Written by Nick Heer.

Just Me, Trying to Wrap My Head Around Three Bank Failures in a Week

This weekend’s news of the second- and third-largest bank failures in U.S. history has been hard for me to process. I live somewhere that has not had a bank go bust since the mid-1990s, so what happened over the past several days is entirely unfamiliar to me. If you feel similarly confused, I have some links which helped me understand it better, and may hopefully do the same for you.

Tabby Kinder, et al., Financial Times:

[Silicon Valley Bank] serves about half of all venture-backed US tech and life sciences companies and has total assets worth $212bn, making it the 16th-largest bank in the US. Founded 40 years ago, it has grown into a fixture in global tech, having banked groups such as Cisco, Ring, Beyond Meat and Shopify in their earliest stages.

It is being rocked as tech start-ups face the biggest collapse in their value since the dotcom bubble burst in the early 2000s. SVB’s market capitalisation has fallen from a peak of more than $44bn less than two years ago to $17bn today.

This article was published three weeks ago; as of Friday, SVB was history.

Matt Levine, Bloomberg:

Also, I am sorry to be rude, but there is another reason that it is maybe not great to be the Bank of Startups, which is that nobody on Earth is more of a herd animal than Silicon Valley venture capitalists. What you want, as a bank, is a certain amount of diversity among your depositors. If some depositors get spooked and take their money out, and other depositors evaluate your balance sheet and decide things are fine and keep their money in, and lots more depositors keep their money in because they simply don’t pay attention to banking news, then you have a shot at muddling through your problems.

But if all of your depositors are startups with the same handful of venture capitalists on their boards, and all those venture capitalists are competing with each other to Add Value and Be Influencers and Do The Current Thing by calling all their portfolio companies to say “hey, did you hear, everyone’s taking money out of Silicon Valley Bank, you should too,” then all of your depositors will take their money out at the same time.

Silicon Valley Bank was just one of three — holy shit! — U.S.-based banks to become insolvent or announce an impending closure in the same week. Two days before SVB was shuttered, Silvergate Capital said it would begin closing down; two days later, Signature Bank was closed. There seem to be many differences in the reasons for the failure of each; one is that Signature and Silvergate were more involved in cryptocurrency markets than SVB. Put a pin in that; I will return to it after two block quotes.

So, what to do? Jeanna Smialek and Alan Rappeport, New York Times:

The reckoning came after the Federal Reserve, Treasury and Federal Deposit Insurance Corporation announced Sunday that they would make sure that all depositors in two large failed banks, Silicon Valley Bank and Signature Bank, were repaid in full. The Fed also announced that it would offer banks loans against their Treasuries and many other asset holdings, treating the securities as though they were worth their original value — even though higher interest rates have eroded the market price of such bonds.

The actions were meant to send a message to America: There is no reason to pull your money out of the banking system, because your deposits are safe and funding is plentiful. The point was to avert a bank run that could tank the financial system and broader economy.

Steve Clemons, Semafor:

Economics writer Noah Smith made the case against the term “bailout” on similar grounds: “No regular folks will owe any money, SVB no longer exists, and SVB management will lose their jobs.”

Others disagreed, saying the Fed and FDIC were intervening in ways that made clear to banks and large depositors across the country that the government would go beyond any established interpretation of the law to rescue them. This was especially galling, some noted, because SVB and other banks had successfully lobbied to loosen post-2008 regulations intended to prevent similar crashes.

“It is a bailout and it does set a precedent,” Dean Baker, co-director of the Center for Economic and Policy Research, told Semafor. “It is a bit infuriating to see us bailing out Silicon Valley geniuses who couldn’t be bothered to do ten minutes of homework on a bank where they are parking tens of millions of dollars.”

So, the terrible short history of this part of this mess: in 2010, following the Great Recession, U.S. lawmakers passed the Dodd–Frank Act to reduce the risk to world financial markets by more closely regulating U.S. banking and investments. Half of its name comes from U.S. representative Barney Frank who, after leaving Congress, joined the board of Signature Bank, saying “[t]hey don’t get involved with exotic derivatives and credit default swaps”. Interesting point, Rep. Frank. A couple of years later, he helped fellow Democrats come around to a position of weakening some of the regulations he helped write. In an interview Sunday with Bloomberg, he admitted cryptocurrency was “new and […] potentially destabilizing” and today said the closure of Signature was more about sending a message. At the very least, it sure looks conflict-of-interest-y and also pretty shitty.

Whether the Trump administration’s kneecapping of Dodd–Frank, encouraged by one of the bill’s namesake authors himself, played a significant role in these developments has yet to be determined. Committing to any narrative is, at this point, probably a bad idea. But if you are interested in right and wrong framing, an opinion piece at the Wall Street Journal is very committed to being wrong; check out the good alt text in the followup screenshot.

The sick sense of humour in me appreciates that we are doing the same Jim Cramer thing in March again, but it is worrying, and it also involves mortgage backed securities. I feel like I have seen this movie before. I did not enjoy it. Maybe CNBC could just fire Jim Cramer.

Those are the articles which helped me understand this situation better — though, let me be clear, not entirely comfortably or wholly. Maybe they could similarly help you, particularly if you also live in a place where this sort of thing is uncommon. If you are more financially literate than myself, please let me know if I have written anything stupid here.