ST. LOUIS — President Biden called for Congress to step in and enact tougher banking regulations on Monday morning after U.S. regulators seized Silicon Valley Bank on Friday.
Small businesses, many of them tech startups, rushed to withdraw their funds all at once, sparking panic at other regional or specialized banks. Signature Bank failed on Sunday night. Shares of First Republic Bank stock fell 60% on Monday.
In a speech from the White House on Monday, the President sought to assuage fears of a broader economic collapse, and kicked off a debate over ways to prevent banks from failing in the future.
"I'm going to ask Congress and the banking regulators to strengthen the rules for banks to make it less likely this kind of bank failure would happen again," Biden said.
Biden and Congressional Democrats highlighted the Trump administration's rollback of regulations in the Dodd-Frank Act, casting a share of blame at his predecessor and political nemesis.
He also sought to avoid any political backlash from voters who remember the collapse of the Lehman Brothers and the bailout that followed.
"No losses will be borne by the taxpayers," Biden said. “Investors in the banks will not be protected. They knowingly took a risk and when the risk didn’t pay off, the investors lose their money. That’s how capitalism works.”
Instead, the Federal Reserve, the U.S. Treasury, and the Federal Depositors Insurance Corporation (FDIC) declared the failed banks posed a "systemic risk," which allowed the regulators to sign off on a special insurance plan that would compensate the customers of the bank for all of their deposits, not just the guaranteed minimum of $250,000.
"This is not a systemic issue and I have confidence in our banking and financial systems," U.S. Rep. Ann Wagner said in a statement.
Wagner, who chairs the House Financial Services Subcommittee on Capital Markets, said, "Congress has no plans to use taxpayer dollars to bail out banks."
U.S. Rep. Nikki Budzinski (D-Illinois) called the bank failures "deeply troubling" and applauded the Biden administration for taking steps "to protect depositors and safeguard our financial system."
"While I’m glad that no taxpayer dollars are being used to guarantee customers’ deposits, we must take a close look at the previous administration’s unraveling of protections that contributed to this situation," Budzinski said.
Lucas Kunce, a Missouri Democrat running for the Senate next year, said "depositors all over the country should be worried, a little bit," and criticized the Biden administration policy for protecting companies with funds held at Silicon Valley Bank over "everyday people."
"Let's face it, like... any time we're giving money to an institution who has made bad decisions, that's a bailout," 2024 Senate hopeful Lucas Kunce said. "So if we're doing that, that's a bailout."
"It's not a bailout. It's making depositors whole," Yale professor Jeff Sonnenfeld said, noting that the insurance funds wouldn't go to bank executives or shareholders who were responsible for making investment decisions.
"The FDIC is funded through banks. So banks pay into that fund," Ben Jackson of the Illinois Bankers Association said.
While the full details of the plan have yet to emerge, Jackson said banks might ultimately have to pay higher insurance rates to the FDIC to offset the cost of compensating customers who banked at Silicon Valley Bank.
"We just got off a call with the U.S. Treasury Department a few minutes ago where this was discussed and there's still not a lot of clarity there," Jackson told 5 On Your Side on Monday afternoon. "So, yes, banks in the Midwest could be part of the solution."
Senator Josh Hawley (R-Missouri) said he plans to file legislation that would ban any banks from passing those "special assessment" fees on to customers for what he called a "woke bailout."
Kunce claims banks have "lost the entire incentive to act responsibly because they know that the federal government's going to bail people out."
The candidate who ran in the 2022 Democratic primary sharpened the strains of economic populism in his rhetoric as he lays the groundwork for a chance to challenge Hawley next year.
Kunce said he would restore all the regulations in the 2010 Dodd-Frank Act, and reinstate Glass-Steagall, aligning himself with policies proposed by Senator Elizabeth Warren, the Massachusetts progressive.
