- Jun 6, 2007
- 852
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The Biden Administration did the right thing in extending the FDIC insurance protection to the entirety of the deposits for the depositors of Silicon Valley Bank (SVB)which the Federal Government took over this past weekend instead of just limiting it to $250,000.00 of the account per the law passed by Congress. The nation was in a real danger of a contagion of panic about the solvency of the nation's banks the nation could have faced a run on its banks like it faced during the Great Depression which if occurred would have sent the nation into at minimum a significant recession! That being said I agree with the experts that say the Federal Government should not do this again it should make it clear to the banking industry and to the American people this was a one-off. The reason why the Federal Government should not do this again is because it will increase the FDIC insurance charge banks pay on their depositor accounts which means they will have less money to lend and be less financially strong that is have less capital and equally important it will eliminate a moral hazard that deters bank executives from being bad stewards with depositors money. If bank executives know that the Federal government will back stop any losses they incur with depositors money they will take more risks in gaining a return on that money which will increase their pay and bonuses and cause more losses amongst the nation's banks thereby weakening the soundness of America's banking system.
There is several aspects of this Silicon Valley Bank failure which cries out for Congress to pass legislation correcting the problem. A Bank should not be able to condition a loan or a line of credit to the term that the borrower has to conduct all their banking activity with the respective bank! That is what happened with SVB many small start-up business and high technology firms had largely all their cash in SVB accounts because of SVB loan terms so when it appeared SVB was going into bankruptcy and monies in accounts over $250,000 would not be available and might be lost it put these small businesses in a position where they would not be able to make their payroll and pay vendors and their business operations would be in jeopardy. Good public policy should promote businesses having at least three banks that can carry on their payroll and account receivables banking account functions; so federal law should limit this condition on loan and credit lines to the borrower from a bank so that the maximum restriction is that the borrower must maintain at least thirty percent of its banking activity at the respective bank.
This is not any type of panacea to the problem that the country saw this past week but it would help the problem by sparing a lot of people from losing money in a bank. This figure on the FDIC deposit protection coverage amount was raised to $250,000 per account back in 2008 or 2009 so it hasn't been raised in over thirteen years and of course the country has gone through a lot of inflation over that time period. So why doesn't the Congress lift this FDIC deposit protection limit to accommodate inflation and mandate that every ten years from now this ceiling will be raised to accommodate inflation. The media was replete with stories of SVB depositors after hearing there was a run on the bank this past Thursday were frantically trying to pull money out of their SVB account to get their balance below $250K so their money would be safe, a higher protection limit would alleviate this harrowing experience for some bank depositors in the future that find themselves in a situation where there bank is collapsing or facing collapse!
The critical specific mistake that the executives at SVB made is that they invested an undue amount of their capital in long term mortgage backed bonds and Treasury bonds which they planned to hold unto maturity which means for example if one holds a ten year Treasury bond the recipient of the bond won't get the principle, the amount of the bond, until that ten year date comes. The problem with this investing strategy is that the interest rate environment for the country is that interest rates are going up and going up dramatically because the Federal Reserve Bank has to get control of inflation and the only way they can reliably succeed is by raising interest rates. The problem this poses to bond investors like the SVB executives with their long-term bond investment strategy is that as interest rates go up these bonds drop dramatically in value because buyers of the bonds have to factor in that they won't get their principal and a fair interest rate until the entire length of the long-term. To use banking parlance there is two types of bond investments a bank can make one is HTM (Hold To Maturity) type which SVB did and then there is AFS (Available For Sale) type which are generally short term bonds so in a high interest rate environment if the holder has to sell the bonds the loss on the bonds will be minimal. The other key thing is that HTM bonds a bank doesn't have to report the loss of value of the bonds to its investors on a quarterly or yearly basis for AFS bonds the bank has to report this loss of value at this regular basis even if it does not realize this loss which means even if the bonds aren't actually sold. In SVB the bank held like $91 billion dollars of HTM bonds and its total deposit base was like only $189 billion. Last Wednesday SVB reported they lost like $1.8 billion on $21 billion of bonds they sold and since the equity in the bank was only like $17 billion dollars this scared depositors and investors and triggered a run on the bank . The Federal Government should issue a policy that a bank because you are a bank where you should be prepared to return depositors their money so your capital in so far as covering those deposits should be liquid the bond investments you hold should be AFS bonds at least to the percentage of your overall deposits you don't have cash available to cover up to sixty-six percent of your outstanding deposits.
