SVB collapse: Silicon Valley Bank is not getting a bailout
Conn Carroll
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The term “bailout” is a dirty word, and rightly so. When taxpayers are forced to pay for the mistakes of corporate executives, and investors who were supposed to be monitoring those executives, bad incentives for risk-taking are created.
This is what happened in the U.S. economy, stretching from the bailout of the Long-Term Capital Management hedge fund in 1998 to the Troubled Asset Relief Program of 2008. The government-led rescue of firms, and their investors who made risky bets, only encouraged even more risky behavior.
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But this is not what is happening to Silicon Valley Bank. Silicon Valley Bank is not getting bailed out. It is dead. Its investors and bondholders have been completely wiped out, and the executives are now unemployed.
The only people getting bailed out here are the depositors — the ones who put their hard-earned money in accounts with Silicon Valley Bank, including the companies that have bank accounts with them. So when Sen. Bernie Sanders (I-VT) says, “Now is not the time for U.S. taxpayers to bail out Silicon Valley Bank,” he should be happy to know that Silicon Valley Bank is not getting a bailout — its depositors are. This is an important distinction.
The executives who ran Silicon Valley Bank definitely made some big mistakes. They have been punished with the loss of their jobs. But they are not guilty of the same reckless behavior that caused the global financial crisis over a decade ago. In the run-up to the mortgage meltdown, financial firms were issuing predatory mortgage loans they knew were very risky and then engaging in highly questionable financial engineering (some would even say fraud) to sell those mortgages as safe investments. When those predatory mortgages started going bad (as any honest banker knew they would), the value of the supposedly safe investments fell, and many investment firms, insurance firms, and banks suddenly didn’t have the assets they needed to meet their liabilities.
Making bad predatory loans is not what caused Silicon Valley Bank to fail. Quite the opposite. If anything, Silicon Valley Bank didn’t make enough loans. Instead, it bought a bunch of ultrasafe low-yield Treasury bonds. In other words, it did exactly what people like Sen. Elizabeth Warren (D-MA) wanted it to do: It bought safe assets.
The problem with this was that as the Federal Reserve began to raise interest rates, the value of these low-yield Treasury bonds fell. Silicon Valley Bank failed to diversify its asset holdings to manage the risk of rising interest rates. The executives at Silicon Valley Bank, and the investors in Silicon Valley Bank stock who should have been monitoring, are being punished for this imprudent but very conservative investment strategy.
Are the depositors of Silicon Valley Bank really to blame for not knowing if bank executives had properly managed the risk of higher interest rates? No, of course not.
The case of Signature Bank is different. Signature sold itself as a cryptocurrency expert. If you had your money in Signature Bank, you were making a decision about the safety of cryptocurrency assets.
In contrast, depositors in Silicon Valley Bank didn’t know that bank executives had recently begun making bad long-term bets on low-yield Treasury bonds. Sure, a Silicon Valley Bank customer knew the bank invested in Silicon Valley tech startups, but the bank did not fail because a bunch of tech startups suddenly went belly up. The bank failed because it didn’t manage the risk of rising interest rates correctly.
If you own Al’s Bakery, your business will succeed or fail because of your baking skills. Your expertise is in baking, not banking. The whole reason to have a bank is so that nonbanking experts don’t constantly have to monitor the decisions bankers make. That is the job of the bank’s executives, its board, and its investors.
We still don’t even know how much money the Federal Reserve will have to use from the Deposit Insurance Fund to cover the deposits of Silicon Valley Bank’s depositors. The assets the bank has are solid. It’s not like they have a bunch of mortgage-backed securities made up of garbage loans. It’s possible enough SVB assets are available to cover 95% of their liabilities.
I have no idea whether or not what the Federal Reserve did was necessary to avoid a wider bank panic, but I am failing to see what big new risk is being created by making SVB depositors whole here.
It’s fair to say that SVB depositors are being bailed out, but I am failing to see what exactly they did wrong here or how bailing them out creates bad incentives for other depositors.