Like it or not, saving Silicon Valley Bank was probably the cheapest option we had. Allow me to explain.
· Mar 13, 2023 ·

"Saving" might be too strong a word, at least based on what we know right now.

Regulators have explicitly said they are not going to cover investors in the bank (shareholders and the like), but they are going to cover depositors. All of them, below, above, and at, the traditional $250,000 FDIC insured limit.

Moral hazard?

You bet!

Unfair to those who are careful regarding where they place their money and take seriously such caps as that $250k?


Are some of the most wealthy and privileged people in the country getting a bailout?

Sure looks like it!

Does any of that matter today?


There are a couple of things to keep in mind. The first is the least important, but still relevant to the matter.

SVB probably has enough assets to cover all the deposits.

According to the FDIC, at the end of last year SVB, had assets of $209 billion and deposits of $175.4 billion. It's unclear how many people got their money out after the run started, but they tried to pull $42 billion at last count so there might be significantly fewer deposits today.

(The amount of assets is unclear, but those don't typically change dramatically in a couple of months).

That's a pretty good cushion.

There are plenty of unknowns, of course, which is why no one has been eager to jump in and purchase the bank, but once the hysteria dies down and examiners (and potential buyers) have had a chance to see what's there, there is a really good chance that those assets, sold in something other than a panic, will cover the deposits. That is, the net cost to us taxpayers could be zero.

The problem is what would happen in the meantime, if the federal government's "new plan" falls short of working like they hope it will.

Payrolls would be missed, transactions would fall through, vendors wouldn't get paid, then more payrolls would be missed, and more vendors wouldn't get paid, and people would panic (understandably) and sink any number of additional banks. Maybe all of them.

All of them are insured by the FDIC, but the FDIC would quickly run out of money.

In a sea of bad choices, that is at the very bottom depths.

Which brings me to the more important point, the one where we have to grit our teeth, tolerate the distasteful actions being taken today, and give a good, long, hard look at how finance and banking are run in this country.

SVB did not have to be corrupt or a Ponzi scheme or incompetent to collapse. All it had to have was a good old-fashioned panic. Whether there were good reasons or not for that panic can be determined at a later time, but it's still a panic. SVB did not have to fail on Friday. But it did, because everyone ran for the exit doors at once.

The darker, larger, truth is this: Any bank can be sunk at any time.


The business of banks is to lend out money and provide other forms of financing. Your deposits are not stuffed in a mattress. Okay, mine are, but we're talking about banks here, and as anyone who has watched "It's a Wonderful Life" knows, if everyone shows up at once and wants their money back, the bank doesn't have it, period. No bank does, not until the loans (and other investments) it has made either mature or are sold.

There are a lot of questions, a lot of financial forensics in our future, and investigations into the bank's officers, and a broad revisit of banking regulations, enforcement, and even the structure of deposit insurance itself. Still, the fact is, had we permitted this to spin out of control, it had the potential to be far more costly to the federal government, far more disruptive to the economy, and potentially disastrous to the country.

And frankly, it still can be. We still don't know how this will play out, or what the consequences will be of the actions taken over the last few days. But, the bleeding had to be stopped, even if the patient remains in great peril.

You don't have to like any of it. I don't like it. But here we are.

All it takes is for everyone to rush out and start withdrawing cash all at once.

The sad, unsettling truth is, in our credit-driven economy – one that fosters unimaginable prosperity when things are going well – we are only ever a day or two away from complete catastrophe.

Yellen said over the weekend that the overall banking system "is really safe and well capitalized." That is true.

Until it isn't.

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