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From LeverNews.com — Lever Time is the flagship podcast from the investigative news outlet The Lever. Hosted by award-winning journalist, Oscar-nominated writer, and Bernie Sanders' 2020 speechwriter David Sirota, Lever Time features exclusive reporting from The Lever’s newsroom, high-profile guest interviews, and expert analysis from the sharpest minds in media and politics.
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David Sirota
Hey there. And welcome to another episode of Lever Time, the flagship podcast from The Lever, an independent news outlet. I'm your host, David Sirota. On today's show, we're going to be talking about the extraordinary collapse of Silicon Valley Bank and the impact it's having across the entire American financial system. As we record this, Moody's, the credit ratings agency, has just downgraded the entire U.S. financial system.
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David Sirota
All while the Biden administration is saying everything is just fine. It all sort of feels like that scene in Star Wars
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and everything's perfectly all right now. We're fine. We're all fine here now. Thank you. How are you? We're sending a squad quarter. Negative. Negative. We have a reactor leak here. Now, give us a few minutes. Locked down.Largely.Very dangerous. Who is that? What's your operating number for a conversation, anyway?
00:01:03:00 - 00:01:36:18
Now, if you want to know what's actually happening and what can be done and you want to know it in plain language, this is the podcast episode for you. We're going to be talking to Lever reporter Julia Rock, who dug up all the moments in recent years where these exact same banking executives lobbied to roll back key regulations and requirements for less risk in the lead up to this crisis.
00:01:36:22 - 00:02:05:11
David Sirota
We also are going to talk to Cornell University law professor Robert Hoggett, who has advised Senator Bernie Sanders on financial regulatory issues. We talked to him about whether Silicon Valley banks, uninsured deposits should have been protected and whether everyone in America's uninsured deposit should also be protected. This week, our paid subscribers also get a bonus segment. We talked to Steven Cohn about his new book, Rules for Whistleblowers.
00:02:05:21 - 00:02:26:13
David Sirota
It looks at how you can blow the whistle on corporate and government malfeasance and how you can protect yourself in the process. If you want access to every time premium, you can head over to lever News.com to become a supporting subscriber that gives you access to all of our premium content and you'll be directly supporting the investigative journalism that we do here at the lever.
00:02:26:20 - 00:02:49:10
David Sirota
Speaking of which, if you're looking for other ways to support our journalism, share our reporting with your friends and family, leave this podcast a rating and review on the podcast player you are listening to it on right now. The only way that independent media grows is by word of mouth, and we really need all the help we can get to combat the inane bullshit that is corporate media.
00:02:50:01 - 00:02:53:13
David Sirota
I'm here today with Lever Times producer producer. Jared. Hey, Jared. What's up, man?
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Guest 1
Just converting all my assets into gold. Got my money in coffee cans in the backyard.
00:03:01:06 - 00:03:19:10
David Sirota
Bringing suitcases over to the bank to collect the cash. Yeah. Yeah. Now, listen, before we get to the main story today, the financial crisis that's may or may not happen. Let's talk about one other huge piece of news about money in politics. What do we got? What happened?
00:03:20:08 - 00:03:47:10
Guest 1
So in Ohio, a trial recently wrapped up of Larry Householder. He's the former Republican speaker of the House of Representatives and he was convicted by a federal jury on Thursday of racketeering conspiracy charges. And this was in connection to a $60 million bribery scheme. And I've been a little bit obsessed with this trial. It hasn't actually gotten a lot of coverage outside of Ohio.
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Guest 1
But it's it's kind of like the type of story that seems like a movie. But if I would have told you the plot, you would have wondered if I was overdoing it. For example, if I was to say this is a movie about corruption. And there's the former that speaker of the House of Representatives who's a Republican, and he's going to do a get bribes from an energy company for a bailout of their nuclear power plant.
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Guest 1
And it's going to involve the Public Utilities Commission, the governor, and millions and millions of dollars in money. There was in the trial, there was FBI wiretaps were played. And it was all very secretive until it came out through some of these whistleblower ers. And the FBI got involved. And the Justice Department.
00:04:36:12 - 00:05:13:15
David Sirota
Now, I had seen a headline here in which the defense, the folks who were at the center of this case basically were trying to rely on Citizens United, basically trying to insist that there wasn't real bribery happening here, that money didn't buy influence. So very quickly, just tell us the connection between Citizens United, which I think most people have heard of, who are listening to this, the connection, potential connection between that Supreme Court decision and the arguments that the defendants were making.