Another good public policy initiative that Congress and the President should put into law involves the following. Banks have to file paperwork on their business operations when they take certain actions. This past Wednesday SVB planned to and did file paperwork saying that they lost $1.8 billion on the sale of $21 billion dollars of bonds and that they held $91 billion dollar of long-term bonds which as of Wednesday they had a $15 billion dollar unrealized loss on due to the raising interest rate environment and interest rates are almost certainly going up and SVB depositor base is a lot of small businesses who are dipping into their cash reserves because of the economies headwinds and SVB cash cushion wasn't great meaning they would have to sell some of their HTM bonds to cover deposit withdraws if trends continued. Wouldn't it have been nice for the country if a Federal Reserve Bank top executive could have gotten involved at this time and said woo, woo, woo if you SVB do what your planning to do there is almost certainly going to be widespread questioning of your solvency you are risking investers fleeing your stock and a run on your bank. Let the Federal Reserve Bank bring you back from the brink of failure here, your bond portfolio is high grade just low interest rate and long-term so if the Fed takes these bonds off your hands we won't lose any money we can wait for maturity to get our money back; so the FED will buy $50 billion of your bond portfolio at par you won't lose any money. We don't want to look like fools helping you out here so your top executives will have to forgo bonuses for three years and for that time you cannot raise your dividend outside the norm assuming you are issuing dividends and you have to agree to invest conservatively. In short, Congress and the President should give the Federal Reserve Bank in regard to mid-size and large banks the power to buy high quality investment grade bonds at par from a bank to solidify the capital position of the respective bank and save it from instability and/or failure if they believe it makes sense to do it and it is good for the banking system and the U.S. economy!
Another issue that this SVB failure bought to fore is the sale of a bank after the FDIC either takes the Bank into receivership or is poised to take the bank into receivership; apparently, there was no or maybe one interested buyer in buying SVB once the regulators shut it down on Friday. This touches on one major shortfall in our nation's system about what to do with banks that fail; to best understand the system's shortcoming one should examine the history of the 2008-2009 Great Recession. During this economic crisis three large Banks failed and the Federal government lobbied other banks to take them over with terrible liability consequences for the Good Samaritan Banks that took over the failed banks. JPMorgan took over Bear Stearns, Bank of America took over Merrill Lynch and Wells Fargo took over Wachovia. Each bank incurred at least one billion dollars of liability if one includes the legal cost, and the settlements. Actually JP Morgan had at one time said its liability had run into the five to ten billion dollar range over the Bear Stearns acquisition. The lesson and the principle that should be learned here is that Congress and the President have to give the Federal Regulators the power to shield these Good Samarita banks from liability over the acquisitions from the failed bank stock holders, depositors and customers; the acquiring bank should be treated just like a bank that is buying an asset if it is being auctioned off during a bankruptcy proceeding where the buyer is taking on no legal liability! Further, many of these Good Samaritan banks incurred significant liability from regulators over their purchases and the wrongdoing of the executives of these purchased banks Federal Regulators should be empowered to waive this liability for the acquiring banks. SVB had a great core business model and a great reputation it should have been able to be sold by Sunday afternoon so the Federal Regulators did not have to come out with this very problematic policy that they did that the entirety of all deposit accounts would be insured by the FDIC. To a bank that knows how to deploy lots of money and America has numerous purchasing SVB bank would have been like hitting the lottery but I am certain that the legal liability associated with such a purchase frightened away many good suitors!
