If It looks Like a Bailout, and It Smells Like a Bailout, Chances are It's a Bailout!

 

by Pa Rock

Citizen Journalist

Bank failures can be like cancer and show a quick tendency to spread.  That is why most sane people don't want to see any bank fail - whether they have money in the particular bank or not.   Sooner or later cascading bank failures will reach us all.

Last Friday the US government seized. control of Silicon Valley Bank, a California-based banking operation that helped to finance and manage the assets of tech start-ups and other companies related to the tech industry.    Silicon Valley Bank, the nation's 16th largest financial institution, was experiencing a "run" on its assets by depositors who were hearing stories about a potential bank failure and rushing to withdraw their money from that bank.  The bank, in order to  meet those sudden demands for cash, was, in turn, selling off securities, at big losses, and other assets to raise quick cash to pay off the nervous depositors.

Some news stories indicate that before the feds showed up with the padlocks on Friday, executives in the company were able to find enough emergency cash to pay themselves their anticipated bonuses for the year.   Praise Jesus for small mercies!

Then, yesterday, agents of the US government also seized control of Signature Bank out of New York State. ( I haven't seen any word yet on whether their executives managed to pocket their anticipated bonuses on the way out the door.)

US Treasury Secretary Janet Yellen spent much of the weekend prattling on about how the federal government would not be "bailing out" the US banks as it had done during the financial crisis of 2008.  What she apparently meant by that was the  federal government would not be writing a check to cover that banks' losses as it had done fifteen years earlier, and would instead find another way to deal with the impending crisis.

Early today we are hearing about a rescue plan that is apparently being funded by the banks' insurers, the Federal Deposit Insurance Corporation (FDIC).   The FDIC  is funded by payments from member banks, and it already insures every deposit at both banks for up to $250,000.   But many of the current depositors in the affected banks have accounts with totals in excess of that amount.  Now, under the new plan, the FDIC will pay off all accounts in both banks - in full.  (I wish State Farm operated that way!)

It wasn't a bailout because the taxpayers did not have to write a check, but the plan will deplete with resources of the FDIC leaving it in the lurch when it comes to paying off accounts of the next set of failed banks - and eventually somebody will have to rescue the FDIC.   (Guess who?)

All of this could be short-circuited if Congress and the banking sector of the economy would hammer out some serious banking reforms, but American banks traditionally fight serious reforms tooth-and -nail, and the government always presents as too weak to extract serious concessions from America's major banks.  As an example, this current round of negotiations to save the operations of Silicon Valley Bank and Signature Bank placed no limitations on the ability of officers of those banks to increase their own compensation.  Why should the bosses be exempt from the costs of the failures of their own leadership?

American taxpayers may not have written a check to cover the greed and bad banking practices of the two most recent failed banks - yet - but the story is still unfolding.   If it looks like a bailout, and smells like a bailout, chances are it is a bailout and we are all just waiting on the final bill!