With the acquisition of First Republic Bank by J.P. Morgan, the dust is settling for this recent wave of U.S. banking failures. Two key players in this capital market farce reveal the flaws of their banking sectors and how this kind of crisis might recur. Enter Gregory Becker, president and CEO of Silicon Valley Bank (SVB), playing the part of a greedy banker seeking nothing but personal fortune at all costs.
The time was May 24, 2018 when U.S. President Donald Trump signed into federal law the Economic Growth, Regulatory Relief and Consumer Protection Act. In this bill, the threshold for systematically important banks under increased regulatory scrutiny was raised from US$50 billion in assets to US$250 billion.
This was a significant rollback of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank), a U.S. federal law enacted in the wake of the aftermath of the 2007-2009 economic crisis that was sparked by rogue banking practices on Wall Street.
A rollback of the law dedicated to preventing a banking crisis actually led to a banking crisis; isn’t it ironic?
And the lobbying campaign of the rollback was spearheaded by none other than Becker whose bank was at that time quickly approaching US$50 billion in assets.
Innocent observers may blame high interest rates for the collapse of SVB, but a closer examination would show that SVB was a gigantic freak that should not have been created in its unique form.
Unlike ordinary banks whose loans are mainly handed out in consumer credits, credit card interest charges, mortgage payments, industrial and commercial loans that generate steady cash flows matching their liquidity obligations, SVB had a huge chunk of its loans tied to illiquid venture capital and private equity projects.
When the go-go days were over and there was a drought of public listings in the capital market, the balance sheet of SVB could not function properly. The bank run in the mobile digital age easily took it downhill.
The liquidity structure of SVB is more like that of a private equity or a hedge fund. It took advantage of its access to mass deposit markets to balloon in size.
Banks should be “boring,” as advocated by Massachusetts Senator Elizabeth Warren, because the wealth of every household is tied to this industry.
However, lawmakers and regulators chose to look the other way when a bank like SVB with a queer balance sheet quadrupled in size in a couple of years to become the country’s 17th-largest bank.
Enter Barney Frank, yes, the Frank in Dodd-Frank, the powerful temporizer and rainmaker going through the revolving door of legislature and business.
Barney Frank, wearing the hat of a congressman, was a leading co-sponsor of Dodd-Frank, the legislation aiming at tightening regulations on banks to ensure their security and stability. After his retirement from the congress, Frank joined the board of Signature Bank, which, as we now know, quickly collapsed on the heels of SVB.
While serving on the board of Signature Bank and representing greedy banks, Frank testified before the congress and pushed to ease the regulations in Dodd-Frank. He played a significant role in the rollback of the legislation bearing his name’s sake.
The tightening and easing of banking regulations can be traced all the way back to the Glass-Steagall Act of 1933 after the Great Depression.
With the wounds from a financial crisis still hurting, lawmakers rush to strengthen regulatory rules. After years of prosperity, banks now employ their immense lobbying power to loosen legislation to create more room for profits.
As a consequence of lobbying, congressional candidates collected US$2.4 billion, political parties received US$1.4 billion, and political action committees raised US$5.5 billion, according to campaign finance reports filed with the Federal Election Commission that covered activity from Jan. 1, 2021 through June 30, 2022.
During the 2019-20 election cycle, Wall Street spent at least US$2.9 billion on campaign contributions and lobbying to influence policy in Washington, according to a report released by Americans for Financial Reform.
Wall Street preaches greed is good, and bankers are not known for being philanthropists. Legislative candidates cannot take the money and shun away from the biddings of their contributors, not on this planet.
This circle of loosening and tightening of banking regulations forebodes another crisis down the road due to the elastic legislative and regulatory oversight.
Next time when you feel quite certain about something, it may not be a good idea to use the phrase “take it to the bank,” as there might be a comeback like “Which bank, WaMu or SVB?”
(The author is an independent financial investor.)