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SVB sign in front of Silicon Valley Bank headquarters in Santa Clara, California. (Minh Nguyen, via Wikimedia Commons, licensed under CC BY-SA 4.0)
The Silicon Valley Bank collapse brings with it memories of the wider 2008 economic crisis. Jeet Heer and John Nichols from The Nation join us to discuss the 2018 bank deregulations that set the stage for this moment and the risky investment strategy at the bank itself. They argue that bailout and FDIC’s role in the collapse could set the stage for a dangerous economic future.
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Featuring Music Credits
Making Contact Staff
TRANSCRIPT
Salima Hamirani: I’m Salima Hamirani and on today’s Making Contact…
Jeet Heer: All their money was put into a situation that only makes sense if interest rates remain low, and that was the whole predication of the bank.
Salima Hamirani: We talked to John Nichols and Jeet Heer from The Nation about the Silicon Valley Bank collapse.
Jeet Heer: Well, guess what? Interest rates did not remain low, and so it was like just an incredibly risky thing that they did. It was a gamble and it did not pay off.
Salima Hamirani: What does the bailout mean for the future of our economy? And why did the bank crash in the first place?
John Nichols: What’s incredible about this and why this is a big deal is that this is a circumstance where if it becomes a precedent, it means that the federal deposit insurance company has suddenly been expanded into a massive bailout operation for basically anybody that puts money in a bank,
Salima Hamirani: Stay tuned. All that and more coming up.
Welcome to our show today. I’m Salima Hamirani, and joining me are John Nichols and Jeet Heer, who have both written for The Nation about the reasons behind the Silicon Valley Bank collapse in March of 2023.
News clip: SVB, the 16th largest bank in the US with 175 billion in deposits is now the biggest American bank to fail since the 2008 financial crisis…
Salima Hamirani: On Friday, March 10th, the bank was found to have insufficient funds to cover its depositors. Then it went into a freefall.
News clip: After reporting a loss of over $1 billion, there were fears of a run on this bank. People wondering if they should have PTSD to 2008, what’s going on here?
Salima Hamirani: The bank collapse was called a classic bank run…
Movie clip: Don’t look now George but there’s something weird going on at the bank. I’ve never seen one, but that has all the signs of a run!
Salima Hamirani: But Jeet and John argue that actually some relatively new bank regulations and a set of risky decisions are what led to the collapse.
So John, can we quickly do a review for the audience, what is the Silicon Valley Bank? And give us an overview of what happened.
John Nichols: The Silicon Valley Bank is one of the most powerful banks in the country. Not because of its size, but because of its clientele. By its name, we know that it’s located in the Silicon Valley, and many of its clients were cutting edge tech entrepreneurs and folks who were, were in the digital world, so to speak.
They had a tremendous amount of money piled up in the bank. Although the interesting dynamic of it is it was referred to as a kind of a regional bank, a smaller bank, and thus it had a different set of rules. It didn’t have to monitor its money so closely. It didn’t have to follow all the regulations that bigger banks did. And so you ended up in a situation where because of a variety of factors we’ll talk about later, they ended up in a crash situation. They did not have enough money to cover their accounts. The bank was taken over by the federal government and in an unprecedented move, the president of the United States and other federal officials announced that they were going to make sure that all the deposits were made whole.
Salima Hamirani: The decision to bail out the bank was made over a weekend, two days after the collapse. Basically, the Treasury Department, the Federal Reserve, and the FDIC, or the Federal Deposit Insurance Company, said that they would make sure that every depositor received every last cent, even if traditionally their money wasn’t actually insured.
John Nichols: What’s incredible about this and why this is a big deal is that this is a circumstance where if it becomes a precedent, it means that the Federal Deposit Insurance Company, which is supposed to ensure deposits up to about $250,000, has suddenly been expanded into a massive bailout operation for basically anybody that puts money in a bank. That’s a transformational moment. So the Silicon Valley Bank collapse raises profound issues about how we regulate banks and about how the future of insurance for bank deposits may go. Both of them are gonna have profound effects for American taxpayers.
