Silicon Valley Bank collapse: White House urges calm as bank failure recalls 2008 crisis

WASHINGTON — As federal regulators sift through the remains of Silicon Valley Bank, whose collapse last week recalled the 2008 liquidity crisis and sent shudders through the fragile post-pandemic economy, elected officials in Washington and elsewhere used the regional lender’s demise to deploy their arguments about what went wrong.

SVB, as the Palo Alto, Calif., lender has come to be known, was undone by lax federal oversight, or else by “woke” investing imperatives. The bank was felled by Federal Reserve interest rate hikes. Or it was doomed by the move-fast-and-break-things culture of Silicon Valley.

Those are some of the charges that have been touted on cable news and social media since Thursday, when fearful depositors pulled $42 billion from SVB, leading to the second-largest bank run in history. The bank was closed by federal regulators the following day, leading some to recall the collapse of IndyMac in 2008, one of the first signs at the time of something profoundly amiss in the American economy.

But whereas there were already clear signs by early 2008 of economic turmoil, the demise of SVB is far too recent for similar diagnoses.

Not that that has stopped anyone.

For former President Donald Trump, who is seeking the White House for a third time, SVB is a case study in President Biden’s alleged mismanagement of the economy. “The fact is that Biden has presided over a catastrophic economy that has devastated everyday Americans and has caused misery across the country due to his anti-America policies,” Trump spokesman Steven Cheung said.

But it was, in fact, the anti-regulatory Trump administration that in 2018 undid the federal rule that would have subjected midsize banks to “stress tests” to ensure sound capital ratios.

“Let us have the courage to stand up to Wall Street,” Sen. Bernie Sanders of Vermont said in a statement Sunday, “repeal the disastrous 2018 bank deregulation law, break up too-big-to-fail banks, and address the needs of working families, not the risky bets of vulture capitalists.”

His fellow Senate progressive Elizabeth Warren of Massachusetts made a similar argument in a New York Times op-ed, urging “Congress, the White House‌ and banking regulators” to “reverse the dangerous bank deregulation of the Trump era.”

Congress is unlikely to act, given the sharp partisan divisions in both chambers. As for the White House, Biden said on Monday morning that all SVB deposits would be covered by a banking industry fund (those below $250,000 were already protected by the Federal Deposit Insurance Corporation).

“No losses will be borne by the taxpayers,” the president said. And the bank’s management, he added, would be fired.

Biden was vice president in 2009 when President Barack Obama and his treasury secretary, Timothy Geithner, pulled the American financial system back from imminent collapse. But many progressives called for sweeping reforms such as bank nationalization, which Obama and Geithner resisted.

For now, at least, such calls have been muted, with little sense thus far that a systemic crisis requiring large-scale fixes is in the works. “This is not 2008,” White House press secretary Karine Jean-Pierre said to reporters on Air Force One on Monday afternoon.

SVB appears to have succumbed to the Diamond-Dybvig model of bank runs, which holds that “illiquidity of assets” is a primary cause of depositor panic. Illiquidity, in this case, appears to have been caused by SVB’s bet on mortgage-backed securities. The bet badly backfired when the Federal Reserve started to raise interest rates last year in an effort to tamp down inflation.

Much like banking regulators, Fed economists face newfound scrutiny. “Maybe they made a mistake by saying interest rates are going to be low for a very, very long time,” Douglas Diamond told NPR on Monday. He and co-author Philip Dybvig won the 2022 Nobel Prize in economics for their now classic model of bank runs.

Over the weekend, some Silicon Valley investors ditched their prevailing libertarianism to argue that the government should have moved more quickly to rescue SVB.

“Stop this crisis NOW,” investor David Sacks wrote on Twitter. Critics noted that he had failed to evince similar urgency when it came to helping Ukraine resist an invasion from Russia.

Others blamed SVB’s supposed commitment to progressive causes, though that commitment appears to have been largely superficial.

“SVB is what happens when you push a leftist/woke ideology and have that take precedent over common sense business practices,” Donald Trump Jr., the former president’s son, wrote on Twitter. Similar takes were offered by Gov. Ron DeSantis of Florida and other conservative culture warriors.

In the White House, these and other recriminations seemed to find little traction. Barring catastrophic new developments, Biden and his advisers appear confident that SVB was an isolated case, not the start of a broader calamity.

“The financial system as a whole is in very strong shape,” Diamond told NPR on Monday morning. Biden was preparing to speak from the White House, and Diamond offered his own thoughts on what the president should tell the nation: “He should say things are probably fine.”