How Silicon Valley Bank echoes WaMu and the Panic of 2008

Watching the collapse of Silicon Valley Bank, two thoughts came to mind.

First, most news stories labeled it the second largest “bank” failure in American history, after Seattle’s Washington Mutual in 2008. But that’s incorrect. Even though WaMu acted like a bank in many ways, it was a savings and loan.

What we’ve witnessed in recent days is the largest bank failure and the second-largest banking failure. Silicon Valley was the nation’s 16th largest bank and, although it was state-chartered, its chief executive sat on the board of the Federal Reserve Board of San Francisco.

I’m not pettifogging. Washington Mutual lacked the more rigorous regulators, along with the regulatory and political protection of a bank. When it came to grief from doling out too many subprime housing loans, no one in power was there to bail it out from a run on the institution.

Then-FDIC Chair Sheila Bair wanted to protect the federal insurance program and quickly arranged for JPMorgan Chase to purchase WaMu’s assets for $1.9 billion. The very politically connected JPMorgan chief executive, Jamie Dimon, won a Northwest empire he had long craved.

“Was it fair? Absolutely not,” Bair told me in 2014. However, “I never heard a peep from other regulators that WaMu was systemic.” In other words, it posed a risk to the larger financial system.

Bair’s nemesis in the panic of fall 2008 was Timothy Geithner, head of the Federal Reserve Bank of New York and later Treasury secretary. He peeped loudly, wanting the government to stand by Washington Mutual’s shareholders.

He vowed that “there would be no more WaMus” and afterward the government protected all banking institutions, an important step in stemming the bank panic.

WaMu’s shareholders were wiped out and thousands of jobs were lost in downtown Seattle. Beneath the onion wrapping of those noxious subprime loans was a healthy banking institution. Otherwise, why was TPG, a Texas-based private equity group, willing to put $7 billion into WaMu in hopes of turning it around, after CEO Kerry Killinger was ousted, in April 2008? Why would Dimon have wanted it and moved so quickly to acquire WaMu’s assets? (Contrast that with the failure to sell Silicon Valley Bank’s assets for days after the FDIC closed it, a saga continuing as I write.)

If Washington Mutual could have been saved in 2008, Seattle could have retained a major banking institution and its place as a banking center. But it was not to be.

My second thought about Silicon Valley Bank was about how little was learned from the Panic of 2008 and the Great Recession that followed — and the power of the bank lobby.

The loose lending practices, handsomely rewarded by Wall Street, of Killinger and other bankers, was the direct outgrowth of deregulation, specifically the repeal of the Glass-Steagall Act in 1999.

This law was enacted in 1933, 90 years ago, after the bank crisis that helped bring on the Great Depression. It separated commercial banks from investment banks among other new rules. Along with federal deposit insurance (the FDIC) and the Securities and Exchange Commission, it was the most important reform to the nation’s financial sectors during President Franklin Roosevelt’s Hundred Days.

And for decades, Glass-Steagall kept the banking system safe and sound, even though it was gradually whittled away at the margins. It certainly wouldn’t have allowed commercial banks to invest in the derivatives and other exotic pieces of financial engineering that followed its repeal. Or the lap dog regulators that allowed them to hide on balance sheets until the crisis.

After the Panic of 2008 nearly imploded the banking system, Congress passed the Dodd-Frank Act, which tightened bank regulation. But it was no modernized Glass-Steagall and its toughest provisions were loosened in 2018, encouraged by President Donald Trump.

Those seeking schadenfreude will be pleased to know that the bill’s co-sponsor, former Democratic Rep. Barney Frank, was a paid board member of Signature Bank, which dabbled in cryptocurrencies and was shut down soon after Silicon Valley Bank.

Writing in The New York Times, Sen. Elizabeth Warren, who was instrumental in creating the Consumer Financial Protection Bureau as part of the post-panic reforms, summed up Silicon Valley Bank’s problems well:

The bank “suffered from a toxic mix of risky management and weak supervision. For one, the bank relied on a concentrated group of tech companies with big deposits, driving an abnormally large ratio of uninsured deposits‌. This meant that weakness in a single sector of the economy could threaten the bank’s stability.

“Instead of managing that risk, S.V.B. funneled these deposits into long-term bonds, making it hard for the bank to respond to a drawdown. S.V.B. apparently failed to hedge against the obvious risk of rising interest rates. This business model was great for S.V.B.’s short-term profits, which shot up by nearly 40% over the last three years‌ — but now we know its cost.”

This would be a fitting benediction if the storm had passed, but so far that hasn’t happened.

And the failure to bring the rule of law to the “banksters” after the Panic of 2008 seeded today’s regulatory failure.

The Justice Department and SEC are reportedly investigating Silicon Valley Bank’s collapse.

Will the outcome be different this time?

I wouldn’t bank on it.