3/13/2023 4:02:00 PM
When Silicon Valley Bank imploded last week, it was the second biggest bank failure in U.S. history. Then, over the weekend, another bank, Signature Bank, was also taken over by the government. WSJ financial editor Charles Forelle explains what kicked off this banking crisis and how the government is scrambling to contain it.
Full Transcript
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Charles Farrell: Hi, I’m Charles Farrell. I’m the financial editor at the Wall Street Journal
Kate Linebaugh: And it’s Sunday night and we are not watching the Oscars. We’re watching a banking crisis unfold.
Charles Farrell: It’s vastly more exciting. This is about as interesting as it gets in finance. This is pretty wild. You don’t see banks fail every day, especially not banks of this size.
Kate Linebaugh: The bank Charles is talking about is Silicon Valley Bank. This bank catered to the tech industry and last week it collapsed in a matter of days and was taken over by the government.
Charles Farrell: This is not some random little bank that banked a few small businesses in one town. This was the 16th biggest bank in the United States that banked lots of really sophisticated customers in the United States’ premier industry, so it’s pretty significant.
Kate Linebaugh: Silicon Valley Bank collapsed on Friday. Then on Sunday, the government took over another bank, Signature Bank and announced sweeping measures designed to steady the financial system.
Charles Farrell: So the government really, really, really wants to try to stop this from continuing. Banking is really a confidence game. Either you believe in the system or you don’t believe in the system. And if everybody decides all at once not to believe in the system, then the system comes apart.
Kate Linebaugh: Welcome to The Journal, our show about money, business, and power. I’m Kate Linebaugh. It’s Monday, March 13th. Coming up on the show, can the government contain a banking crisis? Before last week, you probably never heard of Silicon Valley Bank unless you were a startup founder or a venture capitalist.
Charles Farrell: So Silicon Valley Bank goes back to 1983. It was a fairly conventional bank. It was just very focused on the business of working with startups and venture capitalists. But it did a lot of the things that you would associate with the bank. It took deposits, it made loans, it processed payroll and services and other transactions, and it was sort of a bank for that industry.
Kate Linebaugh: So it’s like the Bank of Startups.
Charles Farrell: It’s the bank for startups and for their investors.
Kate Linebaugh: Silicon Valley Bank did business with well known tech companies like Roku and Roblox, as well as thousands of lesser known startups. And until recently, business was pretty good, especially during the pandemic.
Charles Farrell: There was a huge amount of government stimulus. The economy went crazy, and specifically the tech economy went crazy. So super, super boom in that sector. Tons of people are investing, tons of people are writing checks into the sector. Tons of these companies are spending money and hiring people, and there’s just money, money, money moving around like crazy in that system, generally going in.
Kate Linebaugh: Into startups, bank accounts at Silicon Valley Bank.
Charles Farrell: Silicon Valley Bank got lots and lots and lots and lots and lots and lots of deposits.
Kate Linebaugh: Between 2020 and March, 2022, Silicon Valley Bank’s deposits ballooned from $60 billion to $200 billion.
Charles Farrell: So what did Silicon Valley Bank do with all this money that was coming in? It said, okay, I’m going to buy safe assets: government bonds and mortgage backed securities. Pretty safe stuff, but they made one really, really, really, really bad mistake.
Kate Linebaugh: What was that?
Charles Farrell: The really bad mistake was they put their money into bonds that matured in a long time.
Kate Linebaugh: Why is that a problem?
Charles Farrell: What’s the problem with the long duration? So the problem with the long duration is basically that if you buy, when interest rates are relatively low, so let’s say the interest rate on your 30 year bond is 1.5% or 2%. If interest rates rise, all of a sudden you are stuck with a thing that earns you 1.5% or 2% when everybody else around you is making 5% or 6%. And you are stuck with it for 30 years, congratulations.
Kate Linebaugh: And if you wanted to sell your 30 year bond?
Charles Farrell: Not good.
Kate Linebaugh: What does not good mean in this scenario?
Charles Farrell: Not good in that scenario means that you would have to accept a lower price. So if you paid 100 for it, somebody might only be willing to pay you 75 or 80 for it.
