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      Danger and deja vu: what 2011 can tell us about the US debt ceiling crisis

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      Angry at the size of the government debt, House Republicans have passed a bill that ties spending cuts to any lifting of the US’s debt limit. A tense fight is escalating, with Democrats refusing to budge and hard-line Republicans digging in. Without a solution, economists and others warn, the US could be plunged into an “economic catastrophe”.You can be forgiven a sense of déja vu. This has all happened before. Only this time, it could be worse.The federal government has a legal maximum on how much debt it can accumulate –often called the debt ceiling or the debt limit. Congress has to vote to raise that limit and has done 78 times since 1960 – often without fuss. But in recent years, the debt negotiations have become Washington’s most heated – and potentially dangerous – debate.This year’s fight looks like the most high-risk one since 2011, when Republicans used the debt limit debate as a bargaining chip for spending cuts. It was a fight to the bitter end. One former congressman told the New York Times that the battle drew “parallels and distinctions with other tumultuous times such as the civil war”.With stock markets reeling and 72 hours left before the US would have defaulted on its debts, a disaster that threatened to wreak havoc on the economy, Republicans and Democrats finally agreed on a bill that raised the debt ceiling by $900bn and cut spending by nearly the same amount.For Republicans, particularly the new rightwing Tea Party members who refused to budge even as default loomed, it was a political win.Politics are once again deeply embedded in this year’s debt ceiling debate and many see a mirroring of the debt ceiling crisis of 2011.The House speaker, Kevin McCarthy, is caught between his party’s moderate and far-right factions. Though McCarthy rallied his party behind a House bill, Democrats are so far refusing to negotiate.The US treasury is already running on fumes. In January, the treasury started using “extraordinary measures” to avoid defaulting on US debts while the debate over raising the limit started. Some estimate that the US government’s default date – the so-called “X date” when the government officially runs out of funds to pay its bills — will arrive in late July, giving the GOP and Democrats less than three months to find a solution.The US has never defaulted on its debt. Failure to find a solution would send stock markets reeling, recipients of federal benefits might not get their monthly checks, parts of government would grind to a halt and “long-term damage” would be inflicted on the US economy, according to the Federal Reserve chair, Jerome Powell.Fights over the US debt ceiling are common and usually resolved after a session of bloviating. Wall Street has so far ignored this scrap, betting on a repeat. But, as in 2011, all that could change as the X date approaches. This time the Tea Party Republicans have been replaced by even more hardline politicians – the Freedom Caucus – who begrudgingly signed on to McCarthy’s plan but have sworn to hold out for cost cuts no matter the price.“What will damage the economy is what we’ve seen the last two years: record spending, record inflation, record debt. We already know that’s damaging the economy,” Representative Jim Jordan, a founding member of the Freedom Caucus, told Reuters.David Kamin, a New York University law professor who served as an economic adviser to the Obama and Biden administrations, including during the 2011 crisis, said: “Congress has negotiated [the debt ceiling] over the many decades that it’s been in its current form. But what is different about this episode, and the episode in 2011, is the very credible threat from the Republican side to not raise the debt limit, to demand a large set of policy in exchange for a vote.” He added: “That then sets up a dangerous negotiation where what’s at stake is severe repercussions for the economy.”A default would be catastrophic for the US and global economy, creating instability in financial markets and interrupting government services. But, as the 2011 crisis showed, even getting close to default comes with a price. Markets plummeted and the ratings agency S&P downgraded the US’s credit rating for the first time in history, making it more expensive for the country to borrow money. The cost to borrow went up $1.3bn the next year and continued to be more expensive years later, essentially offsetting some of the negotiation’s cost-cutting measures.To some economists, that was just the short-term impact. The spending cuts ushered in years of budget tightening whose impacts were felt for years.