Front Burner - The fallout from Silicon Valley Bank’s collapse

Episode Date: March 14, 2023

On Sunday, a group of U.S. government agencies made the extraordinary decision to ensure that everyone who had money in Silicon Valley Bank would be able to access that cash. The move comes on the heels of Friday’s collapse of the California-based bank following a bank run. Silicon Valley Bank is the second largest bank to fail in the U.S. – the first was Washington Mutual during the 2008 financial crisis. Felix Salmon is a Chief Financial Correspondent at Axios and the host of Slate Money. Today on Front Burner he joins us to explain why Silicon Valley Bank went under and what might happen next. For transcripts of this series, please visit: https://www.cbc.ca/radio/frontburner/transcripts

Happy Holidays! I'm Frank Cappadocia, Dean of Continuous Professional Learning at Humber Polytechnic, and I'd like you to set a goal for 2025 to sharpen your skills and get promoted. Register for a professional designation, micro-credential, or certificate with Humber's Continuous Professional Learning and ignite your career journey this new year. Our experts deliver accelerated learning from resilience-based leadership to electric vehicle fundamentals in learning options that work with your ambitious lifestyle. Adapt, evolve, and excel. Go to humber.ca slash cpl to get started. This is a CBC Podcast. Hi, everybody. Jamie here. So before we get started today, I want to tell you about a new

miniseries that we're launching. It's called The Naked Emperor. It's a four-episode show that tracks the rise and really spectacular fall of Sam Bankman Freed and his enormous crypto exchange FTX. You might remember hearing about Sam at the end of 2022. We did an episode about FTX's collapse back then. super relevant today. It has indirect connections to the episode you're about to hear. Two of the big financial collapses we'll talk about had significant crypto ties. So subscribe to The Naked Emperor wherever you get your podcasts. It's awesome. Our team, including host Jacob Silverman and producer Imogen Burchard, really knocked this one out of the park, in my opinion. So you can just search The Naked Emperor. New episodes drop every Monday. All right, on to the show. The collapse of Silicon Valley Bank is causing shockwaves across the entire business world. The nation's 16th largest bank was shut down by the FDIC on Friday.

The failure caused massive uncertainty in the markets with billions of dollars lost. The question today is if it will trickle across the broader economy. All customers who had deposits in these banks can rest assured, I'm going to have rest assured they'll be protected. So on Sunday night, a group of U.S. government agencies made the extraordinary decision to ensure that everyone who had money sitting in Silicon Valley Bank would be able to access that cash. They did this after the California-based bank collapsed last week after a good, old-fashioned bank run where people raced to get their money out. Uncertainty also spreading to another regional bank, First Republic. Video shows a long line at this branch in California yesterday as customers tried to take out cash.

All of these depositors in the bank were told by venture capitalists that the bank might be in trouble. So all the depositors at the same time went to take their money out and there just wasn't funds there. These are climate startups. These are startups that are helping cure cancer. And they're employing Americans across the country. And they didn't take risks. They just had their money in a bank. It's the second largest bank failure in the U.S. The first was Washington Mutual during the 2008 financial crisis.

And as the government was scrambling to contain a potential broader banking crisis, by the end of the weekend, they had also assumed control of another failing U.S. bank. So, is this the end of it? What could happen now? Was this yet another government bailout, Ella 2008? Felix Salmon is a chief financial correspondent at Axios and the host of Slate Money. And he's here with me now to talk about all of this and much more. Hi, Felix. Thanks so much for your time today.

A pleasure to be here. So I wonder if we could start by explaining what happened Sunday night. What did the U. the US government ultimately decide to do here? It's a little bit unclear whether they had bids for Silicon Valley Bank, but whether they did or not, they didn't sell SVB in the end. And instead of doing that, what they said was all of the deposits at SVB were safe. If you had $250,000 or if you had $250 million at SDB, all of that would be made fully available to you from the FDIC Insurance Fund, which is the big fund that insures every bank in America.