"We had real protections that have been in place in this country for many, many decades because we knew that financial institutions aren't trustworthy," Kunce said. "They're run by financial engineers who do everything they can to squeeze money out of the rest of us. And so the bigger they are, the worse they get, because the bigger you get, you know, you become too big to fail and then you're willing to take risks because they know, you know, the taxpayers are going to bail you out."
Once again, Sonnenfeld said Kunce's rhetoric misdiagnosed the problem.
"I think the mid-sized banks could have been held to somewhat tougher standards, but they still wouldn't have caught this because this was considered a prudent asset management strategy," he said.
Sonnenfeld criticized the bank for paying out bonuses in the days before the crash and for leaving a key risk management position unfilled, but he gave its executives a pass for investing so heavily in long-term government bonds.
"Until four days ago, any economist would tell you that U.S. Treasuries are the safest assets. They're very low risk," op-ed article author Jeff Sonnefeld told 5 On Your Side.
Sonnenfeld co-wrote an opinion piece for Fortune Magazine that blamed the U.S. Federal Reserve for creating the conditions for Silicon Valley Bank to fail.
"The financial regulators did just the right thing now. They did the wrong thing before," Sonnenfeld said. "We wouldn't have this problem if the Federal Reserve wasn't still basically using a sledgehammer to try to hit a nail and missing the nail, throwing the sledgehammer right through a plate glass window across the street. I mean, it's just so wildly missing the mark. It's really out of control."
The professor says bank executives overreacted when they went looking for enough cash to meet the demand from customers.
"It made it seem worse than it was," he said. "It's basically like somebody lit a match and the CEO went over and pulled the fire alarm. Now, who was it that lit the match? It's the Federal Reserve that lit the match that forced this problem on them."
"That's what's taking place here," he said. "There wasn't some sort of economic chemistry, some special elixir, some magic on the mathematics behind this. This had to do with some bad decision-making of individual leaders, particularly Jay Powell, the chairman of the Federal Reserve, who was trying to act macho just at the wrong time."
Senators Hawley and Eric Schmitt, both Missouri Republicans, saw another culprit lurking in the shadows: investors who wean their portfolio off of fossil fuels in favor of clean energy.
Hawley and Schmitt both tweeted that Silicon Valley Bank was "too woke to fail." Schmitt suggested "ESG investment policies," which prioritize investments in sustainable energy, might have played some role in the bank's demise.
"To try to weave woke into this is delusional," professor Sonnenfeld said.
Sonnenfeld instructs students at Hawley's alma mater how to make savvy strategic decisions at the corporate governance level.
"I respect his education, we at Yale admire him," he said. "But you think that his use of 'woke' is a joke and you wonder, is it something that he had to smoke? It makes no sense. It isn't related. His use of [woke] is as related as somebody's weight loss programs if they had to replace the tire on the car. It's just completely irrelevant."
"He's focused on the woke issues of Fortune 500. He should be corrected that none of these customers are Fortune 500. These were small startups," Sonnenfeld said. "Senator Hawley needs to take a look at who the customers are here. These are people that he would support."
"They relied on this bank because a lot of the big behemoths wouldn't take chances on those little guys."
"This is much more of a political problem than it is an economic problem," he said. "It's being driven by the politics, frankly, of the left and the right."
While members of Congress and the Washington political class have been pointing fingers of blame across the aisle at each other, one of the potential solutions for the country's ongoing labor market quandary could be within their grasp.
"Immigration reform would help a lot," Sonnenfeld said. He says more migrants on work visas could fill jobs that the Fed currently sees as a problem.
"The Fed was late to tighten rates last year, but now they're overcorrecting. They're fighting last year's war," he said. "But beating up on the average worker is ridiculous. The only wage number that corresponds with inflation, strangely, is the number of employed professional economists."
He claims the central bank strategy to raise interest rates is a prescription for the wrong problem.
"Inflation has been plummeting, but the Federal Reserve is still using this ridiculous notion that there's a relationship between high employment and the and high prices," Sonnenfeld said.