Podcasts Business Investing Real Estate News: Real Estate Investing Podcast Bank Execs Clash with Lawmakers at Hearing on Bank Failures

Bank Execs Clash with Lawmakers at Hearing on Bank Failures

Published: May 19, 2023, 6:24 p.m.

b'

A Senate hearing on recent bank failures turned into a prickly confrontation between bank executives and lawmakers. Former leadership for Silicon Valley, Signature, and First Republic Banks were hammered by lawmakers about why their banks collapsed. And there wasn\\u2019t a lot of agreement on the cause. Bank executives blamed the government and the media, while lawmakers blamed mismanagement and greed.
\\xa0
Hi, I\'m Kathy Fettke and this is Real Estate News for Investors. Please remember to subscribe to this podcast and leave us a review.
\\xa0
Silicon Valley Bank made the biggest splash as the first bank to fall with about $210 billion in assets. Signature bank had about $110 billion when it was seized by regulators. They were the third and fourth largest banks in the U.S. so their failures raised huge concerns about the impact on the entire financial system. First Republic went south and teetered for a few months after it lost billions in deposits, and was largely taken over by JPMorgan.
\\xa0
SVB CEO Blamed a Series of \\u201cUnprecedented Events\\u201d
\\xa0
In a joint session before the Senate Banking Committee, former Silicon Valley Bank CEO Greg Becker pointed a finger at the federal government, saying the bank\\u2019s failure was the result of a series of \\u201cunprecedented events.\\u201d He testified that: \\u201cWith near zero-percent interest rates and the largest government sponsored economic stimulus in history, more than $5 trillion in new deposits flooded into commercial banks. By the end of 2020, SBV had grown 63 percent over the prior year, and in 2021, SVB\\u2019s assets grew another 83 percent to $212 billion.\\u201d (1)
\\xa0
He also pointed out that during the pandemic, when inflation started to become an issue, the Federal Reserve insisted that inflation was \\u201ctransitory\\u201d and that interest rates would remain low.
\\xa0
Massive Bank Run at SVB
\\xa0
The bank\\u2019s collapse largely happened after a decision to invest more than half of the bank\\u2019s loan portfolio into fixed-income Treasury securities, when interest rates were low. They are considered \\u201clow risk\\u201d but they are also impacted by interest rate hikes. When interest rates blew up to fight inflation, the value of SVB\\u2019s portfolio shrank and that forced the bank to sell at a $2 billion loss. When news spread about the bank\\u2019s situation, depositors became concerned about accessing their funds and the bank experienced a massive bank run.\\xa0
\\xa0
Media Misconceptions
\\xa0
Becker also blamed the media for comparing the March 8th failure of Silvergate Bank to Silicon Valley Bank. He told lawmakers that the two banks had completely different business models, and said: \\u201cRumors and misconceptions quickly spread online, culminating on March 9th with the first-ever social media bank run leading to more than $42 billion in deposits being withdrawn from SVB in 10 hours, or $1 million every second.\\u201d
\\xa0
Two More Dominoes to Fall
\\xa0
Former Signature Bank Chairman Scott Shay was miffed that his bank was seized by New York State regulators on March 12th. He insisted that the bank would have survived that bank run. He argued: \\u201cWe were at all times solvent and well-capitalized, and even with the sale of our available-for-sale securities, we still would have remained well capitalized.\\u201d
\\xa0
Former First Republic CEO Mike Roffler also blamed social media and news stories for inciting panic among depositors along with technology that allows for fast-paced digital withdrawals. Roffler told lawmakers: \\u201cThe contagion spread very quickly and panic is very hard to control.\\u201d (2)
\\xa0
Lawmakers Blame Mismanagement, Greed
\\xa0
But lawmakers also took the conversation in a different direction, criticizing bank leaders for millions of dollars in bonuses and personal stock sales ahead of the failures. Senator Sherrod Brown ripped into Becker saying: \\u201cWorkers face consequences, executives ride off into the sunset. Only in corporate boardrooms can you run your business into the ground, take the whole economy along with you and come out ahead. We can\\u2019t let that happen again.\\u201d
\\xa0
Some lawmakers said that bank executives could have reduced the risk by hedging their portfolios, but that they, instead, placed profits ahead of safety. As explained in a Washington Post article, Silicon Valley Bank had financed short-term liabilities with long-term debt. It seemed like a no-brainer when interest rates were low, and to be fair, there was a lot of talk about interest rates remaining low for a very long time. But when the Fed started hiking rates, the value of those Treasurys went down. Lawmakers say the bank could have swapped those longer-term notes for one with shorter-terms that match the duration of the bank\\u2019s liabilities. But they say the banks didn\\u2019t do that because it would have been more expensive. (3)
\\xa0
Sharp Words from Some Senators
\\xa0
The session became downright nasty at times. Senator John Kenney of Louisiana had sharp words for what he called SVB\\u2019s \\u201cstupidity.\\u201d He told Becker: \\u201cYou made a really stupid bet that went bad, didn\\u2019t ya? And the taxpayers of America had to pick up the tab for your stupidity, didn\\u2019t they?\\u201d (4)
\\xa0
He continued saying: \\u201cNo, this wasn\\u2019t unprecedented. This was bone-deep, down-to-the-marrow stupid. You put all your eggs in one basket and unless you lived on the International Space Station you could see that interest rates were rising and that you weren\\u2019t hedged.\\u201d
\\xa0
Let\\u2019s hope we\\u2019ve seen the last of this kind of banking madness. You can read more about this by following links in the show notes at newsforinvestors.com.\\xa0
\\xa0
I always encourage listeners to hedge their own financial empire with real estate. You can learn how to invest in rental properties at RealWealth. Becoming a member is free and will give you access to all our educational material as well as our investor portal with valuable data on rental markets, sample properties, and help from our investment counselors who can answer your questions. Just hit the \\u201cJoin for Free\\u201d button.
\\xa0
And please remember to subscribe to this podcast!\\xa0
\\xa0
Thanks for listening!
Kathy Fettke
\\xa0
If you\\u2019re a RealWealth member, just sign into the portal and look for DealCheck under the Resources tab. If you aren\\u2019t a member, it\\u2019s free and easy to sign up. And, please remember to subscribe to this podcast!
\\xa0
Thanks for listening!
Kathy\\xa0
\\xa0
Links:
\\xa0
\\xa0
\\xa0
'