Gus Carlson is a U.S.-based columnist for Tausi Insider.
In an increasingly consequence-free culture, where poor planning, weak decision-making and bad behaviour go unchecked and unpunished, no one should be surprised the U.S. government stepped in like a frantic helicopter parent to backstop Silicon Valley Bank and agreed to cover deposits beyond the Federal Deposit Insurance Corporation’s US$250,000 limit.
While the politically expedient intervention might have appeared angel-like in calming nerves and easing initial concerns about SVB being a canary in a coal mine for 2008 all over again, it changed the banking game – and not necessarily for the better.
With the subsequent failure of Signature Bank, which is heavily dependent on cryptocurrency deposits, and First Republic Bank teetering on the same tech-dependent precipice as SVB, the bending of the FDIC guidelines is generating even more heat and begging the question: Where will the government draw the line on its unmandated generosity that rewards bad business?
As the SVB infection spread, many influential voices in the banking community weighed in to say the get-out-of-jail-free quasi-bailout of a bank with questionable management ability, not to mention a suspect business model almost solely dependent on risky tech startups, was the wrong thing to do and set a dangerous new precedent that is asking for more trouble. They are right.
The move by the U.S. government runs counter to the capitalist mantra that only the strong and savvy survive, fails to punish bad management and poor financial discipline and creates moral hazard by intimating that it’s okay to look the other way when risk management fails, especially with institutional depositors.
The best thing would have been to let SVB’s institutional depositors feel the pain, then use the fallout to send a strong and clear message to the industry: Bad things happen to those who play fast and loose with risk.
Instead, the tendency now will be to brush off risk discipline, knowing that if things go sideways, Big Brother will be there to step in to bail you out.
Among the most powerful critics of the rescue is Citadel hedge fund guru Ken Griffin, who told Financial Times that the capitalist economy is “breaking down before our eyes. There’s been a loss of financial discipline with the government bailing out depositors in full.”
Similar sentiments about risk have emerged with the failure of Signature Bank, though the target problem is a bit different.
The man not-always-affectionately known as Dr. Doom, economist Nouriel Roubini, tweeted that protecting depositors at Signature was the “mother” of all moral hazards because of its multibillion-dollar deposits in cryptocurrencies, which he calls “purely speculative asset bubbles.”
There’s an interesting nuance here that puts a sharp point on the concerns about SVB in particular.
SVB’s deposit mix was weighted heavily toward corporate customers. That means the extension of a safety net beyond the US$250,000 federally insured cap captured a higher percentage of corporate deposits than might have been captured at other banks. That, say some, sends a very alarming signal.
“Bailing out uninsured depositors at SVB, which are mostly corporates, further infantilizes markets by sending the message that such risk management is anachronistic,” said Carson Black, the founder of Muddy Waters Capital.
As usual in any business issue these days, there’s a partisan subplot here. It suggests that SVB’s Achilles’ heel was management’s heavy focus on a woke agenda rather than the hard business of running a bank responsibly. As a result, backstopping the institution in a time of need was entirely consistent with the Biden administration’s progressive agenda, even if it runs counter to the dynamics and sensibilities of a free market.
Political posturing? Perhaps. The government would like everyone to believe the system will absorb its generosity. But let’s not kid ourselves. The pain of bank levies imposed to pay for the rescue will be passed on down the line in the form of higher fees to regular bank customers in the grand “there’s no such thing as a free lunch” tradition, no matter what spin the Biden administration tries to apply to the story.