Americans can have confidence that the banking system is safe. Your deposits will be there when you need them. Small businesses across the country, the deposit accounts at these banks can breathe easier knowing they'll be able to pay their workers and pay their bills. And their hardworking employees can breathe easier as well. So that put worries to rest. A lot of corporations had money in SVB and were worried about making payroll on Wednesday. And the idea was that they also announced a bunch of liquidity provisions at the Fed, which basically made it clear that any other

bank that might be facing an incipient bank run could get all of the liquidity they need to meet withdrawals. And there shouldn't be any more big bank failures beyond Signature Bank, which was the other bank that failed on Sunday. Right, right. And so basically, the message that this is sending to people who have money in any bank in the US is you're good, like you're going to be able to get your money out of this bank, we got you. Exactly. There was technically and there has been for many years, this $250,000 insurance limit. But in reality, the overwhelming majority of banks that fail, unsecured depositors get paid out in full. And

what they're saying is this is potentially systemic. And in order to prevent any broader potential bank run, we're going to try and effectively signal that even if you have more than that insurance limit, you're still going to get your money. Okay. And now back up for me a little bit here. Why did they do that? Why did they make the decision to cover people's deposits? What led to this? So there were two reasons.

The first reason, as I say, was Silicon Valley Bank specific, that most of those deposits were corporate deposits. They were what's known as corporate transaction accounts. And it was basically the working capital of a bunch of important Silicon Valley companies. And those companies need to pay their workers. And they were literally worried about we will not have cash to pay our workers on Wednesday, because most workers get paid twice a month in America, and the 15th is Wednesday. So that was a very immediate worry of a lot of depositors. And they wanted to put all of those worries to rest. And they didn't want to be blamed for, you know, hundreds of thousands of workers

missing a paycheck on Wednesday. Then beyond that was the broader action that they took for the banking system as a whole, which was a lot of individuals and corporations with money at smaller banks like PacWest or First Republic also had more than $250,000 in the bank. And they looked at what happened to Silicon Valley Bank and they said, wait, hang on a second, maybe this money isn't as safe as we had thought. What we should do, perhaps, is take our money out of the bank and move it to a huge too-big-to-fail bank because we know that JP Morgan is not going to fail. So maybe we should just move it all to JP Morgan. And that is a bank run, basically. And what no bank regulator wants is a bank run. So they try to prevent that, or at least minimize that by making it clear that all of these banks would have abundant

liquidity from the Federal Reserve. And just for people who might not have been glued to what actually happened to Silicon Valley Bank, I wonder if you could just take me through that very quickly. There actually was a good old fashioned bank run on that bank. It was. It completely collapsed. And why? It was. So the proximate cause of death was the largest bank run, I'm going to say, in the history of the planet, certainly in American history.

Forty two billion dollars in one day. You mentioned that it was the second biggest bank failure in US history after Washington Mutual in 2008. Washington Mutual saw a bank run. It saw a bank run of $16 billion in 10 days. This was $42 billion in one day. That gives you an idea of how big the bank run was. And that number was just going to increase even more on Friday. That gives you an idea of how big the bank run was. And that number was just going to increase even more on Friday. That was just on Thursday. So SVB had to be taken over on Friday because, yeah, it was basically running out of money. And why did we get that bank run at SVB? What happened that caused all of these people that had money in the bank to say, like, get my money out of this bank immediately.

It's a little bit of a chicken and egg situation. But one of the reasons was that the share price went down. And the share price plunged quite dramatically after a different bank, Silvergate, announced that it was liquidating. And people thought, oh, now suddenly all of these banks are vulnerable to deposits going down. now suddenly all of these banks are vulnerable to deposits going down. Silicon Valley Bank was definitely vulnerable to deposits going down because it had a bunch of basically VC funded companies who weren't getting new money from VCs anymore, because the VCs have suddenly tightened up their purse strings, and instead of taking money out. So the deposit base wasn't very stable. And then on top of that, there was this important article in the Financial Times at

the end of February, which basically said, if you look at Silicon Valley's balance sheet, it looks like they might be insolvent. The assets on their balance sheet, you know, if you hold them to maturity, they're fine. But if they're forced to sell them, they won't be able to get what they paid for them, because they bought them when interest rates were low, interest rates have now gone up. When interest rates go up, prices go down. And so the price they paid for the bonds on their balance sheet was higher than, significantly higher than the price that those bonds were worth. So if SGB had to sell those bonds in order to meet deposit withdrawals, then they would run out of money. And that seems to

have basically been what happened, that when they were taken over on Friday, the California state regulator said they were actually insolvent. At the beginning of the year, it boasted nearly $210 billion in assets and was brought to its knees in fewer than 48 hours. There are important questions of how these banks got into the circumstance in the first place. We must get the full accounting of what happened and why those responsible can be held accountable. In my administration, no one, in my, no one is above the law. Maybe I'll just take a very quick stab at trying to summarize what you just said there. We have this bank.

