The Latest from the Prospect
 â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â
View this email in your browser
<[link removed]>
Â
MARCH
**10, 2023**
Dayen on TAP
The Fed-Induced Bank Wobble
Silicon Valley Bank's collapse is a function of the Fed rate spike,
and will surely trigger calls for its well-heeled tech and venture
capital clients to get a bailout.
On Thursday, officials at Silicon Valley Bank, the nation's
16th-largest, were urging clients to "stay calm
<[link removed]>"
after a run of depositor withdrawals amid loud calls from venture
capital firms (including Peter Thiel's Founders Fund) for companies to
move their money. On Friday, the bank collapsed
<[link removed]>,
taken into receivership by the Federal Deposit Insurance Corporation.
It was the first FDIC-led bank failure in the U.S. since late 2020, but
a significant one, with approximately $175 billion in customer deposits,
making it the second-largest bank collapse in U.S. history, rivaled only
by Washington Mutual in 2008. The vast majority of them are business
accounts, mostly from tech and bioscience startups, as well as personal
accounts for founders and executives of those companies. While the
typical bank has something between 40 and 60 percent of assets above the
$250,000 limit for FDIC insurance, at SVB it was an incredible 93
percent, meaning that over $150 billion is not government-guaranteed.
SVB was mostly invested in long-term government bonds, which are
normally pretty safe. (They also had a large batch of those
mortgage-backed securities, which you might remember from 2008.) The
bank really succumbed to the wild swings in the tech industry, which
soared in the immediate aftermath of the pandemic but has plummeted
recently, as rising Federal Reserve interest rates put cheap money out
of reach. SVB grew massively in 2020 and 2021, but with tech startups
suffering, its customers pulled their money, and because of the interest
rate spike, those government bonds were worth less. When SVB conducted a
fire sale of some of those assets to cover the depositor losses, it came
up $2 billion short.
In total, the bank was underwater by around $15 billion
<[link removed]>,
according to the
**Financial Times**. The bank run from the startup world forced the
realization of some of those losses.
There are a couple of important lessons here. First and foremost, the
Fed's rapid pivot on interest rates couldn't help but spill over
into the broader economy. As Dennis Kelleher of Better Markets, who sees
this as just the beginning, explained
<[link removed]>,
banks had no time to adjust to the rate changes, which caused mismatches
between the expected and real value of their assets. Indeed, stock in
First Republic Bank, a regional lender in California and elsewhere,
plunged 50 percent in Friday trading.
"The Fed's actions to fight increasing inflation will need to be
materially adjusted, which it should be anyway because inflation is
driven by many factors that are beyond the Fed's control," Kelleher
said. "Causing financial instability and a recession (of any depth and
length) while missing the mark on inflation should cause a fundamental
rethinking of the Fed's powers, authorities, and role."
Second, because the depositors holding the bag at SVB are Very Important
People, there's going to be intense pressure for a bailout. Hedge fund
titan Bill Ackman is already calling for one
<[link removed]>. Larry
Summers told Bloomberg that the financial system should be fine, as long
as depositors get every penny of their money back
<[link removed]>,
which would be a $150 billion bailout. The character of the depositors
as "job creators" will be used to push this narrative, as Atrios points
out <[link removed]>.
We just had a crisis where government stepped in to protect regular
people; the job market roared back to life. The employment-population
ratio for prime-age workers passed the pre-pandemic peak
<[link removed]> in today's
jobs report in just three years. In the 2008 crisis, predicated on
bailing out banks and the rich, it took 12 years to hit that milestone.
Let that be a warning as we brace for the fallout.
~ DAVID DAYEN
Follow David Dayen on Twitter <[link removed]>
[link removed]
Conservative Witness Admits Potential Chaos From CFPB Court Case
<[link removed]>
The witness said that the Supreme Court finding CFPB's funding
unconstitutional 'could result in significant problems throughout the
financial system.' BY DAVID DAYEN
Intuit's Top Lobbying Firms Are Also Major DSCC Bundlers
<[link removed]>
Congress is set to receive a report on how the IRS can streamline the
tax filing process after lobbyists for Intuit bundled millions for the
Senate Democrats' campaign arm. BY DAVID MOORE
Sunsetting Racial Justice in the Sunshine State and Florida-izing the
Nation
<[link removed]>
How Florida's anti-diversity legislation may be a model for the
Supreme Court BY MARC SPINDELMAN
Reclaiming Black Trauma
<[link removed]>
Once a spectacle produced by and for white people, Black artists and
entertainers now present it on their own terms. BY RAMENDA CYRUS
[link removed]
Â
Click to Share this Newsletter
[link removed]
Â
[link removed]
Â
[link removed]
Â
[link removed]
Â
[link removed]
YOUR TAX DEDUCTIBLE DONATION SUPPORTS INDEPENDENT JOURNALISM
<[link removed]>
The American Prospect, Inc.
1225 I Street NW, Suite 600
Washington, DC xxxxxx
United States
Copyright (c) 2023 The American Prospect. All rights reserved.
To opt out of American Prospect membership messaging, click here
<[link removed]>.
To manage your newsletter preferences, click here
<[link removed]>.
To unsubscribe from all American Prospect emails, including newsletters,
click here
<[link removed]>.