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Guest 1
Yeah, and that's what's interesting, because while this basically a pay to play scheme that involved millions of dollars, while that was pretty extraordinary, the means by which they did it is part and parcel with how politics is done today. So why Citizens United is involved in this is that the the groups that were set up by hawks out there were these nonprofit groups, one called Generation Now, another one called Partners for Progress.
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Guest 1
And these were basically shell organizations, shell companies to allow first energy to put its money into and have the money come out in this form of political advocacy. Now, why is Citizens United involved? Well, as we know, that ruling allowed for these types of nonprofit aggregate and advocacy groups to be able to spend unlimited amounts of money in political campaigns in which they did.
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Guest 1
So if you're a person that was putting up this ballot initiative to try to push back against this nuclear energy bailout, you started getting all of these mailers and all of this money flowing in from this company called Generation Now or this organization is called Generation Now. And you don't really know where that money is coming from. And that happens in every single state, in every single district.
00:06:38:14 - 00:07:02:20
Guest 1
And everyone's always suspected, right, that there might be big business behind some of these groups. But it's really difficult to prove, even if there isn't any a legal things going on. But in this in this case, I mean, they just use the the same tactics that are used day in and day out in this country with these nonprofit groups.
00:07:03:15 - 00:07:27:15
David Sirota
And I think we may see this case, I have a feeling we're going to see this case appealed. It may go up to the Supreme Court. And let's not forget, the Supreme Court has overturned corruption convictions. So it's my guess I could be wrong. It's my guess that this isn't over. But this case in Ohio and Mann, Ohio, has really the last couple of weeks these stories coming out of Ohio.
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David Sirota
First East Palestine, now this I mean, Ohio has been ground zero of a lot of a lot of bad stuff of late. My guess is this is not the last we hear of this story, especially because it relates so closely to the Supreme Court's ongoing effort to further and further legalize corruption. We will stay on top of that story.
00:07:51:00 - 00:08:20:09
David Sirota
Speaking of legalized corruption, that gets us to our main topic of the day. The potentially burgeoning financial crisis happening in the United States with the protection of Silicon Valley bank depositors. We're going to tell you exactly what happened, exactly what you should be watching and exactly why it's so important not just to people who have deposits at Silicon Valley Bank, but to anybody in America who cares about, frankly, the entire American economy.
00:08:20:13 - 00:08:47:16
David Sirota
That's coming up next after this break. Welcome back to leisure time. For our main story today, we dig into the sudden and shocking collapse of Silicon Valley Bank, which is a story not just about one bank in California, but about the entire American financial system. Over the weekend, the Biden administration's regulators took extraordinary steps to protect that bank's depositors as the bank collapsed.
00:08:48:02 - 00:09:17:00
David Sirota
Now, this comes about 15 years after the 2008 financial crisis. But as importantly, and as the lever has reported this week, it comes just five years after congressional Republicans, many Democrats and the Trump administration weakened the so-called Dodd-Frank bank regulations that came out of the 2008 financial crisis. To review what's going on and why it's so important. We're going to talk to the Levers.
00:09:17:00 - 00:09:34:18
David Sirota
Julia Rock, who's been breaking big stories on this all week. We're also going to talk to Cornell law professor Robert Hackett, a financial regulation expert who's advised U.S. Senator Bernie Sanders on the Vermont lawmaker's push to better regulate the banks. Hey, Julia, how are you doing?
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Guest 2
Hey, I'm doing well. How are you doing today, David?
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David Sirota
I'm good. Hey, Robert, what's going on?
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Guest 3
Hey, David. Great to be with you. A joy.
00:09:41:23 - 00:09:58:17
David Sirota
Thanks to both of you for for being here. I guess this this is such a fast moving story, and we've been right on top of it. That that and I should mention, everybody, we're recording this on Monday afternoon. So by the time you're hearing this, the entire banking sector may have been vaporized. So if it is that, that would really suck.
00:09:58:17 - 00:10:27:07
David Sirota
Hopefully the entire economy has not been incinerated. So I guess before we start into what should happen now, why don't we start with Julia Rock of the Lever, who's been reporting on this? Why don't you tell us what has happened generally over the last few days? Explain what happened with Silicon Valley Bank, why the average person should care about it, and what we have learned in our reporting on the situation.
00:10:27:14 - 00:11:03:13
Guest 2
Silicon Valley Bank is a bank that has played a key role in lending to tech startups, as its name probably implies, and is sort of a mid-sized bank, which, as we will get into, says a lot about how it was regulated. Last Friday, California regulators shut down the bank following a run on its deposits. The bank is somewhat unusual or perhaps Professor Hock will have more to say about this, but somewhat unusual in that over 90% of its deposits were uninsured.