The last policy change really needed would be a seismic change in America for the good if it happened and on its merits it definitely definitely should but it probably won't because the devil, Satan has his tentacles very much in our society in America and wouldn't want this evil lifted from America. This is an unusual point but not irrelevant by any stretch of the imagination Satan's tentacles can be seen very clearly in our country when one considers the great harm done in our society by the widespread legalization of gambling across the nation how many families financial well being is really harmed by gambling which is a foolish and meritless activity for any country that claims to be good country to let it exist to the depth it does in America. The activity that I am referring to here is shorting stock and selling options put options specifically. What these investment tools do is they benefit from a fall in a stock price. More specifically "shorting a stock" involves an investor borrowing a stock and selling that borrowed stock with the plan that the stock will fall in price and when it does the investor will buy the stock at the lower price and return it to the stock lender and the investor will capture the difference between the higher sale price and the lower purchase price. A "put" option is a specific type of option of course an option is a right to do something and a put option is a right to sell a stock at a certain price the utility of put option is that when an investor believes a stock will significantly drop in price over the future he or she buys a put option with a strike price near the current market price so when the stock price drops the option owner buys it at the lower price and then exercises the option and sells the stock at the higher strike price. These investment vehicles "shorting stock" and "put options" are ordinarily not bad investment vehicles to have because they foster accurate and fair stock pricing in the system because these short investors research corporations to determine if their revenue will decline or there is another good reason for the stock price to decline. The problem with their use on bank stocks and financial industry stocks during turbulent times is that the well being of banks is based on the confidence of depositors if depositors become galvanized by fear that their deposit account is not safe they will withdraw the monies in their account weakening the financial soundness of the bank and during turbulent times depositors are put into a state of fear it doesn't take much to drive them to withdraw or close their accounts. It is especially the case that falling bank share prices create and grow this fear in the bank depositors, one saw it with SVB depositors and one saw it in the nation's largest bank failure ever that of Washington Mutual back in 2008. I don't think the investment industry wants the American public to know what big role and honestly a proximate cause role shorting stock and options played in the failure, the media doesn't report much on this evil in our nation's system. It has been reported that on Thursday when the stock dropped sixty percent in price short sellers made over a half of billion dollars that day. Also, I was able to find authority that reported that off the exchanges on that Thursday eight million shares were short traded and on a normal day less than 125,000 shares of the stock are short traded off the exchanges; I was not able to locate how much short trading in the stock took place that day on the exchanges. I am sure that the Financial industry would go to great lengths to protect the ability to short trade bank stock during times of stress in the economy because of what Thursday shows a hell of a lot of money can be made by such investors during such times. But members of Congress and the President aren't given their jobs to protect big pay days for big fish Wall Street investors they are given their jobs to protect America's Banking system so to that end laws should be passed to give the Chairmen of the Federal Reserve Bank the power to suspend for however long he or she sees fit the use of short sales and options trading for one or more financial industry stocks to protect that financial business, businesses, industry and/or economy from unfair or illegitimate harm from such investors! Don't let anyone fool themselves unless these agents of evil are disempowered they will strike again with painful consequences for the country and probably not to far in the distant future from what a few experts in the industry are saying that a significant number of commercial loans are in trouble because businesses don't need as much office space with how the Pandemic changed work trends in the country so small and medium banks heavily weighted with such loans could be in for a rough going in the future!
There is several aspects of this Silicon Valley Bank failure which cries out for Congress to pass legislation correcting the problem. A Bank should not be able to condition a loan or a line of credit to the term that the borrower has to conduct all their banking activity with the respective bank! That is what happened with SVB many small start-up business and high technology firms had largely all their cash in SVB accounts because of SVB loan terms so when it appeared SVB was going into bankruptcy and monies in accounts over $250,000 would not be available and might be lost it put these small businesses in a position where they would not be able to make their payroll and pay vendors and their business operations would be in jeopardy. Good public policy should promote businesses having at least three banks that can carry on their payroll and account receivables banking account functions; so federal law should limit this condition on loan and credit lines to the borrower from a bank so that the maximum restriction is that the borrower must maintain at least thirty percent of its banking activity at the respective bank.
This is not any type of panacea to the problem that the country saw this past week but it would help the problem by sparing a lot of people from losing money in a bank. This figure on the FDIC deposit protection coverage amount was raised to $250,000 per account back in 2008 or 2009 so it hasn't been raised in over thirteen years and of course the country has gone through a lot of inflation over that time period. So why doesn't the Congress lift this FDIC deposit protection limit to accommodate inflation and mandate that every ten years from now this ceiling will be raised to accommodate inflation. The media was replete with stories of SVB depositors after hearing there was a run on the bank this past Thursday were frantically trying to pull money out of their SVB account to get their balance below $250K so their money would be safe, a higher protection limit would alleviate this harrowing experience for some bank depositors in the future that find themselves in a situation where there bank is collapsing or facing collapse!