“We were still in a pretty depressed economy and in recovery from the great recession when those cuts were instituted. They just made the recovery last far longer than it should have,” said Josh Bivens, chief economist for the Economic Policy Institute, a leftwing thinktank. “Over the next six or seven years, really valuable public goods and services were not delivered because they were cut so sharply.”Government spending tends to rise after recessions but per-capita federal spending fell after the debt crisis. Bivens argues that if government spending had continued at its normal levels, the unemployment rate would have returned to its pre-recession level five or six years before 2017, when the job market finally recovered its losses.This time around the Republican bill, called the “Limit, Save and Grow Act”, would increase the debt ceiling by $1.5tn in exchange for $1.47tn in cuts during the next fiscal year and a 1% spending increase cap thereafter. The Congressional Budget Office estimates that the bill would cut federal spending by $4.8tn over the next 10 years.The bill would mean cuts to things like defense, education and social services over time, though Republicans have outlined few specific cuts in the bill. House Republicans are proposing scrapping Joe Biden’s student relief program, making more stringent work requirements for government benefits, namely Medicaid, and rolling back several Inflation Reduction Act investments, particularly clean energy tax credits.The IRS would lose $71bn in funding under the new bill, a move that would lead to more lenient tax collection and ultimately cost the federal government $120bn over the next decade. Republicans have been targeting the IRS for budget cuts for over a decade, weakening the agency’s tax enforcement over corporations and the wealthy and allowing $18bn in lost government revenue, ProPublica estimated in 2018.While Republicans are using old tricks from 2011, Democrats appear to have learned some lessons from the Obama-era spat. After 2011, the Obama administration refused to negotiate over the debt ceiling. Biden and other Democratic leaders have continued the practice: the Senate majority leader, Chuck Schumer, called the Republican bill “dead on arrival” when it got to the Senate.“President Biden will never force middle class and working families to bear the burden of tax cuts for the wealthiest, as this bill does,” the White House press secretary, Karine Jean-Pierre, said in a statement Wednesday. “Congressional Republicans must act immediately and without conditions to avoid default and ensure that the full faith and credit of the United States is not put at risk.”The question now is: what are the political costs for the Democrats and Republicans? As the crisis deepens, how long will they hold and who will fold?Despite Republicans preaching fiscal discipline, US debt actually rose by $7.8tn under the Trump administration. Spending cuts would also likely target GOP-friendly expenditures. The party has already had to make a tough compromise over ethanol tax credits, which were ultimately left untouched at the behest of “Corn Belt” Republican lawmakers. And McCarthy still lost four Republican votes, the most he can afford to lose with the Republicans’ slim House majority. He has little room to compromise even if he can get Biden to negotiate.Matt Gaetz, a Republican representative from Florida and another Freedom Caucus member, voted against McCarthy’s bill and said in a statement that it would “increase America’s debt by $16tn over the next ten years”.“Gaslighting nearly $50tn in debt to America is something my conscious [sic] cannot abide at this time,” Gaetz said.Kamin pointed out that Republicans only focus on the debt ceiling as a leverage point when there is a Democratic president – the debt ceiling was raised three times during Trump’s presidency – showing that their objective is less about actually reducing the deficit than it is about playing politics.“The Republican party – at least elements of the Republican party – have organized themselves using this as a litmus test for adherence to their beliefs and are really focused on it as a central element of their agenda,” Kamin said. But the fight is “not fundamentally about deficits and debt”, he said. It is a fight about politics.As in 2011, the two sides are locked in a game of chicken and waiting for the opposition to cave. If neither side blinks, the impact on the economy will be felt for years to come. More

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      What is the US debt ceiling and what will happen if it is not raised?

