It Is Not 2008 Again…Yet

Regulations put in place after the 2008 financial crisis are working, but they obviously didn't go far enough.

On the heels of the spectacular weekend collapse of the twentieth largest bank in America, Silicon Valley Bank (SVB), a regional player in the world of Wall Street houses, but a nonetheless incredibly important lender to the tech, and especially the start-up tech, sector, the government has interceded quickly, hoping to stem a viral panic attack that has already claimed a much smaller New York firm, Signature Bank. Leveraging knowledge gained the hard way (there never seems to be an easy way) from the 2008 collapse, the powers that be knew fast action and a confident public face were necessary to prevent the entire system from collapsing.

In a joint statement, Treasury Secretary, Janet Yellin, Federal Reserve chief, Jerome Powell, and the Federal Deposit Insurance Corporation’s (FDIC) Chair Martin Gruenberg, issued this joint statement: “The U.S. banking system remains resilient and on a solid foundation, in large part due to reforms that were made after the financial crisis that ensured better safeguards for the banking industry. Those reforms combined with today’s actions demonstrate our commitment to take the necessary steps to ensure that depositors’ savings remain safe.”

The best you can say is that we’re not yet in a financial crisis. Rules and regulations changed in the aftermath of the 2008 financial crisis/banking collapse, putting Wall Street’s big banks on more solid footing by demanding larger capital reserves (although still not as large as many prudent observers wished), making them endure multiple and ongoing “stress tests” that simulate responses to the unexpected and unintended consequences of depositors creating bank runs by trying to withdraw more cash from the system than the banks have on hand, and other types of internal and technical crises associated with that same lack of liquidity, as well as unsecured debt that goes bad and leaves institutions holding a really big, really smelly bag.  

This time, early on, officials announced plans to make depositors whole above the $250,000 FDIC guarantee. The money to do so (don’t say “bailout”) comes from an insurance pool that banks fund, so, no taxpayer dollar are being spent. It’s a good thing the banks are responsible because 90% of SVB’s depositors were in for amounts greater, and in many cases, much, much greater than then the quarter mill FDIC protects. Only Rebecca of Sunny Brook Farm would be naïve enough to think they won’t pass as much of this unexpected burden onto consumers and customers, but for now, it is safe to say taxpayers won’t directly pay these bills.

Also worth noting is that SVB is unique in the banking industry for its modern, nontraditional customer base. SVB doesn’t loan much to industrial giants like General Motors, or even mature tech companies like IBM. Their stock in trade, as stated, is mostly the start-up world of their namesake valley. That, and tighten your chin straps because the road is bumpy ahead, Crypto, the imaginary currency, or in the parlance of Stephen Colbert, the “magical internet coins,” that, like Icarus, flew high, before their wings melted in the heat of the sun. Remember: sunlight is the best disinfectant, and it has worked its reliable magic with the meltdown first of the Ponzi-inspired FTX Crypto exchange, which, according to Kiplinger’s financial newsletter, has been closely followed by Three Arrows Capital, Alameda Research, Voyager Digital, Genesis BlockFi, and Celsius Network, which have all paused customer withdrawals or filed for bankruptcy after being unable to continue operations.

From the Washington Post we learn this: “Signature Bank, for its part, bet heavily on the crypto sector. Like SVB, it saw a huge spike in deposits in recent years as valuations for digital assets soared. A large portion of its deposits came from crypto clients. When the Fed began raising interest rates to battle inflation – which lawmakers heartily approved – Signature’s fortunes waned.”

At least today, experts are saying this limited problem only becomes a full-blown panic if the post-2008 rejiggering of the rules fails to stop a social panic even while preventing a financial one. This because the markets both drive and follow human emotions.

There’s a little irony here that would be delicious if the stakes weren’t so high. Free marketeers, the most vocal opponents of government intervention in the financial markets, count many Silicon Valley entrepreneurs among their libertarian ranks. And, you guessed, it: now that it is their ox being gored, they are the loudest voices clamoring for the government to step in and save their bacon. Again, just don’t call it a bailout. It’s all reminiscent of the arguments against socializing medicine through the then maligned, now beloved, Affordable Care Act (never the loathed “Obama Care,” even though they are the same thing). Then it was the “Keep your government hands off my Medicare” crowd, now it’s the “Keep your government hands off the free market” crowd.

©2023 Jon Sinton