(NEW YORK) — The word “bailout” is sure to make anyone who remembers the 2008 financial crisis nostalgic in all the worst ways. At the time, the government used taxpayer money to keep some of the country’s largest financial institutions afloat.
Two regional banks recently collapsed. As depositors of those banks feared for the money in their accounts, the Fed stepped in to replenish any of the money depositors would have lost.
The U.S. government and even the banks struggle to call it a bailout in any way that relates to what happened in 2008, with the government refusing to call it a bailout at all, and there’s a couple of reasons for all of this.
What happened?
When Silicon Valley Bank (SVB) and Signature Bank were seized and shut down by regulators last weekend, depositors of those banks feared for their money. The FDIC insures depositors’ money up to at least $250,000 – meaning if you had more than that amount in one of those banks, you may be out of luck.
However, the Treasury Department, the Federal Reserve, and the FDIC announced they would make sure all depositors with accounts at SVB and Signature Bank would have access to their funds by the next day — beyond just the $250,000 guaranteed by the FDIC.
The Fed announced a few other actions as well — like making funds available for other financial institutions in the form of one-year loans. This is all to instill confidence in other banks after SVB’s collapse, and to avoid any run on the banks.
The money is going to customers, not the institutions.
“In 2008, we were actually bailing out companies,” said Art Hogan, a chief market strategist with B. Riley Wealth and Art’s with over 30 years experience working in the U.S. equity markets. “Banks that were seen as too big to fail.”
But now, as Hogan puts it, the government is not coming to save SVB or Signature Bank — noting that all the money is going towards depositors, not the banks.
“But [the government] is not going to let the depositors get hurt,” says Hogan. “They’re actually rescuing depositors in banks that made some bad decisions over the course of the last year or so.”
That means investors, employees or others who were making money from these institutions are out of luck and should not be able to touch any of the money the government will be using to make depositors whole.
“What happened during the financial crisis: shareholders and bondholders of many of our biggest banks were bailed out by the government,” said Gerard Cassidy managing director with RBC Capital Markets. Cassidy has been with and provided RBC with investment research on the U.S. banking industry for more than 30 years.
“The shareholders and bondholders of the two respected banks that failed — Silicon Valley and Signature, were completely wiped out; And so, from that standpoint, I would say this is not a bailout,” he said.
SVB is not in complete shambles. HSBC on Monday announced a deal to buy the U.K. subsidiary of Silicon Valley Bank, which has a new name: SVB Bridge Bank.
But back to the word “bailout” — which has no traditional definition. Some still consider the actions taken by the government over the last week a bailout. The difference, per some experts, between now and 2008 is simply who is being bailed out: the depositors.
“Bailout,” yelled senior economics fellow at Brookings Institution, Aaron Klein, during a phone interview with ABC News. “That’s what it is — plain and simple.”
Klein spent over a decade working in government, including his time as chief economist of the Senate Banking. During that time, he worked on the Troubled Asset Relief Program (TARP) — a $700 billion government bailout authorized by Congress in October of 2008.
Klein’s point is that the depositors being made whole beyond the original $250,000 guarantee are, in essence, getting bailed out. Everyone who had less than that in their accounts was already guaranteed their money back by the Fed, he noted.
“If you lined up 20 Americans in a room, the 19th richest person will have – based on the average – about $69,000 in their bank account,” noted Klein. “Very few Americans have more than $250,000 in a single bank.”
Per the bank’s own description, SVB catered its services to venture capitalists (VCs), start-up and leaders in the tech industry — many of whom could be considered financially “well-off”.
“VCs should say thank you,” wrote New York Times’ and CNBC’s Andrew Ross Sorkin on Twitter.
“It is a bailout,” he wrote. “Not like 2008. But it is a bailout of the venture capital community + their portfolio companies (their investments). That’s the depositor base of SVB.”
If the government is stepping in to guarantee these bank customers their money beyond the $250,000 guarantee, many are left wondering where that money is coming from and how this is not considered a bailout.
No taxpayer money will be used, says the Fed.
The White House, the Treasury and the FDIC have been blunt about one talking point: the money for these depositors at SVB and Signature Bank will not come from taxpayers.
“For the banks that were put into receivership, the FDIC will use funds from the Deposit Insurance Fund to ensure that all of its depositors are made whole,” said a senior Treasury Department official Sunday.
The Deposit Insurance Fund (DIF) is a program run by the FDIC mainly funded through quarterly assessments on insured banks, paid by the banks — as well as interest on funds invested in government bonds. This is how that $250,000 gets guaranteed, but now the government is going beyond that guarantee to ensure confidence.
The DIF currently has over $100 billion in it, which should be a “sufficient” amount to make SVB and Signature Bank whole, officials said Monday.
The funds offered in the form of one-year-loans to other banks, savings associations, credit unions, and other eligible depository institutions — all of whom will have to put up qualifying assets as collateral — will come from a new Bank Term Funding Program (BTFP).
This is more of a failsafe. The BTFP is aimed at safeguarding banks who may have lost depositors’ confidence after the SVB and Signature Bank collapse.
“This action will bolster the capacity of the banking system to safeguard deposits and ensure the ongoing provision of money and credit to the economy,” the Fed said in a statement. “The Federal Reserve is prepared to address any liquidity pressures that may arise.”
If needed, the BTFP will be partially funded by up to $25 billion from the Exchange Stabilization Fund (ESF). The ESF is an emergency reserve fund normally used for foreign exchange intervention.
The Fed says it “does not anticipate that it will be necessary to draw on these backstop funds.”
It’s unclear how much harm the collapse of SVB and Signature Bank did to depositors’ confidence — earlier this week, stocks of more than two dozen regional banks tumbled.
Banks varying in size from around the country, including San Francisco-based First Republic Bank and Salt Lake City-based Zions Bank, find themselves in market turmoil as some customers rushed to withdraw their deposits and investors dumped bank stocks fearing a run on those banks.
The turmoil in regional U.S. banks spread to Europe Wednesday. The stock of Credit Suisse, a long troubled Swiss bank, plunged 24% on Wednesday. While American banks stocks had another down day. Analysts say the rapid interest raise increases by the federal reserve are shaking confidence in the entire sector.
Nevertheless, the Fed says it’s prepared to make depositors whole should any other bank suffer the same fate as SVB and Signature Bank.
It’s worth noting that most experts agree that the collapse of these two banks was caused by poor management and misguided financial decisions, and should be considered exceptional circumstances.
“This was a poorly managed bank that ran into a couple of different issues at the very same time,” said Cassidy regarding SVB. “It looks like everyone’s money will be insured even beyond $250,000 – so the idea is not to panic, this will settle down…we’ll get through this.”
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