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      The US is teetering on the edge of a fiscal cliff. Over three months ago the treasury warned that the US government had hit its borrowing limit, also known as the debt ceiling. Since then the US treasury has been taking “extraordinary measures” to ensure the government can continue to pay its bills. But time is quickly running out. Congress and the White House have until late summer to raise the debt limit, or else the US government will default on its bills, a historic first, with likely catastrophic consequences.Here is more on the debt ceiling and what it means for the US government:What is the debt ceiling?The debt ceiling is the limit on the amount of money the US government can borrow to pay for services, such as social security, Medicare and the military.Each year, the government takes in revenue from taxes and other streams, such as customs duties, but ultimately spends more than it takes in. This leaves the government with a deficit, which has ranged from $400bn to $3tn each year over the last decade. The deficit left at the end of the year ultimately gets tacked on to the country’s total debt.To borrow money, the US treasury issues securities, like US government bonds, that it will eventually pay back with interest. Once the US government hits its debt limit, the treasury cannot issue more securities, essentially stopping a key flow of money into the federal government.Congress is in charge of setting the debt limit, which currently stands at $31.4tn. The debt ceiling has been raised 78 times since 1960, under both Democrat and Republican presidents. At times, the ceiling was briefly suspended and then reinstated at a higher limit, essentially a retroactive raising of the debt ceiling.What happens if the US defaults?The US has never defaulted on its payments before, so exactly what will happen is unclear. It’s not likely to be good.“Failure to meet the government’s obligation would cause irreparable harm to the US economy, the livelihoods of all Americans and global financial stability,” the US treasury secretary, Janet Yellen, said in a letter to Congress earlier this year.Investors would lose faith in the US dollar, causing the economy to weaken quickly. Job cuts would be imminent, and the US federal government would not have the means to continue all its services.Why is the US debt so high?The US debt grows when the government is spending more money or when its revenue is lower.Throughout its history, the US has had at least some amount of debt. But the debt really started to grow in the 80s, after Ronald Reagan’s huge tax cuts. Without as much tax revenue, the government needed to borrow more money to spend.During the 90s, the end of the cold war allowed the government to cut back on defense spending, and a booming economy led to higher tax revenues. But then, in the early 2000s, the dotcom bubble burst, leading to a recession. George W Bush cut taxes twice, in 2001 and 2003, and then the US military campaigns in Iraq and Afghanistan increased spending by as much as nearly $6tn over the course of the war.When the 2008 Great Recession started, the government had to bulk up spending to bail out banks and increase social services as the unemployment rate hit 10%.When the unemployment rate returned to its pre-recession levels, in 2017, a major tax cut was passed under Donald Trump. The debt rose by $7.8tn while he was in office.And then the Covid-19 pandemic hit. The US government passed a series of stimulus bills to offset the worst of the pandemic’s impacts that ultimately totaled $5tn.What are the main contributors to federal government spending?The biggest chunk of US government spending goes to mandatory programs, such as social security, Medicaid and Medicare, which comprise nearly half of the overall annual budget. Military spending takes up the biggest chunk of discretionary spending, taking up 12% of the budget. Other big-ticket items include spending on education, employment training and services and benefits for US veterans.Why isn’t Congress raising the debt ceiling?On 26 April Republicans passed a bill in the House that would raise the debt ceiling by $1.5tn but mandated $4.8tn in spending cuts over a decade. Given the stakes, Democrats have refused to negotiate spending cuts over the debt ceiling. Lawmakers including Alexandria Ocasio-Cortez have argued that Republicans should bring forth spending cuts during budget negotiations, not over the debt ceiling.Still, Republicans seem adamant on using the high-stakes timeline toward default to pressure Democrats into agreeing to spending cuts. They did this successfully in 2011, when Democrats agreed to spending cuts 72 hours before the government defaulted. This time around, with neither side budging, a continued stalemate could bring the US economy closer to disaster. More

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      To prevent more bank runs, the Fed should pause rate hikes | Robert Reich