Salima Hamirani: And Jeet, why were startups and that sort of investment capital so drawn to this particular bank?
Jeet Heer: I think the specific nature of the Silicon Valley Bank came out of the specific nature of the industries, the tech startups. Now, these are not sort of mature industries where you have a regular amount of money coming in and money going out. You know, let’s say the big car companies or even like your local mom and pop restaurant.
These are like startup companies. They start off with like much more capital than a normal business and much less money coming in. So they need to have a place where they can maintain normal operations. And Silicon Valley Bank, my understanding is it really made itself a bank that could do that. They had people who put in a tremendous amount of money that was uninsured. You’re typically insured up to a quarter of a million dollars. But they had at least ten depositors that had more than a billion dollars in their checking account.
Salima Hamirani: Is that normal, to have a billion dollars in a checking account?
Jeet Heer: No, it is not normal. And so with that special setup you’re gonna have a lot of money from depositors. Sometimes what a normal bank would do is, you know, like it’d have money from depositors. And then it’d be lending some money out. You have some risky businesses you give money to, you have some very safe business, and you have like money in long-term bonds. What they did instead was to put on an inordinately large amount of money in long-term bonds, which one would think is a safe thing to do.
Salima Hamirani: And we should just back up one second because I mentioned a lot of people are calling this a bank run. And, you know, a bank run is technically something that could happen to any bank because all banks have their money in circulation. It’s not sitting under the bank in some kind of massive vault, like in the movies. So if everyone who had money deposited in a bank decided to withdraw all their money all at once, the bank could crash. It can’t guarantee that everybody would be able to withdraw cash at the same time because most of it’s in circulation.
Salima Hamirani: So Jeet is the issue that because of these bonds, Silicon Valley Bank didn’t have the money on hand when people were trying to withdraw?
Jeet Heer: The issue was where they were keeping their savings, which is overwhelmingly in bonds. And the thing is, these are long-term bonds. They’re not liquid, right? You keep them there for like 10, 20, 30 years or more. And so when you have a run on the bank, you don’t have the money on hand to pay it off. But also these long-term bonds, they invested them in in a period where the interest rates were lower. Once interest rates rise, these long-term bonds, they become degraded in value. They put all their eggs in one basket is the simple way to put it. They put all their eggs in the basket of long-term bonds. And if you’re a bank, you normally, like, you know, you do have some long-term bonds, but you also balance it with other things, and you balance it with other money that you lend out that is more resilient in terms of interest rates. They did not do that.
All their money was put into a situation that only makes sense if interest rates remain low. And that was the whole predication of the bank. Well, guess what? Interest rates did not remain low. And so it was like just an incredibly risky thing that they did. It was a gamble, and it did not pay off.
Salima Hamirani: Okay, but John, back to you, interest rates have changed many times throughout history. Why did they assume that the economic situation in the country would never change?
John Nichols: Sure. We had been through a period where the Federal Reserve had kept bank rates, you know, interest rates very, very low. This really was a playout of the 2008, 2009 economic downturn. Well, this was great for a lot of investors and bankers and stuff like that cause they could get money cheap.
But it also created a certain comfort level with that. That circumstance became so locked in that I think there was a doubt that interest rates would actually ever go up at some sort of substantial rate.
Then we hit inflation. And the inflation that really kind of took off during and after Covid-19, after the pandemic hit, caused the Federal Reserve to decide that they had to raise interest rates.
The Federal Reserve kind of wanted to do so anyway. So they were looking for an excuse. They found it, and they started to raise these interest rates. That was something that had a profound impact on Silicon Valley Bank. Frankly, it’s had a lot of impact on all sorts of other people. We should understand that raising interest rates in this way, you know, ripples through all of society. It has an impact, you know, even for people perhaps getting jobs and things like that.
Now, here’s where the problem came in as regards Silicon Valley Bank. The Federal Reserve is supposed to kind of keep an eye on banks and what it does and how it affects banks. And the Federal Reserve didn’t think about this. Or at least there’s not much evidence that they thought about this because they were apparently as surprised as anybody else that Silicon Valley Bank and other banks as well ran into trouble. And the next stumble, if we can, you know, kind of keep looking at this circumstance, is that you should have federal regulators examining banks, right?
