SVB: Wall Street Legend Calls Depositor Rescue a 'Big Mistake'

(The Street) - Faced with the risk of market and consumer panic after the sudden collapse of Silicon Valley Bank, U.S. regulators were forced to unveil an emergency plan to avert disaster.

This plan provides a guarantee that all SVB depositors get all their money back, even those who were not insured depositors, meaning they had more than $250,000 in deposits. 

The extraordinary measure also applies to Signature Bank in New York's depositors, another bank shut down by regulators on March 12.

Beyond that, the regulators have decided to guarantee for at least one year all the deposits of U.S. banks.

The Federal Reserve (Fed) also created a new facility to provide liquidity to struggling banks if needed.

'All Deposits Guaranteed?'

Anticipating criticism and anger from politicians, regulators have assured that taxpayers' money will not be used but for many observers and critics this rescue plan is a rescue plan for banks like during the 2008 financial crisis.

But the regulators are criticized for going beyond the coverage of only insured depositors, because critics say it will encourage banks to continue to take excessive risks. SVB collapsed because it bet on interest rates when they were low. But when the Federal Reserve (Fed) started raising rates in 2021, the bank's bond portfolio lost value, resulting in a net loss of $1.8 billion when SVB sold part of these securities. 

The bank then sought to raise $2.25 billion to cover these losses and meet the withdrawal requests of its startup customers which burn a lot of cash. The announcement of a capital raise program caused a run on the bank.

Bill Gross, the legendary financier and co-founder of bond behemoth Pacific Investment Management Co.(PIMCO), is among the regulators' critics. 

For the 'Bond King,' guaranteeing all deposits is a mistake because it will encourage banks to take more risks.

"All deposits guaranteed? Big mistake," Gross blasted out on Twitter on March 14. "Fed and Treasury policy moving to backstop risk."

The now retired asset manager seems to be saying that regulators, by agreeing to guarantee all deposits, even uninsured ones, encourage risk-taking behavior in the banking sector because there are no longer safeguards. 

In addition, he seems to suggest that now that the banks know that all the deposits are guaranteed, they will gamble freely with their clients' money because they know that it is guaranteed by the regulators even if they lose it.

The same regulators provide banks with a last-resort support in the form of a new Bank Term Funding Program (BTFP), whose purpose is to safeguard institutions impacted by the collapse of SVB, according to a statement by the Fed.

Bailing Out 'Greed'

This facility will provide loans, of up to one year in length, to banks, savings associations, credit unions, and other eligible depository institutions, pledging U.S. Treasuries, agency debt, mortgage-backed securities and other qualifying assets as collateral, the Fed said in a separate statement.

These assets will be valued at par, which means at their original value, regardless of the change in interest rates, the rise of which in recent months has reduced the value of long-term bonds purchased when rates were low.

Basically the link between risks and consequences no longer exists, Gross concluded.

Gross is not the only financier to criticize the regulators' rescue plan. Michael Burry, the legendary investor, known for betting on the collapse of subprime mortgages ahead of the 2008 financial crisis, issued similar criticisms just hours after the announcements.

"2000, 2008, 2023, it is always the same," the hedge fund manager lambasted out on March 12. "People full of hubris and greed take stupid risks, and fail. Money is then printed. Because it works so well."

For Burry, if every time companies and investors make mistakes and need to be rescued because the system is supposedly at risk, greed and bad actors are encouraged, he seemed to say.

Burry seemed to be of the opinion that we shouldn't have helped these bad actors so much.

By Luc Olinga
March 14, 2023


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