Tom Evslin: I’m from the government and I’m here to help them

This commentary is by Tom Evslin of Stowe, an entrepreneur, author and former Douglas administration official. It is republished from the Fractals of Change blog.

Disclosure: I would probably have lost money indirectly if the Fed had not bailed out uninsured depositors at Silicon Valley Bank (SVB). Nevertheless, I don’t think there should have been a bailout. We will (almost) all lose from this escalation of #wealthfare and #cronycapitalism in the not very long run.

There are actually two bailouts going on: one for uninsured depositors at SVB and Signature Bank and the other for bankers and bank investors at other banks who made the same mistakes which SVB and Signature did but who will now be held harmless by a special Federal Reserve program which shields them from the consequences of their mismanagement.

Tom Evslin

The Uninsured Deposits Bailout

It is true that this part of the rescue is not a bailout of bank executives and shareholders like TARP during the last recession. Executives at the two failed banks are out of work; the bank investors are out their capital. However, it is a bailout of those who had uninsured balances at the banks. They benefited from the higher than average interest rates paid by the two banks and access to loans offered by the banks to companies (and their executives) which promised to do all of their deposit business with the bank. The companies took a risk to get these benefits. With hindsight, too much risk. We are only entitled to the gains of capitalism if we actually bear the risk of loss.

The Federal Deposit Insurance Corporation has restored the full amount of all bank balances to all SVB and Signature depositors. Normally all insured deposits (up to $250,000 per account) would be available immediately and uninsured deposits would be paid proportionally from whatever the bank or its assets were sold for in bankruptcy. Typically at least 50% of the uninsured deposits are available immediately and much of the rest (usually all of it) dribbles in over time as assets are liquidated.

The FDIC used cash from its insurance fund both for its intended purpose of reimbursing insured deposits and for the “emergency” purpose of restoring all uninsured deposits. It is true, as Janet Yellen says, that this is not “taxpayer” money. The fund is quite properly established from fees paid by banks directly and by us depositors or borrowers indirectly. However, the fund will have to be increased to cover this unintended use. That means bigger fees to banks so lower interest rates on deposit accounts and or higher interest for loans. We won’t pay for this bailout as taxpayers; we’ll pay for it as bank depositors and borrowers. There’s no such thing as a free bailout.

Had Washington not blinked, it is quite possible that Silicon Valley would have taken effective and proper steps to protect its own ecosystem with its own money. Responsible VCs (and those who were just self-interested) were working through the weekend to make sure that short-term funds for payroll and the like were available to the companies they invested in. Just as J.P. Morgan used to get his cronies together to save the banking system they had a stake in, tech titans might well have prevented the companies with uninsured funds from catastrophe. That is the way capitalism is supposed to work. But, once the FDIC took responsibility, Silicon Valley tycoons could keep their own purses shut.

The Real Bank Bailout

The Federal Reserve also announced a bank bailout program which will save the jobs of irresponsible bank executives and the funds of bank investors just as TARP did 15 years ago. The Bank Term Funding Program uses the Treasury’s (our) exchange-stabilization fund to make loans to banks based on insufficient collateral  to avoid the banks having to take the same sort of losses which drove SVB into receivership. These banks, like SVB, bought treasury securities which have declined in value as the fed pushed interest rates up. The Fed will nevertheless lend them money as if the decline in value had never happened. This is an out-and-out subsidy. It uses our money to keep these banks “solvent” even though they are really underwater and unable to meet withdrawal demand.

If this doesn’t make you mad, think of it this way. If you bought a 10-year treasury bond two years ago and suddenly needed the cash, you’d have to sell your bond at a significant loss just as SVB did since rising interest rates have pushed down the current value of the bond. The Fed deliberately raised interest rates to fight inflation. Many of us have paid some price for this. However, mismanaged banks no longer pay this price. They get a get-out-of-bankruptcy-free card at our expense. They can monetize their bonds as if rates had never gone up. If they can’t pay back their loans at the end of a year and aren’t bailed out again (wanna bet in an election year?), we’re on the hook for the losses.

At the very least the Fed ought to decree that, so long as a bank has loans outstanding under this program, no executive bonuses or dividends to shareholders can be paid.

And So…

The Fed raised interest rates to tame inflation. Might or might not have been the right decision but the motivation was good and in line with the Fed’s mission. They wanted to cool the job market to slow wage increases (questionable socially but traditional policy). Now it turns out that they didn’t really want to lose identifiable politically connected jobs in Silicon Valley or in the banks. They’d prefer more diffuse less-traceable job losses throughout the economy.

Will we have an Occupy Silicon Valley Movement? Will the Tea Party rise again? In this case the #cronycapitalism center is wrong and the anti#wealthfare fringes on the right and left are correct. We really don’t have to repeat the mistakes of 15 years ago, which have damaged capitalism, general prosperity, and civil discourse.