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      The global financial system is facing a crisis of confidence. Which makes this week’s meeting of America’s central bankers critically important.None of the 12 members of the Federal Reserve Board’s Open Market Committee were elected to their posts. The vast majority of Americans don’t even know their names, except perhaps for the chairman, Jerome Powell.But as they try to decide whether to raise interest rates and, if so, by how much, America’s central bankers are deciding on the fate of the American – and much of the world’s – economy.And they’re sitting on the horns of a dilemma.On one horn is their fear that inflation will become entrenched in the economy, requiring more interest-rate hikes.On the other horn is their fear that if they continue to raise interest rates, smaller banks won’t have enough capital to meet their depositors’ needs.Higher rates could imperil more banks, especially those that used depositors’ money to purchase long-term bonds when interest rates were lower, as did Silicon Valley Bank.That means that raising interest rates could cause more runs on more banks. The financial system is already shaky.The two objectives – fighting inflation by raising rates, and avoiding a bank run – are in direct conflict. As the old song goes: “Something’s got to give.” What will it be?The sensible thing would be for the Fed to pause rate hikes long enough to let the financial system calm down. Besides, inflation is receding, albeit slowly. So there’s no reason to risk more financial tumult.But will the Fed see it that way?The Fed’s goal last week was to stabilize the banks enough so the Fed could raise interest rates this week without prompting more bank runs.The Fed bailed out uninsured depositors at two banks and signaled it would bail out others – in effect, expanding federal deposit insurance to cover every depositor at every bank.On top of this, 11 of America’s biggest banks agreed to contribute a total of $30bn to prop up First Republic, another smaller bank caught in the turmoil.This “show of support” (as it was billed, without irony) elicited a cheer from Jerome Powell and the treasury secretary, Janet Yellen, who called it “most welcome”. (Of course it was welcome. They probably organized it.)But investors and depositors are still worried.Other regional banks across the US have done just what Silicon Valley Bank did – buying long-dated bonds whose values have dropped as interest rates have risen. According to one study, as many as 190 more lenders could fail.On Monday, First Republic remained imperiled notwithstanding last week’s $30bn cash infusion. Trading in its shares on the New York Stock Exchange was automatically halted several times to prevent a freefall.Multiple recent downgrades of banks by ratings agencies like Moody’s haven’t helped.Reportedly, the Biden administration is even in talks with Warren Buffett, the chairman of Berkshire Hathaway, who invested billions to bolster Goldman Sachs during the 2008 financial crisis.Meanwhile, on the other side of the Atlantic, the European Central Bank last week raised interest rates by half a percentage point, asserting its commitment to fighting inflation.Yet the higher interest rates, combined with the failure of the two smaller American banks, have shaken banks in Europe.Just hours before the European Central Bank’s announcement, the banking giant Credit Suisse got a $54bn lifeline from Switzerland’s central bank.Yet not even this was enough to restore confidence. After a several days of negotiations involving regulators in Switzerland, the US and the UK, Switzerland’s biggest bank, UBS, agreed over the weekend to buy Credit Suisse in an emergency rescue deal.Finance ultimately depends on confidence – confidence that banks are sound and confidence that prices are under control.But ever since the near meltdown of Wall Street in 2008, followed by the milquetoast Dodd-Frank regulation of 2010 and the awful 2018 law exempting smaller banks, confidence in America’s banks has been shaky.November’s revelation that the crypto giant FTX was merely a house of cards has contributed to the fears. Where were the regulators?The revelation that Silicon Valley Bank didn’t have enough capital to pay its depositors added to the anxieties. Where were the regulators?Credit Suisse had been battered by years of mistakes and controversies. It is now on its third CEO in three years.Swiss banking regulations are notoriously lax, but American bankers have also pushed Europeans to relax their financial regulations, setting off a race to the bottom where the only winners are the bankers. As Lloyd Blankfein, then CEO of Goldman Sachs, warned Europeans: “Operations can be moved globally and capital can be accessed globally.”One advantage of being a bank (whether headquartered in the US or Switzerland) is that you get bailed out when you make dumb bets. Another is you can choose where around the world to make dumb bets.Which is why central banks and bank regulators around the world must not only pause interest rate hikes. They must also join together to set stricter bank regulations, to ensure that instead of a race to the bottom, it’s a race to protect the public.Banking is a confidence game. If the public loses confidence in banks, the financial system can’t function.In the panic of 1907, when major New York banks were heading toward bankruptcy, the secretary of the treasury, George B Cortelyou, deposited $35m of federal money in the banks. It was one of the earliest bank bailouts, designed to restore confidence.But it wasn’t enough. JP Morgan (the man who founded the bank) organized the nation’s leading financiers to devise a private bailout of the banks, analogous to last week’s $30bn deal.Confidence was restored, but the underlying weaknesses of the financial system remained. Those weaknesses finally became painfully and irrevocably apparent in the great crash of 1929.
