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Taking It to the Bank

The story of Silicon Valley Bank continues to dominate the headlines, particularly the political maneuvering that its collapse has occasioned. So, we shall talk about it some more.

There is, of course, a hotly contested U.S. Senate race going on in California right now. Silicon Valley Bank is is California. And so, the three declared Senate candidates—Reps. Adam Schiff, Katie Porter and Barbara Lee (all D-CA)—are competing with each other to see who can chastise the banking system the loudest, and who will do the most to cut the banks down to size if they become a senator. Not mentioned is the fact that one U.S. Senator can do approximately zero about banks (or anything else) on their own.

Meanwhile, in our item yesterday, we referred to the federal government's rescue of Silicon Valley Bank as a bailout. That was sloppy, and quite a few readers wrote in to take us to task. For example, R.S. in Vancouver, WA:

I object to the constant discussion of SVB as a "bailout." When the FDIC seizes a bank, like SVB, the process is a liquidation according to legally defined asset class. This is the exact same process as a Chapter 7 bankruptcy.

There is one primary difference. When a bank fails the FDIC backs some or all of the deposits. The normal order of asset reimbursement in a liquidation are: (1) secured creditors, (2) unsecured creditors, (3) preferred stock and (4) general stock, with $0 dollars of a junior asset class being funded until 100% of all senior asset classes are funded.

When the FDIC seizes a bank and guarantees all or some deposits it creates a new senior asset creditor for reimbursement, the FDIC, thus creating a new schedule for asset liquidation: (1) FDIC, (2) secured creditors, (3) unsecured creditors, (4) preferred stock and (5) general stock. Since a bank deposit is an unsecured debt what's really happening is a class of unsecured debt is gaining preference over secured creditors. This is a fight of the wealthy (large depositors) v. the extremely wealthy (secured debt holders).

However, I know of nobody who considers themselves to be receiving a 'bailout' when going through a Chapter 7 bankruptcy.

Or R.H. in Santa Ana, CA:

The "bailout" of SVB refers to the FDIC extending its guarantee (normally $250K per account-holder) to cover all accounts, no matter how large. This will not necessarily cost the FDIC anything.

SVB has assets, but they're largely longer-term fixed-rate instruments whose "value" dropped when ambient interest rates went up.

I used the quotes around value because those instruments, if held to maturity, would pay off the same face amount whether ambient rates are 1% or 6%—the only sense in which their value fluctuates is the price at which they can be sold—the issuers are still going to pay the face value.

The FDIC doesn't have to sell those instruments—it can hold them to maturity and it will receive 100% of their value.

SVB didn't have that luxury—after Peter Thiel told his funded companies to withdraw their money from SVB ASAP, SVB had to (try to) liquidate some of those long-term holdings to get the cash to pay for those withdrawals.

This was a fire sale—they HAD to off-load those holdings, no matter what price they were offered. This led to their insolvency, which means the value of their assets was exceeded by the value of their liabilities.

One of two things will happen: Either SVB will be wound up, all of its assets will become assets of the FDIC (and the FDIC will pay off its depositors), or a larger bank will "buy" SVB, which means its assets and deposits will belong to that bank. In either case, the FDIC is unlikely to be out a lot of money on this.

A much larger issue looms in the near-to-mid future: What happens when most of these multi-tenant office building REITs default on their mortgages? The pandemic shutdown showed most of those tenants that it's a lot cheaper to give employees a laptop and cable modem than it is to rent expensive Class B and C real estate for them all to work in office buildings. (For now, Class A seems to be mostly unaffected, but that could change).

If you thought the Great Recession of 2008-09 was fun, you're going to LOVE what happens when those commercial loans get marked to market.

We stand corrected, or at least clarified, and we thank R.S. and R.H. and the other readers who wrote in.

Meanwhile, consistent with the logic laid out in the two letters above, Rep. Blaine Luetkemeyer (R-MO), who is a former banker and is a member of the House Financial Services Committee, is urging the government to temporarily guarantee all deposits at all banks. His argument is that if depositors at smaller banks are concerned about a repeat of what happened at Silicon Valley Bank, there could be a run on smaller banks. This would not only further risk destabilizing the economy, it could also cause most depositors to migrate to mega-banks that have the capital to ride out tough times. Luetkemeyer believes that bank consolidation like this would be a bad thing. Given the abuses we've seen in recent years from mega-banks like Wells Fargo, we are inclined to agree.

And finally, quite a few readers wrote in wondering exactly how a bank could be destroyed by "wokeness," as claimed by Sen. Josh Hawley (R-MO), Rep. Marjorie Taylor Greene (R-GA) and many others on the right. The key to this "argument" is a woman named Jay Ersapah. Well, her and poor reading comprehension.

See, until Ersapah's LinkedIn page was taken down (you can see a screen capture here), it identified her as the Head of Financial Risk at SVB. It was also full of postings from her talking about various diversity initiatives she was working on. The conclusion that many right-wingers reached was that if Ersapah spent less time worrying about diversity, and more time focusing on her actual job (i.e., monitoring risk), then the bank wouldn't have collapsed. The Rupert Murdoch-owned properties have leaned into this angle particularly heavily:

The latter piece does not reveal its core thesis in the headline, but it does contain this sentence: "I'm not saying 12 white men would have avoided this mess, but the company may have been distracted by diversity demands." These various outlets, particularly Fox, have also suggested that Ersapah was so eager to promote LGBTQ hiring because she herself is gay, having received recognition from various LGBTQ organizations.

The only issue with this narrative is... Ersapah works for the British subsidiary of SVB. And that subsidiary is financially healthy enough that it was absorbed by HBSC. Oops! Oh, also, Ersapah is straight. Double oops! It's almost like you shouldn't rely on these Murdoch-owned outlets to report the news correctly. (Z)

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