Biden team feared crisis far beyond one bank
It seemed like a simple question: Did the treasury secretary have any concerns about the economic risks posed by Silicon Valley Bank?
It was Friday morning, and a wave of public panic had started to spread about one of the tech industry’s leading financial institutions. Seated for a roughly three-hour grilling on Capitol Hill, Janet L. Yellen replied with a calm nod and a glance at her notes: “There are recent developments that concern a few banks that I’m monitoring very carefully,” she said.
“When banks experience financial losses,” she added, “it is and should be a matter of concern.”
Yellen’s comments foreshadowed the start of a scramble behind the scenes at the White House. New fears began to surface about a potential run on SVB, threatening widespread devastation not just for California, its companies and workers, but perhaps the U.S. economy writ large.
In a meeting, Jeff Zients, the chief of staff; Lael Brainard, the national economic director; and Cecilia Rouse, one of Biden’s top
economic advisers, alerted the president to a type of danger not seen since the financial crisis nearly 15 years ago: The failure of SVB, a little-known entity to most Americans, could trigger a broader crisis in the nation’s banking system.
“We were already very focused on that when we spoke to the president Friday morning,” according to one White House official. “We were already alert to the potential this could lead to contagion and could implicate a series of what are pretty large banks.”
A frenetic, roughly 72-hour race soon unfolded in Washington to confront the threat of a full-blown financial meltdown. A bank was failing. Billions of dollars — in workers’ paychecks and tech companies’ balance sheets — were about to be lost. And the government faced fears of an economy in free fall, rekindling nightmares of the Great Recession in 2008.
Ultimately, the Biden administration decided to complete a major intervention with extraordinary speed, acting to preserve deposits at SVB while safeguarding the finances of other firms on the precipice of ruin. The Biden team’s efforts showed the extent to which the president was willing to risk being accused of providing emergency help to bail out the financial sector — a charge the White House adamantly denies — in a bid to keep the system stable and stave off a worsening crisis.
This account is based on interviews with 20 people familiar with the decision-making process, including top White House officials, leading congressional lawmakers and tech industry executives. Many of them spoke on the condition of anonymity to describe private conversations that carried market-moving stakes.
The administration had until Asian markets opened Sunday to ensure that SVB customers could withdraw money and businesses could pay their workers — all without sparking similar runs on other U.S. banks. Top aides at banking regulators over the weekend spotted surges in requests for cash withdrawals at banks that didn’t appear to be connected to SVB, three of the sources said.
In the back of their minds, government officials recalled all too well the fallout from the 2008 financial crisis, and the immense political blowback that followed over the government’s use of taxpayer money for what was widely seen as an unfair bailout. Over the weekend, they began to see banks outside of tech-heavy New York and California showing signs of volatility. Bank executives told federal officials that major customers had warned they would withdraw their money and move it to a Wall Street giant for safety first thing Monday morning.
The Biden administration faced further pressure from Silicon Valley executives, including the founder of Linkedin, as well as a wide array of influential California Democrats including former House speaker Nancy Pelosi. They amplified the urgent need for action when many financial analysts outside Washington remained unaware of how bad things could get.
“We had to protect the depositors, we had to protect small businesses … [and] make sure this doesn’t become systemic,” said Pelosi, noting she had heard from another unnamed bank executive who said customers were withdrawing cash at higher rates. “We don’t want contagion.”
Instead, the administration managed to calm markets, after a day of turbulence that cut deeply into bank stocks Monday. And it prevented the sort of panic that might have resulted in countless Americans withdrawing money from their banks, which could have created damaging instability in the financial system.
“Within Treasury, there had been some initial concern about going too far in their response. By Saturday, the dynamic had shifted overwhelmingly in favor of doing something big,” said one person in direct communication with several senior Treasury officials, speaking on the condition of anonymity to describe private conversations. “They were becoming increasingly concerned about a bloodbath on Monday.”
Worry starts in California
In the tech and venture capitalist circles that SVB served, the anxiety had been mounting for days.
It began with a public notice March 8 that the firm had offloaded $21 billion worth of securities and was moving to sell another $1.25 billion in its own stock to shore up its balance sheet. The news came as a surprise to many of SVB’S investors and customers. Moody’s Investor Services, an independent credit rating firm, downgraded SVB after reviewing the bank’s business.
By evening, texts, calls and emails began bouncing between tech investors and start-up founders. The news traveled especially fast in the tightknit Valley, where new companies often share the same stable of investors, said Isa Watson, the CEO of New Yorkbased social media start-up Squad, which banked with SVB.
Soon, federal policymakers and SVB customers were starting to worry about whether the bank would make it through the weekend. Around 9 a.m. Eastern on Thursday, Union Square Ventures emailed its portfolio companies to warn them about the situation, according to a person who received the email. USV is one of the most influential early-stage venture capital firms and was an early investor in Twitter, Etsy and Duolingo. Its portfolio includes dozens of start-ups, many of which banked with SVB.
Watson spoke to several investors, some of whom said to pull her company’s money out, while others cautioned against a rash decision, she said. She decided to wait. But many SVB customers did not. On Thursday, about $42 billion fled SVB accounts, according to California’s financial protection authority — a fullblown run on the bank.
Wall Street halted trading in SVB shares Friday as the price fell. State and federal regulators moved to close the bank around noon Eastern — 9 a.m. at most of its branches — in a surprising development because it happened during normal business hours.
In the hours to follow, the extent of the problem became clear: SVB held an unusually high percentage of its assets in Treasury bonds. When the Federal Reserve raised interest rates, the value of existing bonds — a normally safe asset — went down. So the bank could not sell those bonds easily to make good on customers’ deposits as panic set in, and many flooded the bank seeking to withdraw their funds.