Looking at, you know, how are you managing your money? What are you doing? Especially when it’s a bank this size with the better part of $250 billion, you know, this is a lot of money. It’s a quarter of a trillion, right? So when you’re talking about that kind of money, there should be bank regulators coming in on a regular basis.
They were not doing so at the level they were supposed to because in 2018, the Congress and the Trump administration changed the rules and they said, if you’re a quote unquote regional bank, and I mean that’s a bank with, you know, under $250 billion, you don’t have to be as strictly monitored. And so they basically created a circumstance where this was almost destined to happen, where some bank was gonna, you know, be under-regulated, under-examined, and crash and burn.
Salima Hamirani: Okay, and so on that point we are gonna talk about the bailout. But before that, let’s talk a little bit more about what happened in 2018. You’ve both written about 2018 being the basis of what happened to the Silicon Valley Bank. John, can you explain?
John Nichols: Well, as soon as Dodd-Frank was enacted, the bank started a major lobbying campaign to kind of undermine it.
Salima Hamirani: For those of you listening, Dodd-Frank was passed right after the big financial crash in 2007. And it’s this big piece of law that was meant to reign in the big banks and speculative investments that could lead to another crash. Dodd-Frank involves a lot of guardrails, including breaking up big institutions, monitoring banks, and their investments. Basically, it’s kind of a watchdog. But of course the financial world isn’t happy about being watched.
John Nichols: So we should understand they were at work immediately. And the way that banks lobby, the way that their industry lobbies, is by hiring members of Congress, former members of Congress who have left Congress. And they hire Democrats and Republicans and they pay ’em a lot of money. And they send ’em out to Capitol Hill. And they’re sent up there to lie. Or to put it politely, to make the case in a way that is very beneficial to their clients.
And so, the big lie that played out here was an argument that Dodd-Frank was bad for so-called community banks. Now, if you think about a community bank, I grew up in a little tiny town in Wisconsin, a town of about a thousand people. We had the State Bank of Union Grove. The president of that bank, the board members of that bank, they all lived in the town. It was a little bank. It gave farm loans and loans for main street businesses. If it got in trouble right and went down, it would probably harm Union Grove and several townships surrounding it. But it wasn’t gonna take down the global economy.
These banks took that understanding, and they suddenly said, yeah, a bank with say $250 billion, that’s a community bank too. And they kept pushing this fantasy. And initially, it was laughed at, right. But over time, they got it to take. And I mean, clearly how they got it to take was when Republicans took over the House. And they really jumped into action especially in 2017, 2018, when they had a Republican president they thought would be sympathetic.
What they did then was they wanted to portray it as a bipartisan proposal, right. They had all the Republicans on board. And then in the Senate, they had 17 Democrats, including some very prominent Democrats, key Democrats from key states. In the House, they had 33 Democrats who went along with them. So they pitched this notion as, this is a bipartisan effort to help community banks.
It was a complete fantasy. We know it was a fantasy because the congressional analysts ran the numbers. They looked at this stuff. They actually produced reports before the vote occurred where they said, this is not a good idea. This is gonna create vulnerabilities. This is gonna create dangers.
So every member of Congress that voted on this, if they read the paperwork that comes from the budget office and others, they knew that there were dangers here. But they chose to believe the lobbyist. And even if they didn’t read their paper work, all they had to do was listen to the congressional debate because Bernie Sanders, senator from Vermont, literally went to the floor of the Senate and read the reports into the record.
Bernie Sanders: Just yesterday, the Congressional Budget Office told us that the legislation we are debating today will and I quote, increase the likelihood that a large financial firm with assets of between a hundred billion and 250 billion would fail, end of quote. In other words, this legislation makes it more likely that we will see another financial crisis, makes it more likely that there will be another huge taxpayer bailout and massive dislocation of our economy.
