SVB bailout – failing the smell test!

So, no sooner than US Treasury Secretary Janet Yellen implies no bailout for failed woke bank SVB  “We’re not going to do that again,”  what to we get, but an effective bailout for its uber wealthy depositors.  The yet unanswered question however, remains whether this is an abandonment of the $250k FDIC insurance cap on deposits, or just another ‘exceptional’ measure to favour the politically connected.  If the former, then it formalises the moral hazard in that it removes the last vestiges of penalty on irresponsible and reckless lending, while the latter would merely confirm yet another descent into a two tier judicial and financial system and effective banana republic.

Yesterday evening’s Joint Statement by Treasury, Federal Reserve, and FDIC was as brief as it was disingenuous. On the one hand it attempts to bolster Yellen’s claims that the FDIC’s underwriting of all deposits, even above the normal $250k insured deposit limit is not a bailout because

“No losses associated with the resolution of Silicon Valley Bank will be borne by the taxpayer.”

Instead “Any losses to the Deposit Insurance Fund to support uninsured depositors will be recovered by a special assessment on banks”. 

With balance of FDIC’s Deposit Insurance Fund of only around $128bn as of end 2022, this might be able to cover SVB, but would leave its in tatters to meet future potential liabilities , should the $250k exemption be extended universally.

As of the 12 March release by the FDIC,  SVB has reported  total assets of approximately $209.0 billion and about $175.4 billion in total deposits, which might initially suggest a liquidity, rather than solvency issue, which might normally have been resolved by a line of credit from the US Fed. Unfortunately, not only are many of SVB’s assets illiquid, but most probably also over-stated. For instance, it has been reported that holdings of long dated (and low yielding) bonds where included at cost value rather than marked to market to reflect the subsequent rise in yields and therefor reduction in market value. It is therefore increasingly apparent that SVB was facing a solvency problem that was exposed by its liquidity crisis. As to how big a hit, this remains to be seen, but the danger of a run and subsequent fire sales can easily exacerbate the eventual loss. Compound this over a number of similarly shaky financial institutions and the FDIC’s deposit insurance fund might soon be exposed as inadequate even to extend insurance coverage to the original $250k per deposit without recourse to the government and therefore also to taxpayers.

Once again, partisan politics seems to be driving US Treasury/Fed policy. The bailout of all SVB depositors is disingenuous at best in attempting to claim that the absence of an immediate recourse to taxpayers somehow makes it otherwise. If the $250k insurance cap is being waived for all, then how is this to be funded and by whose authority, as surely this would require Congressional authorisation and what sort of moral hazard would this be sanctioning. If however, this is is a one-off ‘exception’, then how s this justified, or do those in charge no longer care about the stench of political partisanship and corruption that is increasingly infesting political, commercial and financial markets?

If the next SVB has Trump as a major depositor rather than Oprah and Newcom, does anyone seriously think that the $250k deposit insurance cap would be waived?