00:11:04:00 - 00:11:06:14
David Sirota
What does that mean? What does that mean, uninsured?
00:11:06:19 - 00:11:27:15
Guest 2
It means that, technically speaking, its deposits over $250,000. And practically speaking, it means that they are not guaranteed by the Federal Deposit Insurance Corporation. So in in in the context of a bank run, it matters that they're uninsured because depositors are less likely to try and go grab their money at the same time if they know they'll be able to get it.
00:11:28:09 - 00:11:50:10
Guest 2
Whereas if the vast majority of the deposits in this case, the vast, vast majority are uninsured, it means that it's more likely people are going to panic and try and get their money. So the short story is that the California regulators shut down the bank. The federal Deposit Insurance Corporation took it over in what was the biggest bank collapse since 2008.
00:11:50:23 - 00:12:12:07
David Sirota
Okay. So the bank collapses. It's a Silicon Valley bank. A lot of people are going to hear this and say, well, why? Why should I care about the collapse of one bank? What was it, the 16th or 17th largest bank in America? Yeah, I mean, it's and that sucks for the people who had deposits there. But why should the average person care?
00:12:12:07 - 00:12:15:00
David Sirota
Let me let me ask you that question, Robert. Why?
00:12:15:14 - 00:12:33:19
Guest 3
Oh, sure. The main reason is because the tech sector as a whole, at least the California tech sector, is very heavily deposited in that particular bank. And in addition, of course, that means all sorts of payrolls are dependent on those bank accounts. Right. So we're talking probably about scores of thousands of people who are on the payrolls of the companies in question.
00:12:33:19 - 00:12:51:20
Guest 3
And so if the deposits were to evaporate, in effect, those people's paychecks would evaporate as well and the companies would probably fold and the like. So it's a little bit analogized. Well, I suppose you could say to the General Motors story back in 2009. Right. I mean, that seems, you know, that kind of smelled bad when we rescued GM.
00:12:51:20 - 00:13:10:05
Guest 3
And, of course, you know, they were very much at fault for what happened. But I think ultimately people thought, well, you know, so many people seem to be dependent on the automotive sector and on GM in particular, that this might be one of those cases where we try to sort of do the best we can to penalize those who are at fault, but at the same time, kind of rescue the hundreds of thousands in that case who weren't at fault.
00:13:10:13 - 00:13:45:06
David Sirota
Let's step back for a second. The federal government then late on or I guess Sunday afternoon says after this bank has failed, says we're going to guarantee the deposits, we're going to we're not going to help the shareholders. We're not going to help the executives. But we are going to guarantee the deposits there. Julia, I will ask you first, why is that, if not a radical step, then certainly a step you don't usually see.
00:13:45:06 - 00:13:52:04
David Sirota
I think a lot of people will be listening to this and say, well, I thought that's what the FDIC is supposed to do anyway. What is extraordinary about that step.
00:13:52:05 - 00:14:14:21
Guest 2
Yes, this is an extraordinary step because most of the deposits in Silicon Valley Bank were not insured. Over 90% weren't insured, which means that the federal government is not going to guarantee the deposits and that it's sort of the job of the private investors to be sort of conducting their own oversight and sort of accept the risks that they're taking on.
00:14:15:10 - 00:14:41:08
Guest 2
I think it's also extraordinary because of what it says regulators were looking at and concerned about. They they took this step because they were concerned about the bank run spreading to other banks, which obviously we've seen happen this morning. It's Monday morning. But this was sort of a declaration by regulators that this is some type of an emergency situation and extraordinary measures are required.
00:14:42:13 - 00:15:01:20
David Sirota
Robert, I'll turn to use. There has been some discussion, actually a lot of blowback, at least on social media, that the government doing this, the government taking this step to guarantee the depositors money. Is a bailout of those depositors. What's your response to that?
00:15:02:13 - 00:15:21:05
Guest 3
Yeah. So maybe a couple of quick things. First is open on the table right away that I've got basically three books out in the last couple of years advocating a kind of nationalization of the banking system. So I want to make very clear that ideally we would in my view, we would socialize the banking system. And it's sort of ridiculous at this point to have it so privatize as it is.
