Can the turmoil caused by the bankruptcy of Silicon Valley Bank be contained?

Ken Sweet | Associated Press

NEW YORK — Can Washington bail out the failing Silicon Valley bank depositors? Politically possible?

When policymakers tried to decide whether the U.S. government and its taxpayers needed to serve primarily Silicon Valley and bail out failed banks with all their wealth and power, it was in Washington. It was one of the growing questions.

Prominent Silicon Valley personalities and executives have pushed the giant red “panic” button, saying that more bank crackdowns are likely if Washington does not come to the rescue of Silicon Valley bank depositors.

Bill Ackman, a prominent Wall Street investor, tweeted, “The government has been given about 48 hours to rectify its soon-to-be irreversible mistake. says it has no deposits but invests in companies that do.

Some other Silicon Valley personalities go even further.

“On Monday, 100,000 Americans will be queuing up at a local bank asking for money. Most will not get it,” Jason Karakanis wrote on Twitter. Technology investor Karakanis is close to Elon Musk, who recently took over his social media network.

Silicon Valley Bank went bankrupt on Friday. U.S. banking regulators urgently closed banks on weekday mornings to stop a crackdown on banks as terrified depositors withdrew billions of dollars from the banks in hours It is the second largest bank failure in history, after Washington Mutual’s failure at the height of the 2008 financial crisis.

Silicon Valley Bank was unique in the banking industry. The country’s 16th largest bank, as its name suggests, primarily served technology start-ups, venture capital firms, and highly paid tech workers. Because of this, the majority of Silicon Valley Bank deposits were in business accounts with balances well above the guaranteed $250,000 limit.

That failure now leaves more than $150 billion in deposits under control. This means that startups and other businesses may not have access to funding for a long time.

Staff at the Federal Deposit Insurance Corporation, the agency that insures bank deposits of less than $250,000, spent the weekend looking for potential buyers for assets in failed banks. There were multiple bidders for the property, but as of Sunday morning, the bank’s corpse was in U.S. government custody.

Despite the Silicon Valley panic, there are no signs that bank failures will lead to 2008-like crises. The country’s banking system is healthy, holds more capital than ever before in its history, and has undergone multiple stress tests that show the system as a whole can withstand a major recession.

Additionally, the Silicon Valley Bank failure appears to be a unique circumstance in which bank executives made the wrong business decision by buying bonds when the Federal Reserve was about to raise rates. . There has been a severe contraction in the past year.

Investors are looking for banks in similar situations. Shares of First Republic Bank, which serves wealthy individuals and technology companies, have tumbled by nearly a third in two days. PacWest Bank, a California-based bank that caters to small and medium-sized businesses, plunged his 38% on Friday.

In a sign of high uncertainty for these medium-sized banks, First Republic Bank sent an email to customers on Sunday to confirm they have sufficient capital and liquidity that could impact the banks. I said no problem.

While highly unusual, it was clear that bank failures of this magnitude caused concern. Treasury Secretary Janet Yellen and the White House are “watching closely” this development. The governor of California spoke with President Biden. Also in Congress, he proposed a bill to raise the FDIC insurance limit to temporarily protect depositors.

“We’ve been working with banking regulators all weekend to develop appropriate policies to address this situation,” Yellen said on Sunday’s “Face the Nation.”

But Yellen made it clear in an interview that if Silicon Valley expects Washington to come to its aid, it’s wrong. “We are not going to do it again,” Yellen said when asked if a bailout was being considered.

“But we are concerned about our depositors and we are focused on meeting their needs,” she added.

Democratic Virginia Senator Mark Warner said on ABC’s “This Week” that a potential bailout of uninsured depositors in Silicon Valley would be a “moral hazard.” Moral hazard was a term often used during the 2008 financial crisis as why Washington should not have bailed out Lehman Brothers.

A story that has been panicking among tech industry insiders is that many companies that keep their operating funds in Silicon Valley banks will not be released on payroll or in the coming days or weeks because their uninsured deposits will not be released. It means that you will not be able to pay your office expenses. However, the FDIC said it will pay depositors an unspecified “advance dividend” (a portion of uninsured deposits) this week, and said more advances will be paid out as assets are sold. .

The ideal situation is for the FDIC to find one, or perhaps two or three, buyers for the Silicon Valley Bank’s assets. So is the possibility that banks will be sold off in small increments over the next few weeks. Insured depositors will have access to funds on Monday, and uninsured deposits will be available as the FDIC sells assets to complete depositors.

FDIC consultant and former attorney Todd Phillips predicts that uninsured depositors are likely to recover between 85% and 90% of their deposits if the sale of bank assets is conducted in an orderly manner. He said he was. He said it was never the intention of Congress to protect business accounts with deposit insurance.The theory is that businesses should do due diligence with banks when storing cash.

Phillips said congressional action would be required to protect bank accounts and include businesses. So it is unclear whether the banking industry will support higher insurance limits.

Phillips added that the best thing Washington can do is tell them that the entire banking system is safe and that uninsured depositors get most of their money back.

“People in Washington need to forcefully refute the narrative on Twitter originating from Silicon Valley. But it goes a long way in stopping the panic,” he said.