- The US authorities fear that the collapse of some banks could unleash a major crisis.
- That is why they decided to rescue users with accounts in SVB. However, they excluded investors from that package.
- But some analysts reject that move, saying it goes against the moral rules of capitalism.
Faced with the collapse of banking institutions and the panic that spread among customers and investors, the US authorities were quick to act. In this regard, the Treasury Department announced that it would have funds to rescue to Silicon Valley Bank (SVB) customers. They did not include the investors of that bank.
Clients who had their funds deposited in that bank will have the possibility of recovering them. The government of the North American country considered unfair that people with deposits will pay for the errors of that institution. The move to bail out clients could be a critical decision to prevent a run-out tragedy from occurring. In that scenario, an endless list of banks would go bankrupt.
But not everyone agrees that the bailout is the best decision on the part of the US authorities. A group of Wall Street veterans came out to attack the fund protection package. They consider that the measure is an error that goes against the financial nature on which the economy is based. In this way, those responsible for financial stability are caught in a dilemma between avoiding a “Lehman moment” or deepening the weakness of the financial sector.
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Is it convenient to rescue SVB customers?
It could be thought that SVB’s clients are the victims of irresponsible behavior on the part of the trusted third party to whom they transferred their funds. Consequently, rescuing them from this situation is a duty for the government entities in charge of ensuring the security of the economy. Furthermore, if these customers end up broke, then millions more will take action to prevent the same thing from happening to them. That translates into the withdrawal of billions of dollars from the banking system, which would generate a major collapse.
That first point of view is held by prominent financial figures like Larry Summers and Bill Ackmam. However, there are other voices that have a radically different vision. This second point of view affirms that in a capitalist economy all those who move capital do so knowing the risks. Ken Griffin, founder of the Citadel hedge fund, is one of the most hostile to the bailout.
“America is supposed to be a capitalist economy, and that is falling apart before our eyes,” he told the Financial Times earlier in the week. He then added that “there has been a loss of financial discipline with the government rescuing depositors in full.”
For his part, millionaire investor Cliff Asness also expressed reservations about the rescue plan for SVB clients. In his understanding, the authorities created an unnecessary “moral hazard,” which is not good for the economy. In short, the view of these investment heavyweights is that the people who lost their funds are just as responsible as the very bank that mishandled them.
What these experts don’t cover is the possibility of an investor stampede in the face of widespread fear based on mistrust in the banking system.
The arguments of the detractors of the rescue
As can be guessed, there are two clear views on the authorities’ emergency measures to protect depositors. Those who are against have various arguments that they focus on the debilitating consequences of the financial system that the measures could entail.
In this particular, Asness assures that the plan “greatly reduces” the incentive for depositors to think about the risks of where they put their money. A similar point is made by Carson Block, founder of Muddy Waters Capital. The latter believes that the government, by proceeding to rescue uninsured deposits, creates great weaknesses. This is because it leaves a gap in risk management. “Corporate depositors, in particular, should be expected to manage their counterparty risks,” he said.
Block was emphatic and stressed:
“Bailing out the uninsured depositors in SVB, who are mostly companies, further infantilizes the markets by sending the message that such risk management is anachronistic”
Another well-known investment veteran, Nouriel Roubini, also criticized the bailout measures, calling them “the mother of all moral hazards.” This investor, nicknamed Dr. Doom, is a hostile critic of cryptocurrencies and believes that the people who lost their money in those bets have it deserved. It should be noted that the clients of SVB and Silvergate trusted those banks knowing their connection to the crypto market.
Clients will be bailed out, not investors
Last Friday, Silicon Valley Bank was taken over by authorities after a rapid nosedive. The collapse of this lender was followed by that of Signature Bank. Similarly, both were preceded by the collapse of Silvergate Capital, one of the most enthusiastic about the digital currency market.
A row of banks were on the waiting list to be next in order. The result was a massive withdrawal from stock investors and depositors. During hectic days at the beginning of the week, the banking sector collapsed, which directly impacted European banks and other latitudes. The authorities’ response was to intervene with an emergency plan to calm the nerves of depositors.
But the bailout measures were exclusive to clients and did not cover investors. The president of the United States himself, Joe Biden, was blunt on this point. The president said that taxpayers would not pay the consequences of the losses. He also assured that those responsible for the collapse should be held accountable.
“Investors in the banks will not be protected,” Biden noted, adding:
“They knowingly took a risk and the risk didn’t pay off, so investors lost their money. This is how capitalism works.”
In any case, what some see as something positive, others consider as the beginning of a possible catastrophe for the financial system. Either way, This unusual situation and the measures that are being taken to deal with it remain a historical precedent that will only be clearly seen in the future.
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Elizabeth Warren lashes out at the bailout plan
Taking the matter to the partisan political arena, it can be said that the Democrats are in favor of the bailout, while the Republicans are against it. However, there are also voices that reject the protection measure for SVB customers from the Democratic side. They are led by the senator representing the state of Massachusetts, Elizabeth Warren.
This senator questions whether the bailout plan is aimed at protecting clients rather than big billionaires. The point is that the clients themselves are mostly big millionaires, cryptocurrency companies, technology firms and the very venture capitalists who caused the bank run on Silicon Valley Bank.
In a opinion piece published in The New York Times, the senator says that there are priorities that are not taken into account. Such is the case “from limbo” in which she keeps student debt borrowers in trouble and who have been treated with disdain by the authorities for months. Instead of addressing such a delicate matter, Warren continues, they are dedicated to creating rescue plans for millionaires, which are created “overnight.”
Student debt relief, which the Supreme Court will decide whether or not it is legal, is one of the Republicans’ bargaining chips for agreeing to raise the debt ceiling. Bureaucratic protocols to alleviate losses for student borrowers during the pandemic become a near-tragedy for true taxpayers, in Warren’s view. But the priority seems to be that the fortunes of millionaires do not lose a penny, he laments.
The senator is one of the proponents of strict banking regulation. For her, current events show that the authorities should have acted long ago to prevent this type of event. “These bank failures could have been completely prevented if Congress and the Federal Reserve had done their job and maintained strict banking regulations since 2018,” she wrote.