00:15:21:20 - 00:15:52:22
Guest 3
All of that being said, I think there are a couple of things that were there, couple of senses in which we might say it's not a bailout in the ordinary sense, even though it is nevertheless clearly a bailout in another, maybe less ordinary sense. The sense in which it's not a bailout, is it? All of the funding that's being used to make these depositors whole is coming first from the liquidation of the asset portfolio of SPV, which was only barely short of the deposit liabilities when the Treasury holdings, in other words, were massive and were almost themselves enough to handle the deposit.
00:15:53:08 - 00:16:14:21
Guest 3
The overage intern is coming under what's called the Federal Deposit Insurance Fund or the Deposit Insurance Fund or DIA. That is entirely funded by banks who are charged premiums on a regular basis. And those are risk priced premiums, and higher premiums are assessed against bigger banks and smaller banks. That's, of course, a change that sort of stems from back in 2005.
00:16:14:21 - 00:16:45:10
Guest 3
It was only then that we went to a sort of essentially bank funded, risk priced insurance premium system. And so insofar as the overage is coming out of that, it's not taxpayer funded in the ordinary sense. That being said, it is a bailout at least in the sense that we are doing something extraordinary, as you put it, David, in the sense that we haven't previously rescued depositors with deposits that large and second, of course, the full faith and credit of the U.S. stands behind the Deposit Insurance Fund in the event that it were drained.
00:16:45:10 - 00:16:49:20
Guest 3
Although it should be said that the likelihood of its ever being drained is quite low, at least at present.
00:16:50:13 - 00:17:22:04
David Sirota
So, Julia, we reported this in the lever, the question of how did we get here? I want to go back to that for a second before we get back to deposit insurance. The deposit insurance issue is, to my mind, a hugely important issue moving forward. But before we get to that, the regulatory issues, the lever reported on some pressure that Silicon Valley bank applied to lawmakers about eight years ago in the aftermath of the financial crisis.
00:17:22:12 - 00:17:33:19
David Sirota
Tell us that story and why it's relevant to the collapse of Silicon Valley Bank and the potential contagion in other similarly sized banks.
00:17:34:09 - 00:18:13:14
Guest 2
Yeah. So as listeners probably remember in the wake of the financial crisis, Congress passed a new set of regulations aimed at regulating more financial institutions and sort of subjecting them to stricter oversight. But the Dodd-Frank reforms and of course, as often happens, pretty immediately there were efforts to roll back Dodd-Frank. So in 2015, the president of Silicon Valley Bank, Fred Greg Becker, was went before the Senate to advocate for the rollback of Dodd-Frank regulations, including for banks of Silicon Valley bank size.
00:18:14:03 - 00:18:47:14
Guest 2
And what they were concerned about were sort of enhanced oversight things like bank stress tests, capital regulations, sort of just more regular oversight from regulators. That that 2015 legislation he was testifying on was the the precursor to this big 2018 rollback of Dodd-Frank regulations, which sort of laid the groundwork for federal regulators to sort of exempt more banks from regulations and make them less strict, basically, which regulators did go on to do.
00:18:47:15 - 00:19:07:07
Guest 2
So the federal Reserve in 2018 proposed rules rolling back restrictions on banks again of Silicon Valley, big sized. Those regulations were finally. So in the end, SBP was subject to fewer, less frequent stress tests, fewer capital requirements, things like that.
00:19:07:17 - 00:19:35:21
David Sirota
Okay. So basically, we're living in this pendulum world now where a financial crisis happens. Actually, let's, let's let's actually rewind it even further. So the SNL crisis of the late eighties or early nineties happens, then that sort of fades from view. There's massive financial deregulation under Bill Clinton and the like. Then there's a massive financial crisis. Then there is the pendulum swings back.
00:19:35:21 - 00:20:03:00
David Sirota
There's the Dodd-Frank reforms, which to my mind were way too weak. But still they were. They were at least something. Then the lobbying begins to weaken them. Now we have a bank collapse and as you said, a bank collapse from a bank whose president submitted testimony to pressure lawmakers, senators and the like to roll back those regulations in a way that effectively weakened the regulations on that bank.
00:20:03:06 - 00:20:17:04
David Sirota
So, Robert, I would ask you, do you think looking at what's happened, that we will now see the pendulum swing back? Do you think there's a real chance that the rollbacks of Dodd-Frank will themselves be rolled back?
00:20:17:16 - 00:20:43:00
Guest 3
I wish I could say that I did, but I don't. There's some wonderful irony in here at the same time that Becker was testifying in the Senate in 2015, in order to get that roll back, I was testifying before House Financial Services to say, whatever you do, don't roll it back. And we're sending texts, various friends on the Senate staff telling them embarrassing questions that they can throw it back, or at the same time, happily, things kind of were staved off for a little while.
