Treasury Secretary rules out politically sensitive scenario of bailing out California bank with taxpayers’ money.
The message is clear: the government is not going to bail out Silicon Valley Bank, despite several calls from influential voices in the financial and business communities.
The message was delivered by Treasury Secretary Janet Yellen during an interview with CBS’s “Face the Nation” on March 12. Yellen said regulators were working all weekend “to address the situation in a timely way” in order to avoid the panic some fear in global markets if no resolution is found.
She however added that a bail out was not an option being considered.
“Let me be clear that during the financial crisis, there were investors and owners of systemic large banks that were bailed out,” Yellen told CBS’ s “Face the Nation.” “And we’re certainly not looking – and the reforms that have been put in place means that we’re not going to do that again. But we are concerned about depositors and we’re focused on trying to meet their needs.”
SVB’s failure on March 10, which was the second-largest of a bank in U.S. history, has shaken many investors. It was the result of a bank run, caused by the bank’s announcement that it planned to raise $2.25 billion by issuing new common and convertible preferred shares to shore up its finances, after it sold bonds in its portfolio of investments at a $1.8 billion loss.
‘Wide Range of Available Options’
About $42 billion of deposits were withdrawn by the end of March 9, according to a regulatory filing. By the close of business that day, SVB had a negative cash balance of $958 million.
The Federal Deposit Insurance Corporation took control and is now the manager of $175 billion in customer deposits, including money from several startups and from some of the biggest names in the technology world.
The regulator also created a new entity, and indicated that unsecured depositors, that is, SVB customers with more than $250,000 in their accounts, will not, for the moment, have access to their money.
This leaves many uncertainties about the ability of many startups to operate in the coming weeks, since their funds are locked up. The FDIC said it will pay uninsured depositors an “advance dividend within the next week.”
The question is how much this “advanced dividend” will amount to.
Companies with SVB accounts, lines of credit and credit facilities are wondering what this means for them, when they can access their funds, if they will be able to get all their funds out, and whether they will have access to their credit lines. More than 95% of the bank’s deposits were uninsured as of December, according to regulatory filings.
As a result, many influential voices on Wall Street and in Silicon Valley worry that the may not enough and are calling on the government to bail out the bank that played such a huge role in the startup and small business ecosystem in the Bay Area.
“I simply want to say that we’re very aware of the problems that depositors will have,” Yellen said. “Many of them are small businesses that employ people across the country and of course this is a significant concern and working with regulators to try to address these concerns.”
Asked whether regulators might be open to a “foreign bank” buying SVB, Yellen responded, “I’m sure they’re considering a wide range of available options that include acquisitions.”
“This is really a decision for the FDIC, as it decides on what the best course is to resolve this firm,” Treasury Secretary said.
‘Corporate Bailouts Must End’
One of the solutions that the FDIC and the Federal Reserve are working on, is the creation of a fund that would allow regulators to backstop more deposits at banks that run into trouble, following the collapse of SVB, reports Bloomberg News.
Many politicians have already sent the message that taxpayer money should not be used to bail out SVB.
“Taxpayers should absolutely not bail out Silicon Valley Bank,” Republican presidential candidate Nikki Haley said on Twitter. “Private investors can purchase the bank and its assets. It is not the responsibility of the American taxpayer to step in. The era of big government and corporate bailouts must end.”
“If there is an effort to use taxpayer money to bail out Silicon Valley Bank, the American people can count on the fact that I will be there leading the fight against it,” Rep. Matt Gaetz (R-Fla) tweeted on Mar. 10.
The challenge for the FDIC and the Fed is that any guarantee of the borrowers’ funds might be perceived as a bailout, with taxpayer money being used to protect clients, drawing similarities to the government intervention in the 2008 financial crisis.
“What I’ll say about the banking system overall is it’s more resilient, and has a better foundation than before the financial crisis. That’s largely due to reforms put in place after the financial crisis. Our Treasury secretary is at the helm and working diligently with regulators,” Shalanda Young, director of the White House Office of Management and Budget, said on CNN’s “State of the Union.”