John Nichols: Elizabeth Warren was incredibly outspoken about this. Outside of Congress, although she now is in Congress, Katie Porter, who was a college professor and an expert in many of these issues, was literally saying on a daily basis, this is a very dangerous piece of legislation. You shouldn’t do this. And yet it was ignored. And I think we have to be very, very clear on why it was ignored. It was ignored because a lack of regulation is, in the view of the banks, a way that they can make a lot more money, right. That they can have a lot more flexibility to do as they choose in the service of letting banks do what they wanna do you know, without oversight.
Our Congress capitulated to them. And if we wanna understand why, the lobbyists are influential, there’s no question of that. But it’s silly to just talk about lobbyists. What you have to talk about is campaign finance. And the banking industry, if you go to Open Secrets, which is the website that monitors campaign contributions and campaign money. If you go to Open Secrets and you, you know, hit different members of Congress, they group where their money comes from, right.
You know, healthcare industry, forest products industry. Invariably you’re gonna find the banking industry as a huge, huge donor. And that’s really the answer here. Members of Congress took money for their campaigns from an industry and then winked and nodded, you know, kinda went along with an industry lie. And that’s really the underpinning of how we ended up with an under-regulated banking system that ultimately produced the Silicon Valley collapse.
Jeet Heer: And there’s also, I mean, it’s interesting as since John mentioned that like, these sort of local community banks, there’s almost a cultural element to this. One of the articles, the first articles about this was, The New York Times evoked It’s A Wonderful Life, the beloved Christmas movie with Jimmy Stewart.
It’s a Wonderful Life:
George: I have some news for you folks. I was just talking old man Potter and he’s guaranteed cash payments to the bank. The bank’s gonna reopen next week.
Charlie: But George, I got my money here. Did he guarantee this place?
George: Well, no, Charlie, I didn’t even ask him. We don’t need Potter over here now. No, but you are, you, you’re, you’re thinking of this place all wrong as if I had the money back in a safe. The money’s not here.
Jeet Heer: And, you know, like said, well the bank run is, you know, like in It’s a Wonderful Life. They don’t have the money and people like come rushing to the bank. And that’s the image that The New York Times wanted to present to this. But when you look at Silicon Valley, like, you know, even the small companies, there are like 30, 40 million dollar companies. And, but a lot of them are like, you know, people like Peter Thiel had $50 million. There’s a streaming service that had half a billion dollars in its checking account. Can you imagine keeping half a billion dollars in a checking account? And perhaps it should be the next issue that’s raised, which is all about like moral hazard.
Because you asked earlier like, is this a normal way to do it? And no, like if you’re actually have a lot of money, but you need it for payroll or whatever, you figure out, you can use third parties to have the money spread out all over the place. You can buy extra insurance. There’s things that a normal company could do. But these Silicon Valley companies, they had such a sense that they like impervious, that they were protected, that they did incredibly risky things.
There were two aspects of risk taking here. One was Silicon Valley Bank, which had this very risky strategy of putting a lot of money into bonds, assuming the interest rates weren’t gonna go up.
And then also the depositors who, like, you know, in some cases deposited more than a billion dollars in a checking account, of which only like $250,000 was insured. So that’s like owning, like let’s say a $2 million house and having $10,000 insurance on it, right? If someone did that and then their house burned down, would you suddenly say, well, we should get the, all the insurance companies together to help bail out that person?
Salima Hamirani: Right. But Jeet, even with all that said, I don’t know if they ever doubted that they were gonna get a bailout and get it soon. I mean, these investors know that they’re not a poor person working in a factory in Detroit trying to keep their home, you know?
Jeet Heer: Well, I mean, yeah, I had said that they did a very risky thing. I’m the one that was wrong. They did something that was very safe because they knew they were gonna be bailed out. And they were right.
Salima Hamirani: And we’re gonna talk a lot more about the bailout and what it means for our economy going, right after the break.
BREAK – Amy Gastelum: We’re jumping in to remind you that you’re listening to Making Contact. If you liked today’s show and want more information or want to leave us a comment, visit us at radioproject.org. There you can access today’s show and all of our prior episodes. Okay, now back to the show.