00:20:43:00 - 00:21:01:11
Guest 3
And I testified again back in 2017 and 2018 when they were getting closer to doing it. I think, you know, I wish they hadn't done it and I wish we would roll back the rollbacks. I agree with you, David, that even Dodd-Frank was pretty thin gruel, right. And so to roll back, that is like basically rolling back something that's virtually nonexistent.
00:21:02:13 - 00:21:22:01
Guest 3
That being said, I'm not entirely sure whether it would have made the difference in the case of SVP. It probably would have made the difference in some of the other banks. Right, like Republic. And the other one that if I been losing track of the bet. But here's the reason I'm not completely sure it would have made much difference to SVP.
00:21:22:08 - 00:21:45:15
Guest 3
SVP Loans, at least for the time being, were all well-performing, right? There was no suggestion that the loans themselves were bad, which of course was a problem back in 2008. And all of the overage that SVP did not put into loans was put into Treasury securities, which are so considered to be so riskless or so safe that they actually get a zero risk weighting according to all the risk based capital requirements.
00:21:46:01 - 00:22:07:17
Guest 3
The only risk against which SBP did a poor job of hedging, of course, was interest rate risk. That could have been to some extent anticipated, I suppose. But it does. It is worth saying that Powell is on an insane rate rising spree at the moment, and we haven't seen rate rises this fast or this this rapid or this large since Paul Volcker in the late 1970s, it's been 45 years.
00:22:07:17 - 00:22:41:18
Guest 3
450 basis points in less than a year is virtually unheard of. So it's not you know, I'm not I don't want to give a free pass to the management here. They should have been hedging that particular risk. But there was an element of surprise here that might have played some role. And I don't know that the enhanced Prudential regulation to which SVP would have been subject had the 2018 rollback not happened, would have prevented this because of course, again, we tend to look at Treasuries as being safe and the regulators tend not to look very carefully at Treasury holdings by by banking institutions.
00:22:42:01 - 00:23:02:00
Guest 3
Final point here, by the way, total irony in effect, the SVB portfolio just was the Fed portfolio. In other words, the Fed is holding treasuries of various maturities and lots of triple-A rated NBFCs, just like ASB was the Fed's portfolio, if it were marked for mark to market, would now be insolvent as well. But the Fed is not a business.
00:23:02:00 - 00:23:40:03
Guest 3
It doesn't have to maintain a profit, so it can kind of get away with this, whereas a private sector institution can't. Julia, moving forward here, the question, let's turn back to the question of deposit insurance. Right now, technically, the levels of deposit insurance across the country are $250,000 per ownership category per account. Now, I want to take a moment to say that I've seen some commentary on social media and the like. Well, you know, hey, listen, most Americans don't have 10,000 bucks in their account, much less 250,000 bucks.
00:23:40:09 - 00:24:13:12
David Sirota
And I think that's kind of a nonsensical way of looking at it. Looking at this in the sense that small businesses, medium sized businesses, etc., etc., do have a lot more than $250,000 in the bank. And and in my to my mind, civilization is built on the concept of if money is put in a bank, it cannot just vanish if you put money in the stock market, if you want to speculate with it, yes, you know that there's risk and the money can vanish totally fine with that.
00:24:13:19 - 00:24:38:21
David Sirota
But I'm not fine with the idea of money being in a deposit account at a bank and there being any kind of presumption that you could wake up one day and it's gone. And I think there's a principle at play here about that. But then there's also there's this other side of the debate which is like, look, listen, Roku, the company, as an example, had $500 million, apparently, or $400 million in this bank.
00:24:38:21 - 00:25:07:06
David Sirota
And I'm like, what kind of a moron risk management person do you have running a company that has 400 or $500 million in one bank knowing that the FDIC limits are $250,000? So I guess the question that comes out of that is there's now talk on Capitol Hill from, for instance, from Congressman Josh Gottheimer, who is a very conservative, corporate friendly Democrat from New Jersey.
00:25:07:06 - 00:25:36:09
David Sirota
Not somebody I agree with on nearly anything who has already floated the idea of expanding deposit insurance. But the deposit insurance fund I, as we reported, doesn't really have a ton of money in it compared to the amount of insured deposits out there. So tell us about the state of the deposit insurance fund and whether you think there's going to be a debate, a discussion about actually expanding those limits.