It arguably made some very bad financial decisions by investing in these long-term bonds in an environment where we saw like historical interest rate hikes. It's pointed out that this is a huge problem, right? And that they might not have enough money to cover deposits. And so basically, everyone's like, I got to get my money off. I got to be like one of the first helicopters out of here before it's too late. Then that creates this panic that this could be a much, much bigger, wider, broader problem. And so the government steps in and says, don't

worry, everybody is going to be able to get their money out at this bank or any other bank where we see bank runs, which brings us to today, that decision to back deposits, has it allayed the concerns that we heard all weekend about domino effects and broader banking crises? I'd say it's too early to tell. I'm 100% sure that the situation right now on Monday is a lot better than the situation would have been if the government hadn't made these announcements. So it has definitely helped. But it's not clear that we are completely out of the woods there are still if you look at the bank stocks the the valuations of pretty much every bank in america has come down today because people are worried about the banking sector they don't think it's

going to make as much money going forwards honestly you know cry me a river if banks make less money going forwards i think we can all live with that. The big question is whether we're going to see any more bank failures. And with any luck, all of these extraordinary policies that have been put in place by the FDIC and Federal Reserve will prevent extra bank failures. And then eventually things will stabilize. Do you think that we're going to see any other bank failures here? I think the government and the Federal Reserve are going to really try very hard to ensure that

doesn't happen. It's too early to be sure that we won't. But the one that seemed closest was First Republic Bank. And First Republic Bank, the share price seems to be stabilizing, albeit at a low level. The bond price, which is much more important, again, seems to be pricing in very little chance of outright failure. And I think if First Republic is safe, then probably everybody else is safe as well. Okay. And there was another bank that failed over the weekend, right? Signature Bank. Is that related to what's happened with SVB? Absolutely. I mean, Signature was a combination of Silvergate and SVB. So Signature was a little bit like SVB in that it was a bank, mostly corporations rather than individuals. It had a large number of corporations who had big deposits of more than

$250,000 that were uninsured. But it was also like Silvergate in that it was a crypto bank, and it had really pushed itself as a crypto friendly bank, that, you know, was the place where crypto companies could open accounts without being asked too many questions. And that really hurt it as well. So those two things combined basically resulted in $10 billion of withdrawal requests on Friday, and that was enough to force it into FDIC receivership. On Sunday, the Federal Deposit Insurance Corporation, the FDIC, took over its assets worth more than $110 billion and more than $88 billion in deposits. Signature is now the third largest bank to fall into financial failure in U.S. history.

What question I have is, why did the failure of this bank, SVP, and then SVB, and then these two other smaller banks create such a panic here like they're all relatively small compared to to the big banks right so so like why was it such a big deal that they failed so yeah this is this is where canadians get very confused where it makes all this all the sense to americans is that most banks in america are small banks america has literally thousands of banks most of which you have never heard of by the standards of the overwhelming majority of banks in america scb was actually large it was the 16th biggest bank in america and as i say america has thousands of banks. So yeah, there are four enormous too-big-to-fail banks, and no one's worried about those.

But people are worried about the other, you know, thousand banks or however many there are. And in aggregate, they account for the majority of the assets in the banking system. So people were really worried about all of the money in all of the regional banks in America. Everyone's saying, like, well, my money is not in one of the top four too big to fail banks. I should move it into one of those four banks. That was the worry. Because if everybody did that, that would be a massive sucking sound out of basically every bank in America and into just four banks. And that

would cause utter chaos. Right. just that concentration in the four banks. And then obviously the ripple effects of job losses. And yeah, it would be catastrophic. Like in most countries, including Canada, the number of banks is tiny, right? No other country has nearly as many banks as America does. And this is both a strength and a weakness. But it does mean that the Federal Reserve needs to worry about thousands of banks instead of really just worrying about three or four.

