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What should the lesson be from Silicon Valley Bank?
The nation's 16th largest bank failed. Depositors were made whole. Investors lost their money. Where do we go from here?
This week I was reading the news and checked Wikipedia for the list of largest bank runs and one from 2007 caught my eye. There’s a single line:
In early August 2007, the American firm Countrywide Financial suffered a bank run as a consequence of the subprime mortgage crisis.
I hadn’t heard of or completely forgot about Countrywide Financial. But about six months after Countrywide fell big banks — Bear Stearns, IndyMac, Washington Mutual and Wachovia — all suffered bank runs as part of the 2008 financial crisis portrayed in the movie The Big Short.
The co-founder of Countrywide Financial, Angelo Mozilo made $470 million from the business between 2001 and 2006. In the twelve months leading up to the crash of his firm he sold $129 million worth of stock. Despite being responsible for the financial crisis and being charged with insider trading and securities fraud by the SEC he settled, paid a fine and bafflingly didn’t have to admit any wrongdoing. The government completely dropped it’s criminal investigation and the only punishment was a $20 million fine. Countrywide was sold to Bank of America for $4 billion in all stock. The true cost was quite a bit more though for Bank of America because they had to pay $17 billion to settle claims against it from Countrywide’s sale of toxic mortgage-linked securities. The rich got richer and the government stepped in to bail everybody else out. No one went to jail.
The 2008 crisis drove further consolidation in the American banking sector. Bank of America gobbled up Countrywide, Wells Fargo acquired Wachovia and JPMorgan Chase scooped up Washington Mutual. The result was fewer, more powerful banks and less competition. One positive outcome was that legislators passed the Dodd–Frank Wall Street Reform and Consumer Protection Act to make sure our financial system was secure from gambling financiers and the crooks that drove Countrywide to massive profits followed by swift destruction.
Enforce financial regulations — don’t weaken them
Fast forward to 2018. Jerome Powell, Chair of the Federal Reserve, the agency that’s supposed to be regulating these banks supported loosening restrictions in law: S.2155 - Economic Growth, Regulatory Relief, and Consumer Protection Act. Silicon Valley Bank lobbied for this legislation but they never could have got it passed without the support of the Federal Reserve itself. Powell testified in support of the bill that undid parts of Dodd-Frank and ultimately led to SVB’s risky behavior that led to its collapse. Right after the bill passed SVB announced a $500 million stock buyback program. Executives took generous pay bumps as they took on larger and larger uninsured deposits, enforcing provisions that customers had to put 100% of their money into SVB. Greg Becker, CEO of SVB took out $2.27 million in personal profits weeks before the entire bank collapsed. Now he’s under investigation by the SEC. Weakening financial regulations leads to behavior that’s highly profitable for financiers in the short term and destructive for the rest of us in the long term. Strong laws and strong civil and criminal enforcement is necessary to keep financiers from engaging in reckless behavior.
Regulate the banks — don’t let them regulate themselves
Jerome Powell is trying to act like the Fed did nothing wrong but that’s clearly not the case. Regulators completely failed to keep SVB’s risk-taking in check and they should be held accountable. We need financial regulatory enforcers that will actually enforce regulations on the books, not campaign to weaken them. It’s telling that every member of the Federal Reserve is a multi-millionaire. Greg Becker, CEO of Silicon Valley Bank was on the board of the San Francisco Federal Reserve, the same body that was supposed to be regulating him. The fox guarding the hen house doesn’t work. Financial regulators need to do their jobs and the regulated clearly shouldn’t be doing regulating.
Listen to Elizabeth Warren — not Yellen or Powell
Elizabeth Warren was the only member out of twenty three on the Senate Banking Committee to vote against confirming Jerome Powell in 2017. She recently wrote a letter cataloging the astonishing list of regulatory failures that led to the collapse of SVB and has already written legislation to undo the 2018 S.2155 law called the Warren-Porter bank bill. Warren has been a champion of decentralizing power for a long time and as the only member of the Senate Banking Committee to vote against confirming Powell has clear authority to not only say “I told you so” but to lead towards what’s next.
In contrast we see Janet Yellen testifying before Congress. Republican James Lankford from Oklahoma ask her if small community banks in Oklahoma will now be fully insured. She responds that they won’t be to which he asks what’s to stop large depositors from moving out of community banks into big banks. She has no good response. Instead it’s clear those banks will have to pay increased “assessment fees” to make Venture Capitalists, startups and even foreign members of the Chinese Communist Party whole.
The full exchange is worth a watch:
From Powell and Yellen’s behavior it’s clear they don’t care about small banks. They’re multimillionaires that come from and live in the world of big bankers. We need politicians and regulators to keep the bankers inline not technocrats that deliberately work to centralize financial power in America.