With the weekend’s failure of two big banks — Silicon Valley Bank and Signature Bank — America is once again vaguely aware that banking regulations have an actual effect on the economy, and, to a lesser degree, that money is imaginary anyway, just a collective agreement about numbers and who has piled them up in particular ways. So here’s Sen. Elizabeth Warren (D-Massachusetts) in the New York Times yesterday, to remind us that the failure of both banks probably could have been prevented if Donald Trump and congressional Republicans — with the aid of more Democrats than there should have been, which would have been “zero” — hadn’t rolled back significant parts of the Dodd-Frank banking regulations in 2018.
Remember how we had that huge financial crisis in 2008, and then Congress actually did something to prevent another one? Elizabeth Warren does!
In the aftermath of the 2008 financial crisis, Congress passed the Dodd-Frank Act to protect consumers and ensure that big banks could never again take down the economy and destroy millions of lives. Wall Street chief executives and their armies of lawyers and lobbyists hated this law. They spent millions trying to defeat it, and, when they lost, spent millions more trying to weaken it.
As Warren points out, one of the bankers insisting that Dodd-Frank was too strict was Greg Becker, CEO of Silicon Valley Bank, who along with others in the industry argued that great big banks like SVB weren’t actually big enough to need rigorous oversight by the Federal Reserve, which they said was holding them back from doing great things for America.
And hey, for a while there, SVB was flying pretty high, becoming a top funder of tech startups and racking up a 40 percent increase in profits in the last three years. And everything would have been great if it weren’t for the tiny problem that SVB plowed most of its capital into long-term federal bonds, which are a great investment as long as you don’t need access to those funds to cover a little panic among depositors when interest rates go up. And as Warren points out, mostly having tech companies as customers also made SVB vulnerable to any wobble in the tech sector. (Same for Signature, which served a lot of crypto companies.) Oopsie!
Warren explains,
Had Congress and the Federal Reserve not rolled back the stricter oversight, S.V.B. and Signature would have been subject to stronger liquidity and capital requirements to withstand financial shocks. They would have been required to conduct regular stress tests to expose their vulnerabilities and shore up their businesses. But because those requirements were repealed, when an old-fashioned bank run hit S.V.B., the bank couldn’t withstand the pressure — and Signature’s collapse was close behind.
On Sunday night, regulators announced they would ensure that all deposits at S.V.B. and Signature would be repaid 100 cents on the dollar. Not just small businesses and nonprofits, but also billion-dollar companies, crypto investors and the very venture capital firms that triggered the bank run on S.V.B. in the first place — all in the name of preventing further contagion.
Hooray for the small businesses and others (as well as their employees) who might have been wiped out if the FDIC hadn’t stepped in to cover losses beyond that normal $250,000 limit on FDIC-insured accounts. But was it really necessary to make whole the very largest depositors? Warren notes that, yes, the idea is to cover all the depositors from both banks using bank funds from the pool the FDIC uses to insure against bank failures. But she adds that it’s hardly surprising that Americans “are skeptical of a system that holds millions of struggling student loan borrowers in limbo but steps in overnight to ensure that billion-dollar crypto firms won’t lose a dime in deposits.”
Well yes, that is certainly a thought-provoking comparison. Say, what was Wonkette saying about all this in 2018? It was so long ago, we barely remember (Wayne and Garth make go “doodley-oo, doodly-oo” while waving their fingers) …
Oh look! We were block-quoting a warning from Cassandra Elizabeth Warren:
“On the 10th anniversary of an enormous financial crash, Congress should not be passing laws to roll back regulations on Wall Street banks,” Sen. Elizabeth Warren (D-Mass.) said in an interview. “The bill permits about 25 of the 40 largest banks in America to escape heightened scrutiny and to be regulated as if they were tiny little community banks that could have no impact on the economy.”
The new regulations passed in 2018 allowed all but the very biggest banks — those with assets of over $250 billion — to avoid the liquidity requirements and stress tests (Dodd-Frank had set the “too big to fail” bar at $50 billion). Even before the 2018 bank bill passed, we noted, several banks subjected to Federal Reserve scrutiny “have already been found to have been taking supposedly prohibited risks with investors’ money.”
Well gosh, it turns out that if you leave big banks to their own devices, they get up to mischief in pursuit of profits. Who could have predicted such a thing?
In her op-ed, Warren calls for the 2018 deregulation to be reversed by “Congress, the White House and banking regulators,” at a minimum. Rep. Katie Porter (D-California), who’s running for the Senate in 2024, is already working on a bill to do that, and President Joe Biden has also called for the regulations to be tightened.
But beyond that, Warren adds,
Bank regulators must also take a careful look under the hood at our financial institutions to see where other dangers may be lurking. Elected officials, including the Senate Republicans who, just days before S.V.B.’s collapse, pressed Mr. Powell to stave off higher capital standards, must now demand stronger — not weaker — oversight.
In addition, she says regulators should make changes to how deposit insurance works,
so that both during this crisis and in the future, businesses that are trying to make payroll and otherwise conduct ordinary financial transactions are fully covered — while ensuring the cost of protecting outsized depositors is borne by those financial institutions that pose the greatest risk.
We could certainly get behind that. And finally, says Warren, for Crom’s sake the people responsible for these failures should be kept from being rewarded, not simply by refusing to bail out the investors, but also by clawing back the big bonuses paid to the executives who drove both banks into the ditch. Beyond that, she adds,
Where needed, Congress should empower regulators to recover pay and bonuses. Prosecutors and regulators should investigate whether any executives engaged in insider trading or broke other civil or criminal laws.
But wouldn’t that be socialism? If you punish banking executives for making the occasional irresponsible bet, aren’t you really just coming after the ordinary small businessperson who won’t have the chance to be trickled down upon? Besides, as Rep. Nancy Mace (R-South Carolina) tweeted yesterday in reply to Warren, is a bank failure any time to be talking about politics? There certainly wasn’t anything political about rolling back Dodd-Frank to please Wall Street in 2018, so why get all political now?
Best to offer the banks our thoughts, prayers, and bailout money and save the blame for … oh, how about the gays?
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