Salima Hamirani: Welcome back to Making Contact. If you’re just joining us, we’re talking about the Silicon Valley Bank crash. We’re joined today by John Nichols and Jeet Heer from The Nation. And on the first half of the show we talked about what led up to the crash. And now we’re gonna talk about its aftermath.
John, I’m curious to know your thoughts. Were you surprised that the Silicon Valley Bank got a bailout so quickly? And was there really any discussion of other options?
John Nichols: No, it wasn’t surprise at all. I mean, these are very powerful players. And very powerful institutions. And if you recognize what happened in 2018 when they did this deregulation, right, and if you also recognize the failures of the Federal Reserve to monitor and keep aware of what was going on, it was A) a given that at some point you were gonna have a problem occur. And it happened that that problem occurred in Silicon Valley, right, which is one of the great drivers, not of the whole of the American economy, right, but certainly of a big part of the American economy, the tech industries, etc. and of the stock market. And that’s where you really gotta notice here.
Because if you’ve got a meltdown in the Silicon Valley, that very quickly becomes a stock market crisis, right. And you even saw some real turbulence in those first days. That is something that an incumbent president who’s planning to run for reelection and members of Congress and others, they do not wanna see that. And so you had a political response. We have seen it before. This is a different kind of bailout. They even tried to give it a different name. But at the end of the day, they’re using the power of the federal government to make sure that people who did risky things would come out fine.
And that message has been so hardwired into the American experiment for so long that of course it was predictable. The striking thing is, the one thing that’s equally predictable is that they will never, ever bail out a working family if somebody gets cancer, right, and they run into, you know, tough times and they may be maybe even are gonna go bankrupt and lose their home. That bailout isn’t coming. And it isn’t coming for the student who worked really hard in school but had to take major loans. No bailouts coming there. So we know exactly where the bailouts go. We know exactly who it goes to. It is to the billionaire class and to their bankers.
Salima Hamirani: Yeah, I mean that’s a really interesting point. Jeet, you know, there’s also been a lot of anger I’ve seen vented online directed towards Silicon Valley, which has surprised them, because of the speed at which they received a bailout. And you know, this double standard that John just mentioned, it is really striking.
Jeet Heer: Yeah, I mean the two things, the contrast is striking because if you look at the student debt thing, you basically had people who made a very rational choice. They were in a society where you’re encouraged to get an education, told that’s the path towards the middle class, and were told that, you know, well, the money you’ll make from these jobs will pay off for your student debt. And then suddenly something that was beyond their control, which is the economic meltdown, made it so that they were stuck with debt that was impossible for them to pay you back. And you know, as a society, you want to try to help people in that situation. But when there’s an argument for student debt relief, Larry Summers will say, no, no, no. There’s a moral hazard problem. This will encourage more bad behavior.
Whereas like as we’ve discussed with Silicon Valley Bank, there’s like multiple levels of risk-taking. They’re in a situation where the consequences of their actions will never have to be paid by themselves. They’ll have to be paid by someone else.
And I think that’s the real root of the anger. People understand that, you know, in America you can go bankrupt if you get cancer, right? But these people, because they’re wealthy and connected, never face consequences for their action. And I think it’s perfectly rational why people are like angry at that situation.
Salima Hamirani: There were some Silicon Valley supporters who argued that the bailout was good for the entire economy and that actually society should support bailouts, even the poor, if we want the economy not to crash.
Jeet Heer: Well, it’s an interesting question as though what would’ve happened if they had not bailed out? I think anyone who had insurance had less than $250,000, which I think is most people, right? Like I would a ask your listeners, how much money do you have in your checking account? And I’m willing to bet it’s less than a quarter of a million dollars. Most people would’ve been covered.
And then the people that had more than that, like say Peter Thiel had $50 million, what would’ve happened is that the bank would’ve been taken over by another bank. It would’ve been liquidated. The value of the bonds would’ve been evaluated, which would’ve been less than what Silicon Valley had put into it.
But you’d have to take a haircut, so let’s say 50 cents on the dollar. So instead of getting 50 million back, Peter Thiel would’ve gotten $25 million back. Well, you know, life is tough. It’s tough all over.