The critical specific mistake that the executives at SVB made is that they invested an undue amount of their capital in long term mortgage backed bonds and Treasury bonds which they planned to hold unto maturity which means for example if one holds a ten year Treasury bond the recipient of the bond won't get the principle, the amount of the bond, until that ten year date comes. The problem with this investing strategy is that the interest rate environment for the country is that interest rates are going up and going up dramatically because the Federal Reserve Bank has to get control of inflation and the only way they can reliably succeed is by raising interest rates. The problem this poses to bond investors like the SVB executives with their long-term bond investment strategy is that as interest rates go up these bonds drop dramatically in value because buyers of the bonds have to factor in that they won't get their principal and a fair interest rate until the entire length of the long-term. To use banking parlance there is two types of bond investments a bank can make one is HTM (Hold To Maturity) type which SVB did and then there is AFS (Available For Sale) type which are generally short term bonds so in a high interest rate environment if the holder has to sell the bonds the loss on the bonds will be minimal. The other key thing is that HTM bonds a bank doesn't have to report the loss of value of the bonds to its investors on a quarterly or yearly basis for AFS bonds the bank has to report this loss of value at this regular basis even if it does not realize this loss which means even if the bonds aren't actually sold. In SVB the bank held like $91 billion dollars of HTM bonds and its total deposit base was like only $189 billion. Last Wednesday SVB reported they lost like $1.8 billion on $21 billion of bonds they sold and since the equity in the bank was only like $17 billion dollars this scared depositors and investors and triggered a run on the bank . The Federal Government should issue a policy that a bank because you are a bank where you should be prepared to return depositors their money so your capital in so far as covering those deposits should be liquid the bond investments you hold should be AFS bonds at least to the percentage of your overall deposits you don't have cash available to cover up to sixty-six percent of your outstanding deposits.
Another good public policy initiative that Congress and the President should put into law involves the following. Banks have to file paperwork on their business operations when they take certain actions. This past Wednesday SVB planned to and did file paperwork saying that they lost $1.8 billion on the sale of $21 billion dollars of bonds and that they held $91 billion dollar of long-term bonds which as of Wednesday they had a $15 billion dollar unrealized loss on due to the raising interest rate environment and interest rates are almost certainly going up and SVB depositor base is a lot of small businesses who are dipping into their cash reserves because of the economies headwinds and SVB cash cushion wasn't great meaning they would have to sell some of their HTM bonds to cover deposit withdraws if trends continued. Wouldn't it have been nice for the country if a Federal Reserve Bank top executive could have gotten involved at this time and said woo, woo, woo if you SVB do what your planning to do there is almost certainly going to be widespread questioning of your solvency you are risking investers fleeing your stock and a run on your bank. Let the Federal Reserve Bank bring you back from the brink of failure here, your bond portfolio is high grade just low interest rate and long-term so if the Fed takes these bonds off your hands we won't lose any money we can wait for maturity to get our money back; so the FED will buy $50 billion of your bond portfolio at par you won't lose any money. We don't want to look like fools helping you out here so your top executives will have to forgo bonuses for three years and for that time you cannot raise your dividend outside the norm assuming you are issuing dividends and you have to agree to invest conservatively. In short, Congress and the President should give the Federal Reserve Bank in regard to mid-size and large banks the power to buy high quality investment grade bonds at par from a bank to solidify the capital position of the respective bank and save it from instability and/or failure if they believe it makes sense to do it and it is good for the banking system and the U.S. economy!
