the capitalist order. But in a bailout, we are told that some people cannot fail, no matter the cost.
This week, we learned that everyone with money deposited in Silicon Valley Bank and Signature Bank met those criteria as the Feds wound them down. Meanwhile, the Federal government stepped into the role of picking winners and losers by infusing First Republic Bank with cash to offset a liquidity crisis it was having too. First Republic Bank gets to live, and the other three have to die. Why? No one knows.
If the beat and melody sound familiar, they should. We've returned to the bailouts and cheap money used to save banks - again. Only this time, the measures taken are more extreme than anything announced in 2008.
After taking control of Silicon Valley Bank and Signature Bank, the Federal Reserve, Treasury, and FDIC made a joint statement. They are "guaranteeing all deposits of SVB, were designed to shore up wavering confidence in the banking system." But you and I are not supposed to call this a bailout; the government is insuring all depositors.
I agree with the Wall Street Journal Editorial Board: "This is a de facto bailout of the banking system, even as regulators and Biden officials have been telling us that the economy is great and there was nothing to worry about. The unpleasant truth—which Washington will never admit—is that SVB's failure is the bill coming due for years of monetary and regulatory mistakes."
We are bailing out the lousy venture capitalists, bankers, and businesses that received bad loans and guarantees from a poorly managed bank. This is not capitalism; it's saving those with political connections.
Had the FDIC, Fed, and Treasury allowed a White Knight to swoop in, or several buyers, to take over all or part of these banks, we could avoid this kind of intervention. But the federal government rejected this line - because they wanted to be the saviors.
The WSJ notes, "Rohit Chopra, the Elizabeth Warren acolyte on the FDIC board, is hostile to bank mergers on ideological grounds, and the purchase terms could be too onerous for some potential buyers." And that's precisely what happened.
According to Reuters, PNC Financial Group Inc and the Royal Bank of Canada wanted to buy Silicon Valley Bank. Both didn't like the terms they got presented. There's no sign the federal government allowed the larger banks to step in and buy out SVB, either.
And so, we're back to picking the winners and losers. The winners, in this case, are all the venture capitalists who screamed on social media all weekend, demanding that the government save their pet projects. The largest big tech firms have a combined half a trillion dollars in cash reserves.
The venture capitalists and various angel funds have equal amounts of cash reserves. Heaven forbid they step up and save their sector. The gall of these well-connected types to demand the government rescue them from a poorly run bank when they have the resources to save themselves is the latest evidence that there's no capitalism in TechBro land. The gains are theirs; the losses are ours.
Now, the FDIC has claimed it has the power to back every single deposit in any bank in America - not just the $250,000 promise every American sees. The Federal Reserve has limited risk at all. If this is to be the banking system, where the United States government and its taxpayers have to continually eat the losses of the finance and technology sector, there's not much of an argument for keeping private banks.
That's not a call for a socialist system. It's noting the irony that we're privatizing gains but socializing losses. That's not the capitalist system, nor is it a fair system for Americans. These corporatists need to feel the burn of loss.
Consolidation of banks is not a bad thing. We can change laws to make it easier for newer banks to appear - that's the current problem. But these bad banks and the executives they breed continue to burn us while never taking responsibility. That's the point of capitalism, allowing bad decisions to burn out the losers. Government regulation preventing new banks and businesses from arising is a separate issue.
Michael Burry, the legendary investor that called the 2008 housing crisis, remarked, "2000, 2008, 2023, it is always the same. People full of hubris and greed take stupid risks, and fail. Money is then printed. Because it works so well."
We're here again, fifteen years later, making the same mistakes for the same people. We must sober up, drain the Keynsian stupidity from the system, and let market dynamics clear out the bad actors. Instead, we seem hellbent on saving losers and dumping the losses on Main Street. That's not capitalism, nor is it fair to the average American.