How Washington came to bail out American banks

WASHINGTON (AP) — After the sudden collapse of Silicon Valley BankCalifornia Democratic Rep. Maxine Waters began frantically working the phones to find out what was going on with the failed borrower – and what would happen to its panicked depositors.

Waters, a former chairman of the House Financial Services Committee, was skeptical that another bank would step in as a rescuer and buy the failing company.

“Banks don’t wake up and say: ‘Oh, there’s another significant bank in trouble, they’ve collapsed. Let’s just take it,'” she said.

The weekend kicked off a flurry of briefings with regulators, lawmakers, administration officials and President Joe Biden on how to deal with the demise of the nation’s 16th largest bank and financial institutions for tech entrepreneurs. At the heart of the problem are billions of dollars, including companies that have payments sitting in Silicon Valley bank accounts that are not protected by federal deposit insurance, up to $250,000.

Something must be done, federal officials acknowledged, before Asian stock markets opened Sunday evening and other banks faced the possibility of a panicked withdrawal Monday morning.

“We were racing against the clock,” said Bharat Ramamurthy, deputy director of the National Economic Council.

Waters is right to be skeptical about closing sales on the plane. The bank’s size — $210 billion in assets — and complexity made it difficult to close a deal quickly.

Federal Deposit Insurance Corp. Officials told Republican senators on Monday that they had secured offers for the bank over the weekend but did not have time to close; They said they could put the Silicon Valley bank back up for bid, a person familiar with the conversation said, requesting anonymity to speak on a private call.

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But another plan came up. On Sunday, Waters spoke by phone with Federal Reserve Chairman Jerome Powell to explain to him how it would work. The central bank created a new emergency program that allowed it to lend directly to banks so they could refinance without selling assets to raise money. The idea was to reassure depositors and prevent the bank from running on other institutions.

By Sunday night, the Treasury Department, the Fed and the FDIC said the federal government would protect all deposits. – Even those that exceed the FDIC’s $250,000 limit.

“It’s really amazing,” Waters said, adding that “it’s an example of what government can do with the right people and working together.”

The appreciation was not unanimous.

In a call Monday with officials from the FDIC and Treasury Department, Republican senators expressed concern that millionaire Silicon Valley depositors are being bailed out — and the cost could be passed on to community banks in their home states in the form of higher assessments for federal deposit insurance. , according to a person familiar with the discussion.

Trouble began last Wednesday when the Silicon Valley bank said it needed to raise $2.25 billion to shore up its funds after suffering big losses on its bond portfolio, which has plummeted as the Federal Reserve raised interest rates. On Thursday, depositors rushed to withdraw their money. The old-fashioned bank run was on.

At a House Ways and Means Committee hearing Friday morning, Treasury Secretary Janet Yellen said her agency is “very carefully monitoring” developments related to the bank. “When banks are experiencing financial losses, that should be a matter of concern,” he told lawmakers.

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Biden was briefed on the situation Friday morning, a White House official said, speaking on condition of anonymity to discuss private conversations. Then she celebrated an unexpectedly strong February jobs report, jetting off to Wilmington, Delaware to mark her grandson’s 17th birthday to meet the head of the European Union.

His weekend would soon be consumed with phone and video calls focused on preventing a nationwide banking crisis. Regulators were so concerned that they didn’t wait until the end of business on Friday — standard practice — to close the bank; They closed the doors during working hours.

It was the second-largest bank failure in US history and trickier than most: an astonishing 94% of Silicon Valley bank deposits — including large cash reserves of tech startups — were not insured by the FDIC.

As administration officials and regulators worked through the weekend, Biden expressed concern for small businesses and their employees who rely on accounts that are now at risk, a White House official said.

There were also fears that if Silicon Valley bank depositors lost money, others would lose confidence in the banking system and rush to withdraw money on Monday, triggering a crisis, the official said.

Massachusetts Democrat Rep. Jake Auchinclose’s phone started lighting up before the weekend. The Silicon Valley bank had eight branches and offices in its home state, and word of its failure traveled fast on social media.

“The panic within Massachusetts’ industrial and nonprofit sectors intensified within hours,” Auchincloss said. “My phone started blowing up.”

Silicon Valley Bank won’t just collapse. By Sunday evening, federal authorities announced that New York-based Signature Bank, a major lender to New York landlords, was also in bankruptcy.

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The government’s scheme, which covers deposits of more than $250,000, also applies to Signature’s customers.

In a statement Sunday, Biden said, “The American people and American businesses can trust that their bank deposits will be there when they need them.”

On Monday, Powell announced that the Fed would review its oversight of Silicon Valley banks. The review will be conducted by Michael Barr, the central bank’s vice chairman who oversees banking supervision, and will be released on May 1.

Now Biden and lawmakers are calling for legislative changes to tighten financial rules at regional banks, perhaps restoring parts of the Dodd-Frank Act that tightened bank regulation after the 2008-2009 financial crisis but was repealed five years ago.

Waters said it may be time to raise deposit insurance limits. “We can’t say it’s an emergency and forget it,” he said.


AP writers Fatima Hussain, Seung Min Kim and Christopher Rugaber in Washington and Ken Sweet in New York contributed to this report.

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