We are all socialist now

Ask any Republican what they think about socialism and they’ll roll their eyes and say, “Socialism is bad!” Although they’re perfectly fine receiving socialist retirement or disability checks and socialist health coverage. That’s different, of course. Do you know a single Republican who gave back their socialist stimulus checks? Nor do I. Socialism is good when the government hands you a free check with my hard-earned tax dollars.

Which brings us to 10 days ago, when we all witnessed moral hazard yet again as Silicon Valley Bank (SVB) took on interest rate duration risks, saw a decline in their asset base and then on March 8 announced that SVB had almost a $2 billion loss on the “sale of securities.” The next day SVB suffered $42 billion in withdrawals in a single day. Just like that, the country’s 16th largest bank was gone. The Fed and Treasury Department stepped in as backstops, which could become a new norm for “too big to fail” banks, giving huge banks an unfair advantage over community banks and credit unions.

Yeah, we know the government wanted to avoid a “Jimmy Stewart moment,” that scene from “It’s A Wonderful Life” when people lined up around the block to take their life savings out of the Bailey Building & Loan. The government was fearful that if $42 billion was withdrawn in one day at SVB, think of what would happen if tens of millions of Americans suddenly withdrew all their cash from every bank and credit union across the country.

We have to analyze Silicon Valley Bank to see how it was unique among banking institutions. The average American household has $5,300 in their banking accounts. Yes, the mean deposit (total dollars deposited divided by total number of accounts) is $41,000, but that’s because wealthy people have much larger bank balances, which skews the numbers higher. Over 93% of SVB’s accounts were greater than $250,000, with their average account balance being $4.5 million.

SVB’s assets from January 2020 to March 2022 tripled to $198 billion. Then over the next nine months their depositors withdrew $25 billion. At the beginning of 2022, SVB invested almost $100 billion in U.S. Treasury bonds and MortgageBacked Securities (MBS). In hindsight, SVB invested long in the bond market just as the Fed started raising interest rates at the fastest level in my lifetime. In simplistic terms, you buy bonds (Treasury or MBS) in $1,000 increments. When interest rates rise, the value of bonds declines, in SVB’s case by 17%, which meant that SVB’s $100 billion bond portfolio was now valued at $83 billion or a $17 billion loss, greater than the common equity on SVB’s balance sheet. It was a perfect storm for Silicon Valley Bank and in one day a 40-year-old bank was gone. The stock price went from $333 in early February to $0 last week. Greg Becker, their president and CEO went from being a genius to an idiot overnight. It was the largest bank failure since Washington Mutual in 2008.

Treasury Secretary Janet Yellen recently told senators, “The government refunds of uninsured deposits (account balances over $250,000) will not be extended to every bank that fails, only those that pose a systemic risk to the financial system.” You may think we have a capitalistic system, however, if you’re too big to fail and do stupid things, the taxpayers will be there to bail you out. We’re privatizing profits, while socializing losses. Just like the 2008 financial crisis, when the government bailed out Wall Street, while letting Main Street wither and die. I’ll remind you, this led to the formation of the Tea Party.

The FDIC gives $250,000 deposit insurance for each bank account. Most people realize they can structure these with husband and wife and numerous beneficiaries to get $2.5 million of the full faith and backing of the United States federal government. SVB’s depositors didn’t do this as they had a huge amount of venture capital high-net-worth individuals and start-up corporate cash accounts. The Fed and Treasury were in fear that these small start-up companies wouldn’t be able to make payroll, their founders would go on TV news to complain that the government caused them to miss payroll and they had to fire all their employees.

So here’s the question: Do we have a capitalist economy where we let private companies that do bad things go bankrupt and close? Or should we bail them out with corporate socialism?