00:25:37:05 - 00:26:05:02
Guest 2
So we wrote a story this weekend about how banks and basically every bank lobbying group fought an effort proposed last summer into the fall to increase the assessment on banks that they were paying into the deposit insurance fund. And in some ways the proposal was basically non-controversial because the reserve ratio for the Deposit Insurance Fund has a statutory minimum of 1.35%, and it had fallen below that minimum.
00:26:05:07 - 00:26:05:22
Guest 2
But the rest.
00:26:05:22 - 00:26:31:19
David Sirota
Of this year for second let me just stop you there for a second. Just remind everybody that what we're talking about is the deposit insurance fund, as Robert alluded to, is funded by insurance premiums that banks pay in. So we're talking about an insurance fund that is supposed to exist to make sure that it's not sort of treasury money, the federal taxpayers money that it's supposed to be, this insurance fund.
00:26:31:19 - 00:26:33:22
David Sirota
We're talking about how underfunded it is. Sorry. Go on.
00:26:34:04 - 00:26:49:14
Guest 2
Yeah. So the FDIC basically said it's underfunded right now. We're going to increase the assessment on banks and banks fight it, sort of making these arguments about how the economy was going to change and they didn't like some of these calculations and things like this.
00:26:49:14 - 00:26:52:22
David Sirota
And they were also arguing that the banking industry is very low risk right now.
00:26:53:11 - 00:27:11:14
Guest 2
Yeah, right, exactly. We're not going to need the deposit insurance fund and, you know, it's going to be bad for bank earnings. We don't like the FDIC calculations of how little it would affect our earnings, things like this. And well, the FDIC did say, no, we have to raise the assessments to meet this minimum and they went ahead with it.
00:27:11:23 - 00:27:42:02
Guest 2
It was sort of remarkable to see like even, you know, months before a panic, like the one we're seeing, you know, regardless of the causes, banks were just sort of very willing to fight against something that was so common sense. And so it is sort of a reminder that if lawmakers want to increase the minimum that is covered by deposit insurance, even if banks are the ones insuring it, they're not going to be happy about paying more into the deposit insurance fund and they are going to fight those efforts.
00:27:42:12 - 00:28:27:02
David Sirota
So that I want to turn to you, Robert, about this. The question of a kind of universal deposit insurance that everybody who puts their money in, whether they put in $1,000,000, whether they put in $1,000, whether they put in whatever amount of money that the federal government will backs stop will guarantee that that money will not vanish. Now, I've heard arguments that have said this will create a moral hazard for banks, the idea being that banks will then know that the money coming into their bank is already federally guaranteed so they can go gamble with it, knowing that their deposits are safe and that their depositors not being safe fully under the current system creates
00:28:27:02 - 00:28:44:07
David Sirota
a deterrent to their gambling. But then the other side would say, Listen, go back to the principle of what civilization is built on that that society breaks down. If people can put money into a bank and wake up the next day and have it be vanished, it brings up memories of the the Great Depression, people running to the bank, trying to get the money out.
00:28:44:07 - 00:28:50:19
David Sirota
The money's not there. So where do you come down on the idea of universal deposit insurance? Inside of that conversation.
00:28:51:03 - 00:29:14:04
Guest 3
I come down in favor of it if it's constructed in a very particular way. And indeed, I've drafted a very brief bill that's now before some Congress members who will probably be introducing it this week. So we'll see what comes of it. But the basic idea is this First you go ahead and insure deposits in full. Second, however, you continue to assess risk based premia against them.
00:29:14:04 - 00:29:34:03
Guest 3
And so you basically pay more to insure a $500,000 house than you do for a $250,000 house. And similarly, again, for a $3 billion bank account than you would for a $1 million bank account and so forth. And that would be one change that would be introduced as you would actually insure without limit, but you would continue to do risk based pricing.
00:29:34:03 - 00:30:07:06
Guest 3
And then second, you would impose a tier structure on the accounts themselves and levy essentially fees against really big account holders so that people like the three of us who I'm guessing probably all have bank accounts considerably below 250 grand, don't pay any fees. Right. But then you would just introduce a kind of graduated scale where you say, okay, 500 K to a million gets charged X, 1 million to 10 million gets charged some multiple of X and so on and so forth all the way up.
00:30:07:12 - 00:30:31:19
Guest 3
Meanwhile, you would continue to have the FDIC impose very strict capital regulations in order to protect the fund as well as it already does. So that's the basic idea. I thought in a sense that would complete a kind of modernization that began in 2005 because the risk based insurance premium assessment system that we're talking about right now, believe it or not, didn't even begin until 2005.
