The bailouts of Silicon Valley Bank and Signature Bank have introduced a new concept to bank regulation: Too Midsize to Fail.
These are, we’re told, the second- and third-largest bank failures in history, but that doesn’t make them big banks. Silicon Valley Bank had $209 billion in assets. That’s a rounding error at J.P. Morgan Chase, the largest bank in America, which has $3.3 trillion in assets. The largest bank failure in history (Washington Mutual in 2008, later absorbed into J.P. Morgan Chase) carried a nominal price tag of $307 billion, which in today’s dollars is $435 billion. That’s more than twice the assets of Silicon Valley Bank and three times the assets of Signature Bank. If banks were cups of latte at Starbucks, Silicon Valley and Signature would be tall, not venti or even grande.
“All customers who had deposits in these banks,” President Biden said Monday morning, “can rest assured they’ll be protected and they’ll have access to their money as of today. That includes small businesses across the country that bank there and need to make payroll, pay their bills, and stay open for business.”
The customers in question have two notable characteristics. They are (at least some of them) not all that small and (at least to this layperson) not all that bright.
At Silicon Valley Bank, the biggest known customer is Roku, makers of those little black boxes that let you binge-watch The White Lotus and various movies that, sadly, nobody wants to watch anymore in a movie theater (including Everything Everywhere All at Once, which just won the Oscar for best picture). Roku has a market capitalization of $8.4 billion and, after laying off 7 percent of its workforce in November, has about 3,000 employees. That makes it not a small business but a midsize one—perhaps a grande but definitely not a venti at Starbucks.
Roku makes a nifty product, but it was dumb to put one-quarter of its cash reserves (about $487 million) into Silicon Valley Bank when only $250,000 of that was insured by the Federal Deposit Insurance Corporation, or FDIC. Looking down a list of known depositors, the only one with any brains would appear to be the video-sharing platform Vimeo (market cap: $562 million; about 1,100 employees after laying off 11 percent of the staff in December), which kept its deposits at Silicon Valley below $250,000, same as you or I would do if we had more than that amount lying around the house.
We don’t yet know who the biggest depositor at Signature Bank was, but in the past its customers have included Donald Trump (to whom it lent money long after most banks knew not to) and Charles and Jared Kushner, and in 2011 Signature put Ivanka Trump on its board. It doesn’t speak well for the management’s intelligence that it was doing business with Trumpworld as late as 2015 (or that one of its founders, Scott Shay, describes himself online as a “thought leader”). Even more damning is that Signature went big into cryptocurrency starting in 2018. At the time it went bust, more than 20 percent of Signature’s deposits were crypto assets. You have to wonder about the savvy of a bank that followed investment advice dished out in Super Bowl commercials.
Or maybe I’m the dumb one to assume that it matters in the slightest how stupid American business is about where it puts its money. In the end it didn’t matter because the idiot depositors got a government bailout.
Biden is careful to emphasize that he’s bailing out the depositors, not the banks. (Never mind that bailing out the depositors smooths the way for the government to auction off the banks.) Biden was even more careful to emphasize that this bailout won’t cost taxpayers a dime. “No losses will be borne by the taxpayers,” Biden said. Then he said it again. That’s because the FDIC is funded by fees from the banks it insures, not by you and me.
If this arrangement strikes a familiar note, that’s because Republican-appointed judges have recently ruled similar arrangements unconstitutional. The privilege enjoyed by businesses to do dumb things with their money and suffer no consequences, the judges ruled, must not be extended to mere consumers and college students who take out loans to pay tuition. In Starbucks terms, they’re a short latte, not even a tall.
The closest parallel is with the Consumer Finance Protection Bureau. Like the FDIC, the CFPB is, by statute, funded by the banks, in CFPB’s case indirectly via the Federal Reserve, which is funded by bank fees. In a ruling last October, the reactionary Fifth Circuit, which is based in New Orleans and has jurisdiction over Texas, Louisiana, and Mississippi, ruled that
Congress’s decision to abdicate its appropriations power under the Constitution, i.e., to cede its power of the purse to the Bureau, violates the Constitution’s structural separation of powers.
The ruling didn’t address whether the FDIC, the Fed, or the Office of the Comptroller of the Currency, which are also funded by bank fees, are similarly unconstitutional. (The U.S. Postal Service and the U.S. Mint also operate without congressional appropriations.) The Supreme Court will have to sort out these issues when it hears the case next year. But something tells me that if the high court tosses out the CFPB, it will find a way not to disrupt the same arrangement at these other agencies (except maybe the Postal Service; everybody hates the Postal Service).
The Fifth Circuit decision concerned a CFPB rule that limited certain heavy-handed practices by payday lenders. The court had no problem with the CFPB cracking down on these predators—except insofar as the CFPB itself was illegitimate and therefore unable to tell anybody to do anything. If a payday lender makes an unauthorized withdrawal from your bank account, as happens to about one-third of all payday borrowers, or if that payday lender makes a withdrawal from your bank account that exceeds your balance, as happens to nearly half of all payday borrowers, you’re out of luck under the Fifth Circuit ruling. You’re denied the same protection extended to some rando who, unwisely, stashed the proceeds from his (also unwise) investment in crypto at Signature Bank.
Another parallel is with Biden’s attempt to cancel $430 billion in student debt. Under the plan, students earning less than $125,000 (that is, most of them) will be forgiven up to $10,000 in debt for college and other postsecondary education and up to $20,000 if they received Pell grants (which are granted only to low-income families). Biden granted this relief under the 2003 Higher Education Relief Opportunities, or HEROES, Act, which allows the executive branch to “waive or modify” the terms of student aid in reaction to a national emergency. The Trump administration used this authority to suspend student loan payments early in the Covid epidemic; the Biden administration subsequently used it to grant substantial relief.
The Biden plan, whose legality was challenged by six red states, got a chilly reception during oral argument last month at the Supreme Court. Once again, the objection was that Congress didn’t appropriate the money; never mind (as Justice Elena Kagan pointed out) that Congress granted the executive branch the power to spend that money. “We worry about executive power when Congress hasn’t authorized the use of executive power,” she said. “Here Congress authorized the use of executive power in an emergency situation.” That wasn’t the view of the high court’s conservative majority. “A trillion dollars here, a trillion dollars there, it doesn’t really make that much difference to Congress,” cracked Alito. “That doesn’t seem very sensible.” The general assumption is that the high court will disallow Biden’s debt relief.
But I would be astonished to see any serious legal challenge to the billions that Biden is handing out to depositors at Silicon Valley and Signature, even though these bank failures don’t pose much threat to the broader economy. “This is a $23 trillion banking system,” Sheila Bair, the much-admired Republican-appointed former FDIC chair told The New York Times. “It just doesn’t make sense to me why banks this size, their failures, would cause systemic ramifications.”
In effect, Bair was saying this isn’t enough of an emergency to require a bailout. The states suing Biden over debt relief similarly look askance at Biden’s claim that he was responding to an emergency. But a questionable bank emergency is good enough for a bailout. Too bad a bona fide Covid emergency, and the ongoing emergency of predatory loans to low-income families, don’t carry the same weight.