      Robert Reich, a former US secretary of labor, is professor of public policy at the University of California, Berkeley, and the author of Saving Capitalism: For the Many, Not the Few and The Common Good. His new book, The System: Who Rigged It, How We Fix It, is out now. He is a Guardian US columnist. His newsletter is at robertreich.substack.com More

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      Elizabeth Warren says Fed chair ‘failed’ and calls for inquiry into bank collapse

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      Political fall-out in the US from the collapse of Silicon Valley Bank continued on Sunday when leftwing Senator Elizabeth Warren hit the morning talk shows and repeatedly called for an independent investigation into US bank failures and strongly criticised Federal Reserve finance officials.The progressive Democrat from Massachusetts, who has positioned herself as a consumer protection advocate and trenchant critic of the US banking system, told CBS’s Face the Nation that she did not have faith in San Francisco Federal Reserve president Mary Daly or Fed chairman Jerome Powell.“We need accountability for our regulators who clearly fell down on the job,” Warren said, adding that it “starts with” Federal Reserve Chairman Jerome Powell, who she said “was a dangerous man to have in this position”.“Remember the Federal Reserve Bank and Jerome Powell are ultimately responsible for the oversight and supervision of these banks. And they have made clear that they think their job is to lighten regulations on these banks. We’ve now seen the consequences,” Warren added.Asked if she had “faith” in Daly, under whose jurisdiction SVB fell, Warren said flatly: “No, I do not.”In the wake of the collapse of Silicon Valley and Signature banks, the one-time presidential candidate has in recent days launched a broad offensive on politicians on both the left and the right who supported Trump-era deregulation of smaller US banks.Warren sent a letter to the inspectors general of the US treasury department, the Federal Deposit Insurance Corp (FDIC) and the Federal Reserve, urging regulators to examine the recent management and oversight of the banks which collapsed earlier this month.Last week, Warren unveiled legislation that would repeal that law and raise “stress-tests” on “too big to fail” banks from $50bn to $250bn. On Sunday, Warren also argued for raising federal guarantees on consumers deposits above the current $250,000.“Is it $2m? Is it $5m? Is it $10m? Small businesses need to be able to count on getting their money to make payroll, to pay the utility bills,” Warren said. “These are not folks who can investigate the safety and soundness of their individual banks. That’s the job the regulators are supposed to do.”Warren broadened out her criticism on NBC’s Meet the Press, calling for a stop to interest rates rises when central bankers meet next week and claiming that Powell was pushed by Congress to support deregulation in 2018.“Look, my views on Jay Powell are well-known at this point. He has had two jobs. One is to deal with monetary policy. One is to deal with regulation. He has failed at both,”, she said.US prosecutors are investigating the SVB collapse, a source familiar with the matter told Reuters last week, after the $212bn bank collapsed when depositors rushed to withdraw their money.A blame-game erupted, with some arguing that the bank’s apparent lack of adequate risk management, combined with deregulation and a sharp interest rate rises, had created an accident waiting to happen.US banks have since lost around half a trillion dollars in value. On Friday, President Joe Biden promised that bank customers deposits are safe and the crisis had calmed down.In Warren’s letter published Sunday, the senator also called for executives of the failed banks to be held to account.“The bank’s executives, who took unnecessary risks or failed to hedge against entirely foreseeable threats, must be held accountable for these failures,” Warren said. “But this mismanagement was allowed to occur because of a series of failures by lawmakers and regulators.” More

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      Why did the $212bn tech-lender Silicon Valley bank abruptly collapse?