Another issue that this SVB failure bought to fore is the sale of a bank after the FDIC either takes the Bank into receivership or is poised to take the bank into receivership; apparently, there was no or maybe one interested buyer in buying SVB once the regulators shut it down on Friday. This touches on one major shortfall in our nation's system about what to do with banks that fail; to best understand the system's shortcoming one should examine the history of the 2008-2009 Great Recession. During this economic crisis three large Banks failed and the Federal government lobbied other banks to take them over with terrible liability consequences for the Good Samaritan Banks that took over the failed banks. JPMorgan took over Bear Stearns, Bank of America took over Merrill Lynch and Wells Fargo took over Wachovia. Each bank incurred at least one billion dollars of liability if one includes the legal cost, and the settlements. Actually JP Morgan had at one time said its liability had run into the five to ten billion dollar range over the Bear Stearns acquisition. The lesson and the principle that should be learned here is that Congress and the President have to give the Federal Regulators the power to shield these Good Samarita banks from liability over the acquisitions from the failed bank stock holders, depositors and customers; the acquiring bank should be treated just like a bank that is buying an asset if it is being auctioned off during a bankruptcy proceeding where the buyer is taking on no legal liability! Further, many of these Good Samaritan banks incurred significant liability from regulators over their purchases and the wrongdoing of the executives of these purchased banks Federal Regulators should be empowered to waive this liability for the acquiring banks. SVB had a great core business model and a great reputation it should have been able to be sold by Sunday afternoon so the Federal Regulators did not have to come out with this very problematic policy that they did that the entirety of all deposit accounts would be insured by the FDIC. To a bank that knows how to deploy lots of money and America has numerous purchasing SVB bank would have been like hitting the lottery but I am certain that the legal liability associated with such a purchase frightened away many good suitors!
The last policy change really needed would be a seismic change in America for the good if it happened and on its merits it definitely definitely should but it probably won't because the devil, Satan has his tentacles very much in our society in America and wouldn't want this evil lifted from America. This is an unusual point but not irrelevant by any stretch of the imagination Satan's tentacles can be seen very clearly in our country when one considers the great harm done in our society by the widespread legalization of gambling across the nation how many families financial well being is really harmed by gambling which is a foolish and meritless activity for any country that claims to be good country to let it exist to the depth it does in America. The activity that I am referring to here is shorting stock and selling options put options specifically. What these investment tools do is they benefit from a fall in a stock price. More specifically "shorting a stock" involves an investor borrowing a stock and selling that borrowed stock with the plan that the stock will fall in price and when it does the investor will buy the stock at the lower price and return it to the stock lender and the investor will capture the difference between the higher sale price and the lower purchase price. A "put" option is a specific type of option of course an option is a right to do something and a put option is a right to sell a stock at a certain price the utility of put option is that when an investor believes a stock will significantly drop in price over the future he or she buys a put option with a strike price near the current market price so when the stock price drops the option owner buys it at the lower price and then exercises the option and sells the stock at the higher strike price. These investment vehicles "shorting stock" and "put options" are ordinarily not bad investment vehicles to have because they foster accurate and fair stock pricing in the system because these short investors research corporations to determine if their revenue will decline or there is another good reason for the stock price to decline. The problem with their use on bank stocks and financial industry stocks during turbulent times is that the well being of banks is based on the confidence of depositors if depositors become galvanized by fear that their deposit account is not safe they will withdraw the monies in their account weakening the financial soundness of the bank and during turbulent times depositors are put into a state of fear it doesn't take much to drive them to withdraw or close their accounts. It is especially the case that falling bank share prices create and grow this fear in the bank depositors, one saw it with SVB depositors and one saw it in the nation's largest bank failure ever that of Washington Mutual back in 2008. I don't think the investment industry wants the American public to know what big role and honestly a proximate cause role shorting stock and options played in the failure, the media doesn't report much on this evil in our nation's system. It has been reported that on Thursday when the stock dropped sixty percent in price short sellers made over a half of billion dollars that day. Also, I was able to find authority that reported that off the exchanges on that Thursday eight million shares were short traded and on a normal day less than 125,000 shares of the stock are short traded off the exchanges; I was not able to locate how much short trading in the stock took place that day on the exchanges. I am sure that the Financial industry would go to great lengths to protect the ability to short trade bank stock during times of stress in the economy because of what Thursday shows a hell of a lot of money can be made by such investors during such times. But members of Congress and the President aren't given their jobs to protect big pay days for big fish Wall Street investors they are given their jobs to protect America's Banking system so to that end laws should be passed to give the Chairmen of the Federal Reserve Bank the power to suspend for however long he or she sees fit the use of short sales and options trading for one or more financial industry stocks to protect that financial business, businesses, industry and/or economy from unfair or illegitimate harm from such investors! Don't let anyone fool themselves unless these agents of evil are disempowered they will strike again with painful consequences for the country and probably not to far in the distant future from what a few experts in the industry are saying that a significant number of commercial loans are in trouble because businesses don't need as much office space with how the Pandemic changed work trends in the country so small and medium banks heavily weighted with such loans could be in for a rough going in the future!
