March 30, 2023

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Silicon Valley Bank Being Bailout: NPR

People line up outside a Silicon Valley Bank office Monday in Santa Clara, California Days after the collapse of the Silicon Valley bank, customers line up to try to get their money back from the failing bank.

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People line up outside a Silicon Valley Bank office Monday in Santa Clara, California Days after the collapse of the Silicon Valley bank, customers line up to try to get their money back from the failing bank.

Justin Sullivan/Getty Images

After a Silicon Valley bank went off the cliff last week, jittery venture capitalists and leaders of tech startups pleaded with the Biden administration for help, but made one point clear: “We’re not asking for a bank bailout,” and more than 5,000 tech CEOs and founders I begged.

On the same day that the US government announced extraordinary steps to shore up billions of dollars in bank deposits, Treasury Secretary Janet Yellen and President Biden reached the same talking point: Nobody is being bailed out.

“This was not a bailout,” billionaire hedge fund magnate Bill Ackman said chirp Sunday, after spending the weekend predicting economic disaster if the government didn’t to intervene.

However, according to experts who specialize in state bank bailouts, the actions the federal government took this weekend to support Silicon Valley bank depositors are nothing if not a bailout.

“If your definition is government intervention to prevent private losses, then that’s certainly a bailout,” said Neil Barofsky, who oversaw the Troubled Asset Relief Program, the far-reaching bailout that saved the banking industry during the 2008 financial crisis.

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Under the plan announced by federal regulators, $175 billion in deposits will be backed by the federal government.

Officials are doing this by waiving a federal deposit insurance cap of $250,000 and digging deeper into the insurance fund that banks pay out.

At the same time, federal officials are trying to sell about $200 billion in assets held by the Silicon Valley bank. Any deposit support that does not come from the insurance fund, or asset auctions, will depend on private valuations of the banks, or essentially a levy mostly borne by the big banks, according to officials at Federal Deposit Insurance Corp.

This means that the lifeline of Silicon Valley depositors will not use public taxpayer funds. Shareholders and CEOs are not bailed out. But do those two facts alone mean it’s not a bailout?

“What they mean when they say this isn’t a bailout, it’s not an administration bailout,” said Richard Squire, a professor at Fordham University Law School and an expert on bank bailouts. “Venture capital firms and startups are being bailed out. There is no doubt about that.”

Avoiding the “tar of the 2008 financial crisis”

When senior White House officials avoid the “b” word, Squire said, they are “trying not to be ignored by the 2008 financial crisis,” when US officials knew blanket bailouts of bankers were politically unpopular. He said the White House did not want to be associated with “the significance of bailing out the fat cats and bailing out the bankers.”

“If we use a different term, we serve the interest of those who want to hide what is really going on here,” Squire said.

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Amiatosh Purnanandam, an economist at the University of Michigan who studies bank bailouts, put it this way: “If it looks like a duck, it probably is a duck.” “This is absolutely a bailout, plain and simple.”

When depositors in one bank are fully subsidized by insurance and bank charges, Purnanandam, who has conducted studies for the FDIC on insurance fees charged to banks, said the cost would ultimately be borne by customers across the entire US banking system.

“When we make all depositors complete, it’s like saying only one person in the family bought car insurance and the insurance company will pay for everyone’s accidents,” he said. “In the long run, that’s a benefit because we’re paying more than we’re insured.”

However, many with connections to tech and venture capital try to resist saying “bailout” and “Silicon Valley bank” in the same sentence.

Scott Galloway, Professor of Marketing at New York University, chirp “We need a new word” to describe when shareholders and investors are wiped out but bank depositors become whole.

Banking expert Fordham Squire isn’t entirely sure that the English language needs to invent new words.

“Saving just means saving,” Squire said.

He said, “Like if you pay a guarantee for someone to get out of jail, and bail someone out when they’re in trouble.” “If you don’t want to use the b word, that’s fine, but that’s what’s going on here.”