Salima Hamirani: John, last question. I’m curious to know where does the Silicon Valley Bank bailout leave us? Are we back in a situation like 2007, 2008?
John Nichols: Well, so it’s important to explain how the Federal Deposit Insurance Corporation works, right? The way FDIC works is that the banks pay in for insurance for their deposits, and you know, they pay in a relatively small amount. It’s like, you know, it’s a classic insurance model, but it’s important to understand the FDIC does not exist to protect depositors. It exists to protect the banks, right. The banks wanna make sure that, you know, they’re a stable enough entity that people will put their money there so banks can loan it out and do all the things they wanna do.
And so if you understand it in that way, right, the banks wanna pay as little as they can for as much insurance as they can get. It’s like anybody else. Well, certainly if you’re only bailing out the Silicon Valley Bank, right, FDIC can probably handle that, right? But if we’ve established this as the precedent going forward, if our standard going forward is any bank goes down, the federal government, FDIC’s gonna come in and bail that bank out, well FDIC’s not gonna be able to do that in the long term, right? If you have a real, you know, broad banking collapse, I mean, it’s gonna go way beyond their capacity. Now you could reform the FDIC, right? Get more resources into it from the banks, have them pay more for insurance. You could reinstitute and say, boy, we had an emergency one-time off thing, and we went above the, the standard amount there because we, you know, it’s a unique circumstance. We’ll never do that again. But we haven’t had either of those things happen.
Right now we are in a circumstance where it appears that the next bank that fails is going to be able to fully expect that all their depositors will be bailed out as well. That does two things. Number one, it makes banks less responsible. And number two, it creates a whole new model as regards how depositors think about where they put their money and, you know, whether they spread it out or put it in one place.
And so in the midst of this crisis for Silicon Valley Bank, we are radically reshaping how the FDIC works, how banks operate, and how savers think about saving, you know, big savers, people with corporations and wealthy people, think about saving their money. All of that is being reshaped without a serious discussion.
We, we, this is like a Sunday afternoon in Washington where people are really scared and they said, you know, we’re gonna do this, right. Well, the end result is, right now we’re in a situation where they’ve established a whole new world as regards to financial services sector without, you know, any serious debate, and frankly, without any real checks and balances. It’s, I would say we are right now on a tightrope. And there is any chance that we could fall off that tightrope. And then if we do, the only thing that’s gonna say, it’s not gonna be the FDIC. It’s gonna be the American taxpayers in probably massive amounts.
Salima Hamirani: And Jeet you know, I feel like we have this conversation every time there is a market crash, but what can we do to fix the ways investment banks like SVB operate so that we don’t have another market crash that, so that we don’t end up in another financial crisis?
Jeet Heer: Well, I mean there is so much to say. John’s point, especially about insurance and like, you know, this new uncertainty, like, you know, like, are we actually gonna ensure any amount of money – that to me is a very worrying and sort of destabilizing thing. And you know, there’s some very radical economists out there that are suggesting that the way out is to separate out finance capital from banking. The actual function of banking, the normal function of banking, people need a place to park their money so they can like make payroll and make rent. And you can actually like have the post office do that literally. And then if you want people, venture capitalists, you know, doing the casino stuff, that could be something totally separate from where people like park their savings.
Salima Hamirani: There also could have been a lot more debate as inflation started on different ways to fight it. So, raising interest rates is just one option. The others are less attractive to the elite, such as raising taxes on the rich.
Jeet Heer: And so a lot of decisions that are actually political decisions that should be debated out. You know, Democrats, Republicans, left, right, and center, people should be putting their opinions in. Like what do they want out of these big institutions that shape society? They’re not being made in the political arena. They’re being made behind closed doors. And that that’s a problem.
Salima Hamirani: That was Jeet Heer and John Nichols joining us from The Nation magazine to talk about the Silicon Valley Bank collapse. And to everyone listening, here’s a hot tip: don’t put a billion dollars in a checking account.
I’m Salima Hamirani. That does it for today’s show. Thanks for listening to Making Contact.
