Here’s Why I Believe the U.S. Government was Right to Backstop the SVB Depositors
Many people have been asking why the U.S. Treasury, the Fed, and the FDIC announced that they would be backstopping the Silicon Valley Bank (SVB) depositors. That is a fair question that demands a comprehensive response. Here is why I think it was the right decision for the U.S. Government to implement the backstop.?
Based on my time at the Federal Reserve during the Savings and Loan Crisis in the late 80s and early 90s, and my 30 years of working in and subsequently partnering with the 20 largest banks in the world, I feel the U.S. Government was prudent, despite the fact that many think what they did was unfair.
For those of you who don’t remember, during the Global Financial Crisis of 2008, the FDIC closed over 500 banks, and all those depositors were paid out in full (including those who had balances above $250,000).
?Something similar happened in the late 80s and early 90s when I was at the Fed, and my bosses seized over 2,000 banks. The reason is that with or without the FDIC guarantee, depositors are at the front of the line when banks get liquidated. Here’s why:
?In the case of SVB, these depositors have even more protection because they are collateralized by U.S. Treasuries (albeit long-dated Treasuries), so they will ultimately be made whole.
?Even without that U.S. Treasury collateral, and without the FDIC guarantee, these depositors will therefore be getting 100 cents on the dollar, it is just a matter of when they get that money.
?To help reinforce this point, I will remind you that in the Lehman bankruptcy, even unsecured bondholders (who rank lower than depositors) got 37 cents on the dollar.?By definition of the waterfall I articulated above, if an unsecured bondholder gets anything, the depositors must first get all of their money back.
This was the case for Lehman, which was significantly more levered than SVB (Lehman was 40 times levered and SVB is eight times or ten times levered);
And
Lehman didn't have U.S. Treasuries collateralizing their deposits like those at SVB.
So if it is the case that Roku, for example, and all these other firms are going to get their money anyway, why does it make sense to have the government backstop them now?
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Two reasons:
What the government is doing by acting now is helping themselves or, indeed, the system. Said differently:
Or
They could do nothing more than the $250,000 FDIC guaranteed amount.
This would result in a global run on bank deposits: We would likely have a 1929-style crash.?People and businesses would lose confidence in the American banking system, and our adversaries would rightly call for the end of the U.S. dollar as the reserve currency.
Stepping in didn't really help the depositors of SVB, who were going to get their money anyway.
Stepping in helped the American taxpayer from having to spend a lot more money defending our currency and defending our banking system over the next couple of years.?
As for the LPs in all those VC funds, most of them will likely, in the end, take significant losses. Not because of their deposits at SVB but rather because they are invested in a risky, overpriced tech sector which is in meltdown.?
Don't think of what happened last night as a bailout that helped VC LPs.
Think of last night as a low- or zero-cost move that helped preserve the USD as the global reserve currency and helped save the American taxpayer a lot of money.
Principal at RECL Group
1 年Paul - very well put. It also avoided a cascading series of impacts - as a long list of companies around here would have failed to make payroll, and caused a series of unwarrnated BK events.
Managing Director at Whitehall & Company LLC
1 年You make some very good points (and place the decision in historical context/precedent) in contrast to the accusations that the decision to protect depositors was based on the heavy Democratic base in Silicon Valley. There is another argument, though, which is that without the government′s protection, significant companies would not be able to make payroll or pay rent or vendors, further exacerbating the crisis and creating a systemic risk because of a bank that was not previously foreseen to pose a systemic risk.
Good points and the message might not change ultimately under a “lesser evil” approach but not all SVB deposits are collateralized with Treasuries (or Agency MBS). About $70bn of the balance sheet assets are various loans including commercial, real estate and other (possibly venture-related). Therefore, the risk in the collateral securing the deposits is a bit more than just timing of cash flows on credit-risk-free assets. A degree of moral hazard was deemed preferable over even a slight chance of a broad panic and more dominoes falling. Indicative of how fragile the system is currently.
Partner at Signal Capital Partners
1 年Well put, as always Paul.
European & American Capital Advisors llc/// Series 7, CF1, CTFA
1 年Nice comments Paul. As far as solvency, lots of focus on the valuation of hold to maturity portfolios in the media. Not mentioned in the media is that most banks have some portion of intermediate or long dated liabilities also issued at low coupons. Meaning the liabilities trade at a discount just as the assets trade at a discount. The volatility is on both sides of the balance sheet with bank profits earned from the spread still intact particularly with deposits no longer a risk.