Many of the bank’s customers, meanwhile, were not the usual fare — they were investors, companies and other large institutions. It had more than $170 billion in deposits by the end of December, but 90 percent of them exceeded $250,000, the amount up to which the federal government insures in the event of a collapse.
By Saturday, Yellen, Fed Chair Jerome H. Powell and Federal Deposit Insurance Corp. Chairman Martin J. Gruenberg convened for the first of several emergency meetings that would lead to extraordinary action. They agreed to move forward to ensure bank depositors were protected — at no taxpayer expense — in a way that would ensure the payrolls of companies that had banked at SVB could operate normally by Monday. Otherwise, they feared a cascading set of consequences would leave many Americans out of work. They also determined to announce the plan before Asian markets opened Sunday night.
Hearing from heavy hitters
Compounding the deadline, the Biden administration faced calls for urgent action from some of the biggest names in Silicon Valley, who wanted to see all depositors — regardless of their size — made whole.
Sounding alarms were the likes of Reid Hoffman, the founder of Linkedin and a partner at Greylock, a major venture capital firm. A prolific donor to Democrats, including Biden, he took his concerns to Democratic lawmakers and administration officials. Ron Conway — another of the area’s leading investors, with original stakes in Airbnb, Facebook and Google — worked with Pelosi and Gov. Gavin Newsom (D) to pressure the White House, Treasury Department and elected officials.
More than 600 tech executives, engineers and investors piled onto a hastily arranged call late Friday with Rep. Ro Khanna (D), whose Bay Area district includes the headquarters for SVB. Publicly, Khanna soon emerged as a forceful voice calling for the Biden administration to rescue the bank’s depositors, warning about broader financial shocks to come.
The lobbying blitz reflected a sea change in the normally libertarian tech industry — one that typically tries to ward off federal intervention. Now, many of those same voices were calling on the Biden administration to act and protect an ecosystem in which they had a large stake.
California lawmakers, meanwhile, mounted their own pressure campaign in Zoom calls and other contacts with Biden administration officials. They immediately began to hear from voters, business owners and political donors, who feared the economic blow that the bank’s collapse could bring.
“When I went to do a little grocery shopping, I couldn’t help but notice a lot of people at the banks,” said Rep. Anna G. Eshoo (D), whose Golden State district includes a portion of the tech industry, recalling her concerns over the weekend.
Rep. Maxine Waters (Calif.), the top Democrat on the Financial Services Committee, started raising the issue with the FDIC late Friday. Rep. Zoe Lofgren (D), who leads the California delegation, by Saturday evening organized the first of several meetings between a wider array of state lawmakers and federal banking regulators.
Initially, Democrats expressed their broad belief that the government, first and foremost, should try to secure the sale of SVB. But as the potential dangers became more apparent of letting uninsured bank deposits evaporate, party lawmakers shifted toward trying to persuade the administration to take any action necessary to stave off crisis.
California members told administration officials stories of local businesses that stood to suffer in the event of a financial catastrophe, even beyond tech. In one example, they pointed to a payroll processor that parked its money at SVB and served nearly 1 million workers — people who could miss paychecks if large depositors weren’t rescued. Khanna, meanwhile, pointed to a local food bank that had relied on the now-failed firm.
Biden’s decision
The panic spreading in California, though, initially did not sway the administration to take sweeping action. Biden had reservations about approving a plan that could be spun as a bailout for bank shareholders. Sen. Bernie Sanders (I-VT.) was publicly warning against a bailout as well.
The White House also needed a plan that would not further alarm financial markets. SVB’S collapse was public over the weekend, but few outside the government knew yet that Signature Bank — with more than $100 billion in assets — was heading toward failure too. Government officials feared that the disclosure of Signature’s collapse on the heels of SVB’S could have a much greater ripple effect, and they wanted to make sure the news surfaced at the same time as the administration’s sweeping rescue plan.
Inside the White House, responsibility for managing the crisis fell primarily to Zients, Brainard and White House Deputy National Economic Council Director Bharat Ramamurti. Brainard had only been on the job for weeks but was almost perfectly situated to respond to a banking crisis, having recently left the Fed after more than eight years.
Although administration officials had largely decided by Saturday night that all depositors must be protected, they also worried about how to ward off the perception that they were acting primarily to bail out the rich and wellconnected who had been pressing for help. The plan does not protect SVB’S shareholders or executives.
“There was a lot of concern about: What is the messaging here?” said one person who spoke on the condition of anonymity to describe private deliberations. “Are we just saving these rich people, or are we doing something to save the economy? How do we present that, and what do we demand in terms of accountability to make clear this is not favorable treatment for a select few?”
Biden has emphasized that the plan is focused on protecting workers and small businesses.
On Sunday afternoon, after Biden signed off on the plan, members of the FDIC and Federal Reserve boards voted unanimously to declare that the failures of SVB and Signature posed a systemic risk to the entire financial system. The Fed also announced a new mechanism to provide loans at favorable terms to banks under duress.
By Tuesday afternoon, the storm appeared to have calmed, and stock prices in the banking sector had stabilized. And yet other risks may lie just around the corner.
The Fed is expected to continue raising interest rates this year in its campaign to thwart inflation, which could subject other banks to the same challenges.
“The weekend intervention dampened the immediate crisis,” said Bob Hockett, a Cornell University economist. “But continued rate hikes will simply bring more distress to industries — and thus to their banks — in the weeks and months to come.”