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      The collapse of Silicon Valley Bank continues to reverberate, hitting bank stocks, revealing hidden stresses, knocking on to Credit Suisse, and setting off a political blame-game.Why the $212bn tech-lender abruptly collapsed, triggering the most significant financial crisis since 2008, has no single answer. Was it, as some argue, the result of Trump-era regulation rollbacks, risk mismanagement at the bank, sharp interest rate rises after a decade of ultra-low borrowing costs, or perhaps a combination of all three?Federal investigations have begun and lawsuits have been filed and no doubt new issues at the bank will emerge. But for now, here are the main reasons experts believed SVB failed.Trump rollbacksThe Vermont senator Bernie Sanders argues that the culprit was an “absurd” 2018 law, supported by Congress and signed by Donald Trump, that undid some of the credit requirements imposed under the Dodd-Frank banking legislation brought in after the 2008 banking crisis.Dodd-Frank required that banks with at least $50bn in assets – banks considered “systemically important” – undergo an annual Federal Reserve “stress test” and maintain certain levels of capital as well as plans for a living will if they failed.SVB’s chief executive, Greg Becker, argued before Congress in 2015 that the $50bn threshold (SVB held $40bn at the time) was unnecessary and his bank, like other “mid-sized” or regional banks, “does not present systemic risks”.Trump said the new bill went a “long way toward fixing” Dodd-Frank, which he called a “job-killer”. But the non-partisan Congressional Budget Office (CBO) warned before the bill passed that raising the threshold would “increase the likelihood that a large financial firm with assets of between $100bn and $250bn would fail.” Joe Biden says he wants Trump’s rollbacks reversed.SVB’s managementThe bank didn’t have a chief risk officer (CRO) for some of 2022, a situation that’s now being looked at by the Federal Reserve, according to reports. SVB’s previous CRO, Laura Izurieta, left the company in October but stopped performing the role in April. Another was appointed in December.Early SVB shareholder lawsuits are said to be looking at the key vacancy, especially as the board’s risk committee was meeting frequently before the bank collapsed.“It means perhaps management was hiding something or didn’t want to disclose something, or had disagreements over the risks it was taking,” said Reed Kathrein, a lawyer specializing in shareholder lawsuits, to Bloomberg.“This isn’t greed, necessarily, at the bank level,” said Danny Moses, an investor who predicted the 2008 financial crisis in the book and movie The Big Short. “It’s just bad risk management. It was complete and utter bad risk management on the part of SVB.”SVB and Signature, the second mid-size bank to fail last week, have also been accused of prioritizing social justice over financial management. The Republican House oversight committee chairman, James Comer, called SVB “one of the most woke banks”.The narrative fed into a larger conflict over ESG, or environmental, social and corporate governance-driven investing, that has become a target of conservatives.But the bank’s loans to community and environmental projects were not central to its collapse nor are its diversity, equity and inclusion (DEI) policies dissimilar to other banks. The argument also fails to take into account all the banks that existed in 2008, before DEI or “woke” became a part of corporate or political discourse.Nevertheless the Florida governor, Ron DeSantis, continued on that theme, telling Fox News, that SVB was “so concerned with DEI and politics and all kinds of stuff. I think that really diverted from them focusing on their core mission.”Inflation and interest ratesSVB had benefited from from more than a decade of “zero money” interest rates as billions poured into the bank via tech venture capital. Looking for some kind of a return, it put the money into long-term US treasury bonds. But when interest rates started sharply rising last year, and depositors demanded higher returns, the bank was forced to sell some of those bonds at a loss. When news of that hit social media, tech investors panicked, triggering a classic bank run. From there, it took 36 hours for the second-biggest bank failure in US history to materialize.Before the collapses, investors had been expecting the Federal Reserve to raise interest rates by a quarter or half a percentage point when the governors meet next week. Now central bankers are in a bind: continue raising rates to tame inflation still running at 6% and risk another break in the financial system, or continue tightening money supply.The treasury secretary, Janet Yellen, gave a hint on Thursday when she told the Senate finance committee that “more work needs to be done” on inflation.What happens next?Financial jitters eased on Thursday after Wall Street rode to the rescue and propped up First Republic, another mid-sized bank whose customers were fleeing. But the respite may be brief.Goldman Sachs has raised its prediction for a recession in the next year to 35%, partly as a result of lending drops by regional banks.In the meantime it seems clear that investigators are likely to uncover more problems at the banks as their inquiries continue. Those revelations may trigger more concerns from depositors and investors.On Thursday, the Republican house financial services chairman, Patrick McHenry, said people should hold off on assigning blame for the collapse of SVB and Signature while Congress and watchdogs investigate.“When people jump to these conclusions at this stage of the game – a week in on this really stressed moment for our banking system – it’s unhelpful and quite politically hackish,” McHenry told Bloomberg. More