Kate Linebaugh: What this meant was that if Silicon Valley Bank had to sell these long-term bonds, it would do so at a loss. But for a long time this wasn’t a problem because the bank didn’t have to sell its bonds until late last year.
Charles Farrell: The tech boom was cooling really fast. So previously in 2020 and 2021, all this money is flooding into the tech sector. People are excited, we’re investing in whatever and investing in this and that and the other thing. And then they all pull back really quickly. In 2022.
Kate Linebaugh: The cash flowing into the tech sector suddenly dried up. Startups didn’t have as much money coming in, but they were still spending, draining their accounts at Silicon Valley Bank. So the deposits come down.
Charles Farrell: Coming down. So the industry, all these startups are spending money. They are in the lingo, I’m told this is what they say in California, they are burning cash.
Kate Linebaugh: And this is when Silicon Valley Bank felt the consequences of its mistake.
Charles Farrell: So on Wednesday, March 8th after the market closed, Silicon Valley Bank said, we’ve had to sell $21 billion worth of all of these long-term bonds and we lost $2 billion on that sale. That’s not very good.
Kate Linebaugh: The bank also announced that it would try to raise more money by selling some stock.
Charles Farrell: Silicon Valley Bank said what we’re going to do is we are going to try to raise two and a quarter billion of additional money. So we lost this money, but hang on guys. We’re going to try to raise this money and we’ll be okay.
Kate Linebaugh: But Silicon Valley Bank would not be okay. Rather than reassuring customers, the bank’s announcement touched off fears about its viability. Soon tech investors were calling up their startups, telling them to move deposits out of Silicon Valley Bank. It was a classic bank run.
Charles Farrell: So Thursday is like a mad dash to get your money out while you can. Mad mad mad dash. So everybody in Silicon Valley who has an account at this bank, at this point knows about it because of course, all their friends bank there and …
Kate Linebaugh: … Are texting them.
Charles Farrell: They’re texting back and forth. They’re investors who are paying attention to stuff, presumably reading the Wall Street Journal. Are telling their portfolio companies, “Hey guys, this is a problem. You got to take your money out.” $42 billion worth of customer deposits tried to get out on Thursday. $42 billion is a lot. Is a lot, a lot, a lot of deposits and there’s nothing they can do. They couldn’t possibly deal with that. And so Friday morning, they didn’t even open up. The FDIC seized them and they were done.
Kate Linebaugh: The Feds seized the bank. Silicon Valley Bank was over, but the crisis wasn’t. That’s coming up. After the Feds took over Silicon Valley Bank on Friday, no one could access their money. Most of the bank’s customers had deposits over the federally insured level of $250,000. And there were big questions about when and whether customers would ever see their cash again. And so what is the mood in Silicon Valley over the weekend?
Charles Farrell: Oh, it’s not a good mood at all. I mean, there’s not a lot you can get done without a bank. If you lose access to your bank, you can’t make your payroll, you can’t pay your vendors, you can’t pay your Cloud software subscription, the like Tuesday, all office poke bowl thing that you have, you can’t pay for that. So the bank is vital and central to business and to operations and to suddenly lose access to your money is really, really, really disturbing. That that’s a pretty scary thought for a lot of businesses.
Kate Linebaugh: To make matters worse, there were fears that Silicon Valley Bank wouldn’t be the only bank to fail.
Charles Farrell: There was a lot of concern that what was happening at Silicon Valley Bank could spread. The problem is it isn’t clear whether Silicon Valley Bank is just a unicorn in a bad sense. I don’t know what the opposite of a unicorn is, but like a bad unicorn. It’s just a one of a kind really out there thing, unlike everything else or whether it’s just the worst of a lot of institutions that have a similar class of problems.
Kate Linebaugh: The fear was that Silicon Valley Bank wasn’t a bad unicorn and that other banks could have the same problems. Late last week, that worry showed up in the stock market. People were dumping shares of other banks that looked in some way like Silicon Valley Bank. How concerning is this for the government and regulators?
Charles Farrell: So this is acutely concerning for the government and for regulators. This is the thing that you really don’t want to have happen in the banking system. You don’t want to have this loss of trust.
