TOO BIG TO FAIL JUST GOT SMALLER: We are no longer a nation with banks, but banks with a nation.
[There are]no atheists in foxholes. [n]or libertarians in bank runs. Jean-Louis Gassée
Wall Street loves socialism for bankers, but not for ordinary people. Robert Reich
Whenever anyone who isn’t FDR tells you that there is nothing to fear but fear itself, it is time to get the heck out of Dodge. Anonymous
The only innovation in money and banking that I am aware of is the ATM machine. Paul Volker
When you have people who were going to take losses and now, they are not, they are being bailed out by somebody. Morgan Ricks
There are two key points that people should recognize about the decision to guarantee all the deposits at Silicon Valley Bank (SVB): (1) It was a bailout, (2) Donald Trump was the person responsible. Dean Baker
The word “bank” originally referred to the tables of the money changers that Jesus overturned on the steps of the Temple in Jerusalem. Let’s face it, bankers have always been wankers, but in the last few decades we have elevated them to master(bator)s of the universe. At root, it is based upon a foundation of legalized fraud (fractional reserves of 10%), and compounds this problem via hyper-leveraging, rehypothecations (re-using loans as further collateral), exotic derivatives (which facilitate naked shorts among other strange things); not to mention self-securitizations (instruments that the banks never intended to sell).
Meanwhile, we experienced incestuous rating agencies (assigning AAA to steaming piles of shit), and stratospheric valuations for completely unproven technologies (as well as pure scams). With central banks (the Fed in our case) priming the pump (near zero interest rates, and tens of trillions in quantitative easing, etc.) in good times and bad, it is no surprise that banks of all sorts came to enjoy dancing along the edge of insolvency to gamble with other people’s money. The final ingredient of hordes of easily panicked depositors and you have a recipe for bank runs that it would take the 101st Airborne and 1st Marine Division to quell.
Ever since securitization became the industry of choice for aspiring billionaires (bi-passing all the risks of actually making something), the financialization of virtually everything became the raison d’état of our dying Ponzi Empire. Battling to become a mammoth tech monopoly platform quickly gave way to skating along as a shadowy money person. Many a tech entrepreneur abandoned innovation for investment banking. When I taught in engineering at Stanford during the mid-80s (and the US was losing the chip wars), we regaled our students with the fact that the US produced 10 lawyers for every single engineer (Japan was exactly opposite). Since then, we probably produced 10 bankers for every single engineer, and many of those majored in “financial engineering” (running huge stochastic hedge models for the shadow bankers).
Once Wall Street showed an interest in the high-tech mecca below the San Francisco Bay, hapless unicorns (with very low probabilities for becoming the “next big thing”) were awash in funding. Everybody was emboldened to think of themselves as venture capitalists. Much of this frenzy was merely to allow initial venture investors to get the cash out. It is many of those highly speculative bets that we are now guaranteeing via the “non-bailout” bailout of SVB.
This situation is obviously very different than the Financial Crisis of 2008, but it signifies that b(w)ankers are still in the driver’s seat. Back then we established the dictum of Finance Uber Alles, when Bush and then Obama dropped neutron bombs (that destroyed the householders and left the banks intact). Nobody significant went to jail or even took the normal haircut. Essentially, the Great Dispossession never ended, and we are still pandering to predatory plutocrats. While indirectly bailing out a few banks seems like a tempest in a teapot, we are far from done yet. Moreover, Biden says “he will do whatever is necessary”, except actually reform the banks.
Sure, unlike last time, SVB Managers are fired and shareholders seem cooked, but bonuses were paid on Friday just as the banks was being grabbed by regulators. Plus, the CEO sold a big wad of his shares the week before. If a buyer shows up soon, it is not necessarily clear that all staff will be canned. The British operations of SVB sold for one pound on Sunday, and much of the staff remained. Say where can I buy a bank (with its toxic assets removed) for a buck?
It is essential to point out that these interventions beyond FDIC insurance limits would not have been necessary, if the Trump had not led the charge to weaken the already weak Dodd Frank Act of 2010. Requirements (e.g., stress tests) for mid-sized banks (100 to 250 billion in assets) were dramatically reduced at his behest in 2018. Virtually every time we deregulate the banks a catastrophe is not far off.
Conservative media, of course, is already blaming “wokeness” (the all-purpose villain these days) and the still hypothetical ESG (environmental and social governance) guidelines for the collapse of SVB. This is pure rubbish. However, Biden could have appointed Lael Brainard (the regulator who had forcefully argued against the Trump relaxations) as Fed Chair. It is well to remember, however, that the Fed (Federal Reserve) is private banking cartel (not much more governmental than the Federal Express). Furthermore, even if the Fed wanted to police the banks, tinkering with the rules is, at best, a long-term project, and we have problems now.
At least 20 more mid-sized banks have solvency issues, and the exact level of systemic risk is virtually unknown given the vast webs of “shadow banking” (un-regulated hedge and private/pirate equity connections). Measures and rule changes adopted during The Pandemic made it possible for the Fed to offer inordinate assistance directly to these kleptocratic mavens of high finance, despite their lack of membership in the reserve system.
Corporate debt is especially troubling of late. The re-securitization of distressed loans has become increasingly egregious, and armies of zombie firms are running amok. Many otherwise functioning corporations were loaded up with mountains debts to finance stock buybacks during the era of “shareholder (corporate raider) capitalism”. And, we are now facing another huge bubble in commercial real estate.
With SVB and Signature Bank, the FDIC could be using most of its available funds for the uninsured, so what happens to insured depositors (who are not even the first in line to be made whole) when the next mid-sized bank fails. Who will bailout the FDIC? It is worth noting in closing that we already have pernicious procedures in place for the so-called “bail ins” (where even insured depositors are merely converted into shareholders in a failing bank). Maybe we should think much more seriously about who is getting bailed and who is getting nailed by our extremely reckless and permanently unstable banking system.