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      Silicon Valley Bank said it was too small to need regulation. Now it’s ‘too big to fail’ | Rebecca Burns and Julia Rock

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      Silicon Valley Bank was supposedly the type of institution that would never need a government bailout – right until its backers spent three days on social media demanding one, and then promptly receiving it, after the bank’s spectacular collapse last week.Eight years ago, when the bank’s CEO, Greg Becker, personally pressed Congress to exempt SVB from post-2008 financial reform rules, he cited its “low risk profile” and role supporting “job-creating companies in the innovation economy”. Those companies include crypto outfits and venture capital firms typically opposed to the kind of government intervention they benefited from on Sunday, when regulators moved to guarantee SVB customers immediate access to their largely uninsured deposits.Fifteen years after the global financial crisis, the logic of “too big to fail” still prevails. The financial hardship of student debtors and underwater homeowners is a private problem – but losses sustained by titans of tech and finance are a matter of urgent public interest. Moral hazard for thee, but not for me.What’s more, SVB’s meteoric rise and fall serves as a reminder that many of the guardrails erected after the last crisis have since been dismantled – at the behest of banks like SVB, and with the help of lawmakers from both parties beholden to entrenched finance and tech lobbies.Before becoming the second-largest bank to fail in US history, SVB had transformed itself into a formidable influence machine – both in northern California, where it became the go-to lender for startups, and on Capitol Hill, where it spent close to a million dollars in a five-year period lobbying for the deregulatory policies that ultimately created the conditions for its downfall.“There are many ways to describe us,” SVB boasts on its website. “‘Bank’ is just one.”Indeed, SVB’s management appears to have neglected the basics of actual banking – the bank had no chief risk officer for most of last year, and failed to hedge its bets on interest rates, which ultimately played a key role in the bank’s downfall. In the meantime, the bank’s deposits ballooned from less than $50bn in 2019 to nearly $200bn in 2021.From the moment that Congress passed banking reforms through the 2010 Dodd-Frank law, SVB lobbied to defang the same rules that would probably have allowed regulators to spot trouble sooner. On many occasions, lawmakers and regulators from both parties bowed to the bank’s demands.One of SVB’s first targets was a key Dodd-Frank reform aimed at preventing federally insured banks from using deposits for risky investments. In 2012, SVB petitioned the Obama administration to exempt venture capital from the so-called Volcker Rule, which prevented banks from investing in or sponsoring private equity or hedge funds.​​“Venture investments are not the type of high-risk, ‘casino-like’ activities Congress designed the Volcker Rule to eliminate,” the bank argued to regulators. “Venture capital investments fund the high-growth startup companies that will drive innovation, create jobs, promote our economic growth, and help the United States compete in the global marketplace.”After the Obama administration finalized the Volcker Rule in 2014 without a venture capital carveout, SVB sought its own exemption that would allow it to maintain direct investments in venture capital funds, in addition to providing traditional banking services for roughly half of all venture-backed companies.One such firm was Ribbit Capital, a key investor in the collapsed cryptocurrency exchange FTX, which lauded SVB’s tech-friendly ethos in a 2015 New York Times profile. “You can go to a big bank, but you have to teach them how you are doing your investment,” Ribbit’s founder told the Times. At SBV, “these guys breathe, eat and drink this Kool-Aid every day.”In the transition between the Obama and Trump administrations, SVB got what it wanted: a string of deregulation, based on the idea that the bank posed no threat to the financial system.In 2015, Becker, the CEO, submitted testimony to Congress arguing that SVB, “like our mid-size peers, does not present systemic risks” – and therefore should not be subject to the more stringent regulations, stress tests and capital requirements required at the time for banks with $50bn or more in assets.Two years later, SVB was one of just a handful