Where Were the Examiners as Silicon Valley Bank Cratered?

The new Republican House Financial Services Committee chairman needs to question regional Fed bank heads. The first step for the Biden administration, though, is to sell SVB to prevent contagion.

AP/Jacquelyn Martin, file
The Federal Reserve chairman, Jerome Powell, during a news conference December 14, 2022, at the Federal Reserve Board Building, Washington. AP/Jacquelyn Martin, file

The first thing I want to say is that the best action the Biden administration can take to calm markets and prevent contagion is to sell the Silicon Valley Bank. That would bring in new management and new equity capital and take FDIC insurance costs off the hook. 

Right now, as the FDIC is guaranteeing both insured and uninsured SVB deposits, this story becomes a taxpayer bailout. If the deposit insurance fund is depleted, banks pony up with bigger fees and probably charge customers, who will pay for it. It’s not exactly a taxpayer tax, but it’s pretty close. 

As soon as the bank is sold, however, new management will cover all these fees. That removes the story as a taxpayer bailout. What’s more, it removes the need to guarantee uninsured deposits. 

In effect, new ownership will presumably restructure their portfolios of risk securities and loans. They will reliquify the bank. Yet the Wall Street Journal reports that on Sunday, at least one offer was made by an institution — and it was declined by the FDIC.  

This sounds like the work of left-wing ideologues Martin Gruenberg, who chairs the FDIC, and Rohit Chopra, who chairs the CFPB and has a seat on the FDIC board. These guys oppose bank mergers — more Biden socialists. 

If they’d get out of the way and let the private sector do what it does best, we’d all be better off. The whole issue of taxpayer bailouts would at least be put to rest as far as SVB is concerned.  

Fortunately, a second auction is being reported to be under way. Hopefully, it will be completed quickly.  

The second point I want to make is a very important announcement by the Fed chairman, Jerome Powell, which has gone virtually unreported, that the Fed is launching a review of its oversight and regulation of SVB. This could unlock one of the biggest problems with the story — namely, SVB and the others are not a regulatory problem, they are a supervisory problem.  

It had nothing to do with the bipartisan regulatory relief bill of 2018. Listen to what a chairman of the Council of Economic Advisers in the Trump administration, Kevin Hassett, said about the issue: “But the thing that I think is really the most obvious clue to the shamelessness of the Biden administration in this crisis is that they came out and they blamed the Dodd-Frank rollback, which was a bipartisan bill in 2018. Barney Frank was on the board of Signature Bank. And Barney Frank came out today and has said there’s no way that 2018 law had anything to do with this. So Barney Frank himself is saying that the Biden administration is, you know, they’re full of garbage.” 

SVB and the other banks are supervised by the San Francisco Fed, which is run by Mary Daly. It was completely asleep at the switch. By the way, First Republic bank also comes under Ms. Daly’s purview. 

What were they doing while these banks were taking cheap money deposits and investing in long-term duration government and mortgage bonds? The management of duration risk by these banks was a catastrophe, and it had been going on for well over a year. So where was Ms. Daly and her team of bank examiners?  

For SVB, reports suggest their available-for-sale bonds lost $1.8 billion. But, far worse, their hold-to-maturity bonds on a mark-to-market basis had a $15 billion loss — which equals the whole equity position of SVB.  

Of course, high inflation drove up interest rates, which crushed bond prices, which crushed the banks’ capital, and ground the operation into insolvency. At first, the deposits were plentiful and free, but then it was reported that SVB had to pay up over 5 percent to attract uninsured deposits.  

So that’s a huge asset liability mismatch — with Treasury bonds, for example, at 3.5-4 percent. Where was Ms. Daly and her team at the San Francisco Fed while all this incredibly inept management was butchering the bank?  

Then you read about a $5 billion one-chunk investment in some kind of climate fund that was completely untested and who knows what other left-wing romping was going on in these woke banks. By the way, Ms. Daly is considered to be quite a wokester herself. 

The new Republican House Financial Services Committee chairman, Patrick McHenry, should haul Ms. Daly and other regional Fed bank heads in front of his committee and find out what the heck they were doing while these banks were going crazy. 

Finally, the root cause of this bank crisis — namely, the worst inflation in 40 years, spurred by the biggest spending spree from the Biden Democrats and the money-printing accommodation by the early inflation-denialist, Mr. Powell — continues.  

Today’s consumer price report shows the third straight month of higher than expected inflation. Last fall, the month-over-month trends were falling. Since November, though, they are rising, while the 12-month change is still 6 percent.  

As an aside, services excluding energy are up 7.3 percent. The Cleveland Fed median CPI is up 7.2 percent in the last 12 months. So, the country still has a big inflation problem — no matter what Mr. Biden keeps telling us — and the Fed’s in a real pickle.  

The Fed might want to pause its rate hikes because of contagion worries, but it may have to raise the target by a quarter anyway because inflation is still running hot.  

You know, this whole episode of high inflation, high interest rates, bank financial worries, crazy left-wing woke theories: None of this stuff had to happen. And, of course, I could list a zillion other problems.  

But, I’ll say again, it’s not America’s decline. It’s a decline of America’s leadership in Washington. We need to wipe the slate clean. We need to start all over again.  

We need to apply principles of free-market capitalism. We need new leaders and a new direction. Because this is a great country.  

From Mr. Kudlow’s broadcast on Fox Business News.


Mr. Kudlow is a Fox News Media contributor. His show “Kudlow” airs at 4 pm ET weekdays. He is also syndicated radio host of “The Larry Kudlow Show” that broadcasts every Saturday from 10 am to 1 pm ET.

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