Happy holidays. I'm Frank Cappadocia, Dean of Continuous Professional Learning at Humber Polytechnic. I'd like you to set a goal to drive key learning for your people in 2025. I want you to connect with Humber CPL to design a custom training solution

that accelerates your team's performance and engagement. Humber works with you to hone industry-specific upskilling, enhance your leadership, and drive results. Flexible learning delivery formats are tailored to your unique needs. Adapt, evolve, and excel. To learn more, go to humber.ca slash cpl. Hi, it's Ramit Sethi here. You may have seen my money show on Netflix.

I've been talking about money for 20 years. I've talked to millions of people, and I have some startling numbers to share with you. Did you know that of the people I speak to, 50% of them do not know their own household income? That's not a typo. 50%. That's because money is confusing. In my new book and podcast, Money for Couples, I help you and your partner create a financial vision together. To listen to this podcast, just search for Money for Cops. So despite their attempts to say that this is not the case, U.S. Treasury Secretary Janet Yellen insisted on Sunday that there would be no bailout. And President Biden said Monday morning no taxpayer dollars were being used here, right, to back the deposits that people put in this bank. But a lot of people still call this

a bailout. And obviously, it conjures up images of the 2008 financial crisis when people were really mad about the fact that taxpayer money was used to prop up rich banks and bankers. So my question for you is, is this a bailout? And if so, why? And if not, why not? So it is definitely not a 2008 style bailout. In 2008, the very big banks received billions of dollars of public taxpayer money, and they paid their executives very well, and no one was held accountable for anything. And you know, they didn't fail, mostly because they got this bailout. This is 100% not what happened at Silicon Valley Bank, the executives all got fired, the shareholders were all zeroed out, the bondholders were pretty much all zeroed out, the only people getting bailed out were the depositors.

So that's very different, right? The bank itself was not bailed out. The only people who were bailed out were the depositors. And then the next question is, whose money is being used to bail out the depositors? And the answer there is the FDICs. There's $125 billion sitting in this FDIC insurance fund. And the depositors are just being able to count on that money, which has been sitting there for years, and it's just sitting there, and they can draw on that money. So there's no money coming from Congress coming from taxpayers

to say we need to spend this money to bail out those depositors. No losses, and this is an important point, no losses will be borne by the taxpayers. No losses, and this is an important point, no losses will be borne by the taxpayers. Let me repeat that. No losses will be borne by the taxpayers. Instead, the money will come from the fees that banks pay into the deposit insurance fund. That said, they are being bailed out by the FDIC. The FDIC is a federal institution.

So in that sense, it's the government bailing out the depositors, but that's very different from taxpayers bailing out banks. But the money that the FDIC, the Federal Deposit Insurance Corporation, is putting aside here, where does that pool of money actually come from? That money comes from a levy on deposits that is charged by the FDIC. It's basically an insurance premium that every bank has to pay. And who pays that premium? Like, I know the banks pay it, but is it just on pass to consumers who are paying bank fees? Like, is this kind of the scenario where it's like you slap, the government slaps a tax on Netflix, and then Netflix is like, yeah, but sure, now your monthly subscription is five bucks more a month. It's very low. The FDIC insurance premium is, you know, it's a fraction of a percent. And

compared to other bank fees, it's pretty low. So it's not the kind of thing that consumers are likely to see. But sure, on some level, it is a cost that banks have to pay. And that winds up getting paid by their customers in one way or another. The interesting question is, does extending the insurance to all SVB depositors, is that going to wind up costing the FDIC more money? Or is that going to end up costing the FDIC less money? Or is that going to end up costing the FDIC less money? There is a pretty strong case to be made that if the government hadn't taken this move, then the FDIC would have been out of pocket even more than it is right now. Because instead of just needing to bail out the SVB depositors, it would need to bail

out a whole bunch of other banks which would have gone bust as a result of bank runs. Now, we're kind of hoping to prevent all of those bank runs. All those other banks won't be taken over by the FDIC. That deposit insurance won't need to be called upon. And the FDIC will actually end up with more money this way than it would have done otherwise. Okay. Maybe worth noting here, there is a second fund that the government has made available, right, that could potentially get tapped here. And is that taxpayer money? The Blessed Exchange Stabilization Fund. We first discovered this in the 1994 tequila crisis. And it's this lovely little sort of government slush fund that can be used in cases of emergency um chances are again if this whole scheme works with the fdic and the

federal reserve chances are this fund will not be touched it is possible that in extremis this fund will have to be tapped um you know it's a a fund. It belongs to the government. But again, it's just kind of sitting there. It's not like no one needs to raise taxes to pay for it. And just zooming out a little bit here, I just wanted to ask you about this argument that I've seen people make. There were a lot of people calling on the government to intervene this weekend. And, you know, the kind of clap back to that is like, these are a lot of rich VCs and, you know, in some cases libertarians, people who probably opposed canceling student debt and called it a bailout. And it, of course, taps into the argument that when they want it, there is socialism readily available for the rich in America and capitalism for the poor.