Image courtesy of Wikimedia Commons

8 thoughts on “Tom Evslin: I’m from the government and I’m here to help them

  1. There’s a lot of blame to go around for failure of SVB Bank and Signature Bank…decent outfits. That SilverGate Bank was all crypto junk and set up to fail eventually.

    The FED messed up….it had nothing to do with Trump or Dodd Frank bank bill. SVB simply went out too far in the duration of their bond holdings. And when FED raised rates too fast, they crumbled in value. BUT ALSO A COMMON THREAD? SVB and Signature were WHAT? THEY WERE ALL FOCUSED ON WOKE…..just like VT …all VT cares about is WOKE. Signature, SVB and VT have no common sense on honest, logical fiscal management:

    “A seminar on gender-neutral pronouns hosted by Signature Bank just months before its collapse now has critics accusing the company of not having its priorities in order. Video of the seminar, which goes for more than an hour, shows Brigham and Shay delivering a lecture about ‘pronouns’ with the ultra-woke company seizing the opportunity to laud their title as the ‘first bank in the United States to have an openly gay man on the board.’

    Vermont is setting up for a similar fiscal crisis…a few years out. Woke – will be broke. VT is drowning in $4.5 billion unfunded UNION debt….and VT’s pension investments in stocks are down.,..the value of their bonds….down from last year too.

  2. I am from the government, and I am here to impose on you centralized command and control, including open borders to ethnically cleanse the US to OUR LIKING

    Your voting no longer matters, because we run the voting system from A-to-Z.
    Just trust us. Do what our media tell you

  3. Let’s not look at the real reason that this happened just like the train accident in Ohio. Donald Trump rolled back Dodd-Frank regulations that allowed this to happen just like he rolled back train safety regulations. This is why you don’t see any RINO like Ted Cruz blaming Joe for this like usual, they know that the truth is a five second Google search away.

  4. A couple of observations here: SVB solicited deposits of crypto firms, who had to make massive withdrawals when FBX et al. crashed and took them down as well. It also solicited deposits from other “venture capitalists,” known for being fervent libertarians who want government off their back; their attitude changed and they vociferously wanted government to give them back their $1.5 billion binky when SVB and Silverbank folded. (They were also very much in favor of getting the strictures of Dodd-Frank repealed for their bank, so the government could not control its mismanagement.) Finally, the Fed’s declaration that it will make all depositors whole now applies to all depositors in all banks, so get ready for a lot more investor misbehavior (but you need your crypto investment protected right? ) as they launder even more money.

  5. So, our government is going to bailout a number of Chinese Communist money launders and spies who had large uninsured deposits in the bank. Our government is corrupt to its core!

  6. You’re wrong on a couple fronts. SVB went down not because of any bad loans. It went down simply because they really messed up investing longer duration out 5-7 years in Govt bonds to get any kind of decent interest….and to meet redemptions they would have to be sold at a loss. Terrible risk management (but SVB is a WOKE bank, so what do you expect!) The 2010 crash was caused by junk – worthless loans/mortgages. SVB had no junk like that. SO. There is no bailout because several large Wall St firms are looking at BUYING the appox $75 BILLION of Gov’t bonds SVB holds. They are money safe. But they carry lower interest rates. So that book sell at a discount. It is NOT a bailout per se…..because those assets are for sale…and they will sell.

    Second, you have often brought up the “bailouts” of the 2010 crash: I Quote you: “It is true that this part of the rescue is not a bailout of bank executives and shareholders like TARP during the last recession.”….. You don’t know what you are talking about….like everyone else that spouts that same erroneous “narrative”. The TRUTH of the 2010 supposed “bailout” is that the Gov’t made investments & loans and EQUITY… in those banks back then…AND GUESS WHAT….since 2010…the Federal Gov’t has REALIZED A $109 BILLION PROFIT !!! So how is it possible you harp it was a “bailout:…when in truth it was a PROFIT MAKING INVESTMENT…that yielded a $109 billion profit!! Now you are informed. Please tell Bernie Sanders, who has bailout on the brain.

    here are FACTS:

    • Here are the REAL facts on the TARP rescue of the greatest financial industry real estate security fraud ever perpetrated in history on the American people. Millions of American citizens suddenly lost their jobs, without warning, almost overnight as the economy froze on the spot. This put them in a position where they were unable to make their mortgage payments and they ended up not only losing their income but also their homes the greatest majority of which never made a late mortgage payment, never mind missed one. All the criminal banks and rating agencies were made whole and the government eventual made a $109 billion dollar profit on the bailout, while those good hard-working Americans lost everything! It put world banks on a 10 + year course of quantitative easing, (money printing) the result of which is the inflation we are all dealing with today.

    • J,

      Google who is on the board.
      All are ESG folks, making dubious loans to Dem/Prog owned companies

      If Musk had bought that bank, a shoe load of scandals would have been revealed

Comments are closed.