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Silicon Valley Bank fallout continues


Can Washington bail out failed Silicon Valley bank depositors? Is that even politically possible?

That was one of the growing questions in Washington on Sunday as policymakers grappled with whether the U.S. government and its taxpayers should bail out the failing bank that largely catered to Silicon Valley, with all its wealth and power.

Silicon Valley celebrities and executives are hitting a giant red “PANIC” button, saying that if Washington doesn’t help Silicon Valley bank depositors, more bank runs are likely.

“The government has about 48 hours to fix this soon-to-be-irreversible mistake,” Wall Street investor Bill Ackman wrote on Twitter. Ackman said he has no deposits in a Silicon Valley bank, but is invested in companies that do.

Some other Silicon Valley personalities have been bombarded even more.

“On Monday 100,000 Americans will line up at their regional bank demanding their money, most won’t get it,” Jason Kalakanis tweeted. Kalakanis, a tech investor, has been close to Elon Musk, who recently took over the social network.

A Silicon Valley bank collapsed on Friday as frightened depositors pulled billions of dollars out of the bank in a matter of hours, prompting US banking regulators to shut the bank down in the middle of the business day. It is the second largest bank failure in history, following the collapse of Washington Mutual at the height of the 2008 financial crisis.

Silicon Valley Bank was a unique creature in the banking world. The nation’s 16th-largest bank catered primarily to tech startups, venture capital firms and well-paid tech workers, as its name suggests. Because of this, the vast majority of deposits at Silicon Valley Bank were in business accounts with balances well in excess of the $250,000 insured limit.

Its failure has caused more than $150 billion in deposits to now be locked in receipts, meaning startups and other businesses may not be able to access their money for a long time.

Employees of the Federal Deposit Insurance Corporation, which insures bank deposits of less than $250,000, worked through the weekend looking for a potential buyer for the failed bank’s assets. There have been multiple bidders for the assets, but as of Sunday morning, the bank’s body remained in the custody of the US government.

Despite the panic from Silicon Valley, there are no signs that a bank failure could lead to a 2008-like crisis. The nation’s banking system is healthy, has more capital than it has ever had in its history, and has passed numerous stress tests that show the overall system can withstand even a significant economic downturn.

Furthermore, the failure of Silicon Valley Bank appears to be a unique situation where the bank’s executives made bad business decisions by buying bonds just as the Federal Reserve was about to raise interest rates, and the bank was uniquely exposed to a particular industry that recently saw a sharp contraction in one year.

Investors are looking for banks in similar situations. Shares of First Republic Bank, a bank that caters to the wealthy and tech companies, have fallen by nearly a third in two days. PacWest Bank, a California-based bank that caters to small and medium-sized businesses, fell 38% on Friday.

In a sign of how uncertain things are for these mid-sized banks, First Republic Bank sent an email to clients on Sunday telling customers it is well capitalized and has no liquidity problems that could affect the bank.

Although highly unusual, it was clear that the failure of a bank of this size was causing concern. Finance Minister Janet Yellen, as well as the White House, are “closely following” the developments. The Governor of California spoke with President Biden. and now bills have been proposed in Congress to raise the limit on FDIC insurance to temporarily protect depositors.

“I have been working all weekend with our banking regulators to develop appropriate policies to address this situation,” Yellen said on “Face the Nation” on Sunday.

But Yellen made it clear in her interview that if Silicon Valley expects Washington to come to its rescue, it is mistaken. When asked if an aid program is on the table, Yelen said: “We won’t do it again.”

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

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

A growing panic story among tech insiders is that many entrepreneurs who keep their operating cash at Silicon Valley Bank won’t be able to make payroll or pay office expenses in the coming days or weeks when those uninsured deposits aren’t released. However, the FDIC said it plans to pay an unspecified “advance dividend,” a portion of uninsured deposits, to depositors this week and said more advance payments will be made as assets are sold.

The ideal situation is for the FDIC to find a unique buyer, or perhaps two or three, for Silicon Valley Bank’s assets. It is equally likely that the bank will be sold piecemeal in the coming weeks. Insured depositors will have access to their funds on Monday, and any uninsured deposits will be available as the FDIC sells assets to make depositors whole.

Todd Phillips, a consultant and former attorney for the FDIC, said he expects uninsured depositors will likely get 85% to 90% of their deposits back if the bank’s asset sales are conducted in an orderly manner. He said Congress never intended to protect business accounts with deposit insurance, the theory being that businesses should do their due diligence on banks when holding their cash.

Bank account protection would require an act of Congress to include businesses, Phillips said. It is unclear whether the banking industry would also support higher insurance limits, since FDIC insurance is paid for by banks through assessments, and higher limits would require higher assessments.

Philips added that the best Washington can do is communicate that the overall banking system is safe and that uninsured depositors will get most of their money back.

“People in Washington need to push hard against stories coming out of Silicon Valley on Twitter. If people realize they’re going to get 80% to 90% of your deposits back, but it’s going to take a while, that will do a lot to stop them. Panic,” he said.

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