And so what do you make of that argument that's kind of playing out largely on social media right now, but certainly elsewhere. Are you saying that Silicon Valley venture capitalists are displaying a level of hypocrisy? Because that would shock me. No, I mean, is that what I'm saying? Yeah, I mean, 100% legitimate, you know, they, they don't like the government stepping in to bail out other people, but they very much want the government stepping in to bail out their portfolio companies. Totally legitimate complaint. And like, I totally agree. The difference is, as I say, that the cost of this bailout to the government is basically zero compared to the cost of, say, cancelling student debt, which is substantial. But yeah, it's the argument, as just a sort of argument from hypocrisy saying like, you know, you don't want government

intervention, except for when it helps you is entirely legitimate. Yeah. And I guess another question I'm left wondering about is, is how this happened in the first place, right? Like, shouldn't all the regulations brought in after the banking crisis in 2008 have worked to prevent failures like this from happening? Shouldn't it have worked to prevent Silicon Valley Bank from investing way too much of their money in these risky bonds, for example? So first of all, the bonds were, there are two different types of risk when you talk about risky bonds. And these are risk-free bonds. They are 100% going to get paid back in full at maturity.

The only question is like, how much are they worth from day to day? And if the idea was that they were holding those bonds to maturity, and that was the idea, then there shouldn't have been any risk there. The risk was a bank run. So, like, but you're absolutely right. Your point is absolutely taken. They took a bunch of interest rate risk. They took a bunch of, like, deposit flight risk.

Regulators did not stop them from taking that risk. And there are a lot of people out there saying, number one, that regulators should have stopped them from taking those risks. And number two, that various safeguards in Dodd-Frank got lifted from them under the Trump administration. They had to have an excessive level of government oversight up until Trump came along and removed that level of government oversight. And that perhaps that level of government oversight might have prevented them from doing what they did with the, you know, with the assets that they ended up investing in. We don't know, right? Anything is possible. But that's definitely an argument being made. And there are definitely regulatory changes that are likely to end up

happening as a result of this incipient banking crisis. One of the interesting things that happened during the last crisis in 2008 was they introduced something called the transaction account guarantee, which literally no one has ever heard of, but it was a really important thing. And between 2008 and 2012, it was in place, and it prevented a lot of panicky corporations pulling their money from banks. And then at the end of 2012, they allowed that guarantee to expire. And if that guarantee had still been in place today, probably we wouldn't have seen this bank run at SVB. So there are sort of very technical things that regulators can do that maybe they should have done. There are lessons that will be learned. And yes, this is definitely

not an episode that regulators are going to be proud of in hindsight. And at the end of the day, call it a bailout, don't call it a bailout, you know, whatever. Does this not send the message that these banks can do whatever they want? What about that argument that the government will back the banking sector, the big banks and also the small banks, because they can't fully fail? Well, I think it sends the opposite message. We've had three significant banks actually fail. Silvergate, SVB, Signature. They have all been allowed to fail.

Their executives have all lost their jobs. Their shareholders have all been zeroed out. Their bondholders have all been zeroed out. They all worked for these private sector banks and they all failed. So like clearly they were not too big to fail. The only people who've been bailed out are the depositors. The banks themselves were allowed to fail.

Okay. Felix, thank you so much for this. This is so helpful. Thank you. A pleasure. All right, so before we go, I just want to note that it wasn't just the United States scrambling here in the wake of the Silicon Valley bank collapse. The United Kingdom and Canada also made moves on the weekend. In the UK, HSBC is acquiring the UK subsidiary of Silicon Valley Bank for one pound and says that they would also insure deposits. Here in Canada, the banking regulator has taken control

of Silicon Valley Bank's Canadian operation, which didn't take deposits. That's all for today. I'm Jamie Poisson. Thanks so much for listening, and we'll talk to you tomorrow.