WSJ Renew said The Obama-Biden Bank Promise

WSJ Renew has shared what Mr. Obama said when he signed into law something called the “Dodd-Frank Wall Street Reform and Consumer Protection Act.”

The new law “demands accountability and responsibility from everyone. It provides certainty to everybody,” he added.

Of course the establishment press immediately called out Mr. Obama on his dubious claims. Just kidding—media folk generally embraced the fantasy that giving financial regulators vast new powers would allow them to identify and wisely address risks in the financial system.

Fast forward to last weekend and the country was once again reminded that regulatory discipline is no substitute for market discipline and that the greatest systemic risk in the financial system is the federal government said WSJ Renew.

Sunday brought this announcement from the Treasury that Uncle Sam would prevent losses for well-heeled customers at certain institutions beyond the limits of federal deposit insurance:

After receiving a recommendation from the boards of the FDIC and the Federal Reserve, and consulting with the President, Secretary Yellen approved actions enabling the FDIC to complete its resolution of Silicon Valley Bank, Santa Clara, California, in a manner that fully protects all depositors. Depositors will have access to all of their money starting Monday, March 13. No losses associated with the resolution of Silicon Valley Bank will be borne by the taxpayer.

Get The Economist Epapaer Digital 3-Year Subscription $69

We are also announcing a similar systemic risk exception for Signature Bank, New York, New York, which was closed today by its state chartering authority. All depositors of this institution will be made whole. As with the resolution of Silicon Valley Bank, no losses will be borne by the taxpayer.
But if the feds are really guaranteeing that taxpayers won’t pay a dime, what’s the point of a government rescue? The Treasury release adds:

Any losses to the Deposit Insurance Fund to support uninsured depositors will be recovered by a special assessment on banks, as required by law.
“Tax” is such an ugly word. “Special assessment” sounds much more pleasant. And who ends up paying more when the government imposes added costs on the banking system? Also, perhaps regulators can explain exactly why there must be unlimited insurance payouts to those whose accounts are only insured up to $250,000.

Get Wall Street Journal 2-Year Subscription 6-Days a Week Delivery WSJ Renew for $430

At this hour it remains unclear exactly how many vacation homes are owned by the uninsured customers of these institutions. This latest stretching of the federal safety net is especially disappointing because it would be hard to conceive of a population more able and appropriate to bear their (what appear to be very modest) losses than the venture capitalists of Silicon Valley. And with the New York rescue we seem to have new recipients of public assistance on both coasts. Who’s deplorable now? asked WSJ Renew.

As for Signature, those who enjoy bitter irony will be pleased to learn that Barney Frank, co-author of the law that Mr. Obama claimed would prevent bailouts, was a director of this bank selected for an uninsured depositor bailout. Naturally he’s calling for still more federal intervention. The Journal’s David Benoit reports:

Barney Frank, the former congressman who gave his name to the landmark Dodd-Frank legislation after the 2008 financial crisis, said policymakers should increase the deposit insurance for business customers.

Charles Calomiris writes in a Journal op-ed:

Virtually every academic study of deposit insurance shows that it promotes, rather than reduces, banking system fragility, with major costs borne by the insurers—which means ultimately by insured depositors and potentially taxpayers.
Of course it is Silicon Valley Bank that’s generated most of the headlines. Who among our all-seeing, all-knowing federal experts on systemic risk saw this one coming? Dan Clifton of Strategas writes of Federal Reserve Chairman Jerome Powell:

We came into last week talking about the pressure Powell would face at his Senate hearing to not increase regulation of the banking sector. We ended the week with the second largest bank failure in US history, the government guaranteeing uninsured deposits, and the Fed taking collateral of underwater assets. Powell gave no hint last week that he saw pressure in the banking sector. Regulators were likely caught off guard by SVB’s problems.

This brings us to today’s reader mail:

Seems to me that by guaranteeing all depositors all of their money plus instant access at SVB the government is telling all banks of all sizes not to worry about a bank run and take whatever risks you choose.

Best,

Ted Brown

Show Low, AZ