00:30:31:19 - 00:30:48:20
Guest 3
Before that, it was just seat of the pants bullshit where you just say, Oh, when the fund falls below a certain threshold, let's just make some random assessment which was pro-cyclical and highly destabilizing, because the only thing that would bring the fund down would be if a lot of banks were failing, which means it's probably not a good time to be making assessments.
00:30:48:20 - 00:31:15:10
Guest 3
Right? But if we do the sort of biblical story of Joseph, where you assess during the fat years, then to sort of draw during the lean years, that's a sensible, countercyclical system and we put that in place in oh five, but we've kept this vestigial sort of account limit thing, which is kind of like the human tailbone. It made sense before we had risk based insurance pricing, but the rationale for it that that was there then is to some extent been pulled away since we've had risk based pricing.
00:31:15:10 - 00:31:35:16
Guest 3
So I think it's theoretically possible to do this right in a way that is indeed universal. The one worry I have, of course, is that the industry is always trying to kind of whittle away at the regs. And so it could very well be that we get a catastrophe if they get if they whittle away the risk base based pricing and if they whittle away the actual capital regs that the FDIC imposes.
00:31:35:22 - 00:32:02:03
David Sirota
And where I come down on this is that it seems like we're and Robert, I want to hear your feedback on this, but tell me if I'm wrong. It seems to me we're living right now in this world where the banks don't want to pay higher FDIC premiums to expand FDIC insurance. FDIC insurance was expanded after the financial crisis, but the fund, I would say, is Julia recounted the fund.
00:32:03:02 - 00:32:42:15
David Sirota
I mean, I'm not an insurance actuary, but having won a little over $100 billion in an insurance fund for $10 trillion in insured deposits, seems like a little bit out of whack, a little bit dangerous, but that the banks don't want to pay the higher assessments. But there is $10 trillion of insured deposits out there. And so the implicit idea is that the federal government, the Fed and the like will swoop in kind of on an ad hoc basis to just essentially create the universal deposit guarantee that nobody wants to actually put on the books and the banks don't want to actually have to pay for it.
00:32:42:18 - 00:33:13:01
David Sirota
So there's kind of like a game going on, like, hey, it's we're insuring $10 trillion of deposits, but we're not actually going to assess the levies necessary to fund the actual insurance that would pay to insure that. And we're just going to hope that every now and again the Fed will swoop in. And part of the problem with that system is that it's predicated on the bank, in a sense, the perception of the bank's economic significance and the perception of the banks political power.
00:33:13:02 - 00:33:43:07
David Sirota
In other words, is this an important bank that we and over the last weekend, you had very, very well known famous people like Mark Cuban, venture capitalists, screaming for their bailout. But if there's a regional bank that doesn't have that kind of power or a small bank that doesn't have that kind of of influence or those kinds of politically powerful depositors, if that bank fails, then there's it's not clear that the Fed would come in to help guarantee those depositors.
00:33:43:12 - 00:34:16:09
David Sirota
So it seems like we're living in a world where everything is haphazard. And the reason I am drawn to the idea of some kind of universal deposit insurance is because at least then it's predictable. At least then it's like we know what it is. Now, my question out of all of that is what about the argument that having the banks actually finally pay into a deposit insurance fund to protect depositors would ultimately be a tax on all depositors because the banks would simply pass the costs on to all depositors.
00:34:16:09 - 00:34:17:10
David Sirota
What do you make of that argument?
00:34:17:15 - 00:34:41:13
Guest 3
Well, that's where the graduated scale comes in, right? That's that's the reason I was sort of suggesting, if we're going to do this, then we have to require the banks also to assess fees against the big deposit holders so that those of us who have the accounts below 250,000 don't end up putting of the bill. And it seems to make sense to me to sort of correlate whatever the fees are that you as a depositor pay would kind of track the size of your deposits, right?
00:34:41:22 - 00:35:01:23
Guest 3
The size of your holdings. There seems to me there has to be a way to do that in a way that's sort of equitable and sensible, even though there are also going to be lots of ways that wouldn't make sense. But I'm sure the banks will push for. So we would want the legislators, of course, to be sort of on their toes in imposing or in developing the right sort of graduated scale here.
00:35:01:23 - 00:35:24:21
Guest 3
If they do it right, I think there's a great prospect here. Right, because a big part of the financialization rubbish that Clinton brought us, but that Reagan was bringing us before that and Bush brought us after, was accompanied, of course, by the deindustrialization of the country and the outsourcing of all of our productive capacity. And we're now embarked on this wonderful new national adventure of sort of re industrial izing and trying to bring back a diversified, productive economy.