of banks to receive a five-year exemption from the Volcker Rule, allowing it to maintain its investments in high-risk venture capital funds.The deregulatory drumbeat grew louder in Congress, and in 2018 lawmakers passed legislation increasing to $250bn the threshold at which banks receive enhanced supervision – again, based on the argument that smaller banks would never prove “too big to fail”.The Federal Reserve chairman, Jerome Powell, supported the deregulatory push. Under Powell, a former private equity executive, the Fed in 2019 implemented a so-called “tailoring rule”, further exempting mid-size banks from liquidity requirements and stress tests.Even then, the banks’ lobbying groups continued to push a blanket exemption to the Volcker Rule for venture capital funds, which Powell advocated for and banking regulators granted in 2020.Then, in 2021, SVB won the Federal Reserve’s signoff on its $900m acquisition of Boston Private Bank and Trust, on the grounds that the post-merger bank would not “pose significant risk to the financial system in the event of financial distress”.“SVB Group’s management has the experience and resources to ensure that the combined organization would operate in a safe and sound manner,” Federal Reserve officials wrote.Since the financial crisis, SVB has reported spending more than $2m on federal lobbying efforts, while the bank’s political action committee and executives have made nearly $650,000 in campaign contributions, the bulk to Democrats.Among the highlights of this influence campaign was a 2016 fundraiser for the Democratic senator Mark Warner of Virginia, hosted by Greg Becker in his Menlo Park home. A few months later, Warner and three other Democratic senators wrote to regulators arguing for weaker capital rules on regional banks.Warner went on to become one of 50 congressional Democrats who joined with Republicans to pass the 2018 Dodd-Frank rollback. When asked this week about his vote, Warner said: “I think it put in place an appropriate level of regulation on mid-sized banks … these mid-sized banks needed some regulatory relief.”In the wake of SVB’s collapse, Republicans have not renounced their votes for deregulation – nor have most of the Democrats who joined them, even as Biden is promising a crackdown.Warner took to ABC’s This Week on Sunday to defend his vote; Senator Jeanne Shaheen, the Democrat from New Hampshire, told NBC on Tuesday that “all the regulation in the world isn’t going to fix bad management practices”. Senator Jon Tester, the Democrat from Montana and a co-sponsor of the 2018 deregulatory law, even held a fundraiser in Silicon Valley the day after the SVB bailout was announced.Unless they reverse course, the Silicon Valley Bank bailout could prove politically disastrous for Democrats, who just oversaw the rescue of coastal elites in a moment of ongoing economic pain for everyone else.The good news is that there are straightforward steps that Democrats can take to start fixing things.For example: Senator Elizabeth Warren’s legislation to repeal Trump-era financial deregulation.Democrats can also revisit the areas where Dodd-Frank fell short, including stronger minimum capital requirements, and consider longstanding proposals to disincentivize risky behavior by banks by reforming bankers’ pay. And they should demand that Powell recuse himself from the Federal Reserve investigation of recent bank failures and take a hard look at whether his disastrous record merits outright dismissal under the Federal Reserve Act, which allows the president to fire a central bank chair “for cause”.And yet even now – amid the wreckage of deregulation – these and other measures to better regulate the banks may still be nonstarters among both the Republicans and corporate Democrats who voted for the regulatory rollbacks and have so far shown little sign of repentance.The words of the Illinois Democratic senator Dick Durbin still ring true, 14 years after the financial crisis.“The banks – hard to believe in a time when we’re facing a banking crisis that many of the banks created – are still the most powerful lobby on Capitol Hill,” he said back in 2009. “And they frankly own the place.”If that remains true today, the possibility of change looks grim.
      Rebecca Burns and Julia Rock are reporters for the Lever, an independent investigative news outlet, where a version of this article also appeared More

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      US banking system 'remains sound' despite bank collapses, says treasury secretary Yellen – video

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      Janet Yellen, the Treasury secretary, informed Congress that the recent collapses of two US banks, Silicon Valley Bank and Signature Bank, does not reflect on the overall strength of the US banking system. Yellen told Congress the US banking system ‘remains sound,’ claiming that the government’s swift response to the failures helped to restore public confidence in the banking system. ‘I can reassure the members of the committee that our banking system remains sound, and that Americans can feel confident that their deposits will be there when they need them,’ she said More