Kate Linebaugh: Regulators had big decisions to make. How could they restore trust in the banking system? Would they make Silicon Valley bank’s depositors (inaudible) ? And how could they stop fear from spreading? So over the weekend, financial regulators got together, the treasury, the Fed, the FDIC, and they came up with a plan. So what does the government do?
Charles Farrell: The government did a couple things. The first is it shut down another bank. So Signature bank, which is a bank that had catered to crypto customers, and you can see where that is going, was shut down on Sunday.
Kate Linebaugh: The government also said the customers at the closed banks, even those with balances above the federally insured limit, would get all their money back.
Charles Farrell: The government said effectively everybody who was a depositor at Silicon Valley Bank and at Signature Bank, I don’t care how much you had in your account, you’re good.
Kate Linebaugh: It also took a big step to shore up other banks.
Charles Farrell: The Federal Reserve said, “Okay, banks, if you have trouble, if you don’t have enough money to hand to your customers who want to take the money out, come to us and we will give you that money. We are going to effectively lend it to you.” So that’s the Government’s sort of opening bid to see if it can stem the crisis.
Kate Linebaugh: Is this a bank bailout?
Charles Farrell: Is this a bank bailout? That’s a great question. It depends what you mean by bailout. It’s not a bailout in the sense that the shareholders or even the bond holders are getting some kind of special treatment. The shareholders of these banks will be wiped out, the management will be replaced. The owners of the banks are not being rescued here. So in that sense, it’s not really a bailout, but it kind of is in the sense that uninsured depositors were not supposed to have risk-free deposits. System’s not set up for uninsured depositors to always get their money back. That’s why they call them uninsured depositors. So in some sense, it was a bailout of uninsured depositors.
Kate Linebaugh: So who has egg on their face here?
Charles Farrell: So the egg, I think there’s, there’s egg to go around here. There’s like an omelet. It’s like one of those Western omelets. It’s a three egg omelet. Certainly the risk management at Silicon Valley Bank leaves something to be desired. It was not difficult to foresee that the Federal Reserve was going to raise interest rates. The Fed was saying, “We’re going to raise interest rates, we’re going to raise interest rates, we’re going to raise interest rates.” It’s really banking like 101 that if you own a bunch of long duration assets, that you are in trouble when interest rates go up. How that was allowed to happen inside the bank I think is a really important question that will have to get answered at some point. And then also, there is some egg for the regulators too, because this was a bank that looked fine. It met all of the standards. It had met the capital requirements, met the liquidity requirements. Fundamentally, something went wrong there that a bank that did in fact meet all of the criteria of the regulations turned out to go from a 200 and something dollars stock Wednesday at four o’clock to a $0 stock Friday at 9:00 AM That shouldn’t happen
Kate Linebaugh: On Monday. President Biden came out to reassure markets.
President Biden: Look, the bottom line is this, Americans can rest assured that our banking system is safe.
Kate Linebaugh: He also demanded an accounting of what happened
President Biden: And why those responsible can be held accountable. In my administration, no one is above the law.
Kate Linebaugh: But investors don’t seem reassured. Today banking stocks got hit hard. Several smaller banks fell as much as 80% in early trading. Could there be more bank failures coming?
Charles Farrell: I mean, can’t say no to that. Yes, there could be more bank failures coming, but it’s very hard to predict and it’s really hard because it’s a question of psychology that’s fundamentally unknowable. Hard to predict how depositors at these various banks will react.
Kate Linebaugh: What’s the lesson of this moment?
Charles Farrell: I’m trying to find a way to put this that doesn’t just sound totally trite, but the low interest rate period created a lot of seemingly free lunches that aren’t free. So the fact that the US government financed itself at very low interest rates for many, many years, the fact that especially in the last couple of years, homeowners and businesses got to borrow at very, very low interest rates, that all seemed just like great. And it was. But there are some costs to that too, and to the cost that way, the benefits, that’s, that’s another discussion. But there are some costs.
Kate Linebaugh: Because there’s no such thing as a free lunch.
Charles Farrell: There isn’t. Yeah, I’m sorry. I wish there were.
Kate Linebaugh: That’s all for today, Monday, March 13th. The Journal is a co-production of Gimlet and the Wall Street Journal. If you like our show, follow us on Spotify or wherever you get your podcasts. We’re out every weekday afternoon. Thanks for listening. See you tomorrow.