00:35:25:05 - 00:35:40:01
Guest 3
One of the things that made that possible when we had it was you did have a lot of what we're called industrial banks that were kind of sector specific. They were kind of de facto credit unions within their particular sectors. And S&P, in a certain sense, could be thought of as a sort of proto version of just that.
00:35:40:08 - 00:35:59:16
Guest 3
And it would be helpful if we could have a lot of those instead of forcing any large firm that makes it big to start basically tapping into the shadow banking sector or to invite, you know, Jamie, come to Papa Dimon to come in and buy up all of Silicon Valley and have Wall Street own all of the rest of the country, too, in addition to the two thirds that it already owns.
00:35:59:23 - 00:36:10:20
Guest 3
But again, to make that, we got to do it right. And that means, you know, legislators and regulators who understand the point of that whole system and who are vigilant about making sure that it remains intact.
00:36:11:00 - 00:36:34:11
David Sirota
Julia, I want to turn to you for one last question. I'm going to put you on the spot. You've been reporting on this, but you also have various opinions, as everyone does, because you're a human being. This whole debate over do we and I'm putting it in quotes, do we bail out the depositors or do we let the depositors burn?
00:36:34:22 - 00:36:59:06
David Sirota
There's been a lot of commentary that that many of the depositors being, quote unquote, bailed out are wealthy VC guys. Tech pros in Silicon Valley. There's been a lot of to my mind, a lot of subjective analysis about the character of the kinds of people who are the depositors being being rescued here or at least having their deposits guaranteed.
00:36:59:16 - 00:37:24:07
David Sirota
The Biden administration making this distinction, saying a bailout is when you're helping the shareholders, the owners of the bank, the bondholders, the executives and that what's different here is that the depositors who put money in were not betting their money by putting money in, whether it's a good person putting their money in or whether it's Darth Vader putting their money in, that a deposit is a deposit.
00:37:24:10 - 00:37:41:11
David Sirota
But again, the other side there's this other side of the argument is that, you know, these are wealthy people who should have risk managed their way to not be in such a vulnerable position. A lot of them, by the way, are self-described libertarians and now running and demanding, you know, help from the government. Where do you come down on on all that?
00:37:41:12 - 00:37:42:18
David Sirota
How do you how do you think about all that?
00:37:43:07 - 00:38:08:21
Guest 2
You know, I think on the point of the distinction between bailing out the shareholders and the depositors, that's one of those things that like Twitter can't really handle nuances, dad, etc.. But of course, there's a difference there. And it seems so, so ridiculous for people to be unable to grapple with that. I don't know what what regulators were looking at when they decided on Sunday night that they were going to guarantee all of the deposits.
00:38:08:21 - 00:38:33:02
Guest 2
And I don't know how, you know, probable a panic was. So I'm not sure I need to weigh in on that, although I am very curious, you know, for how long regulators saw this coming and weren't saying anything for whatever reason. And to your point, David, everybody sort of knew the deposits were going to be guaranteed on some level.
00:38:33:02 - 00:38:43:06
Guest 2
And so maybe it's not even so important whether whether it happened in the end. But but what what happens next if we know that's how all these bank runs end?
00:38:43:20 - 00:39:05:10
David Sirota
Yeah. And Robert, I'll give you the last word on this question, which is and let me it'll be a slightly different question, which is, you know, what about the idea that these were sophisticated depositors. Right. And that they didn't clearly didn't do any risk management at all? Like I like I think about it just for our little operation.
00:39:05:10 - 00:39:29:20
David Sirota
I'm thinking about risk all the time with the money that we have to run our little organization. And these guys some of these guys are like, you know, running 100 or $200 million companies clearly didn't care at all. Or maybe they did care and maybe they simply presumed that they were politically powerful enough that if anything ever went wrong, they could get a special pleading or a set of special favors to back their deposits.
00:39:29:21 - 00:39:39:02
David Sirota
I mean, what do you say to folks who have who, you know, whether on social media or anywhere else, you know, oh, this is just the government bailing out rich people. Again.
00:39:39:15 - 00:39:59:00
Guest 3
I think there are three possibilities here. And my bet would be that some depositors fall under each of these three categories. The first category is one that you referenced before, and that is that when you have a large firm, especially if it's growing really quickly, it has a large operating budget, including a huge payroll. And so a $250,000 transaction account just doesn't make any sense.
00:39:59:00 - 00:40:14:01
Guest 3
And so in a certain sense, some of those companies have to have fairly large accounts that this would be multibillion dollar accounts, of course, but it might at least need multimillion dollar accounts so that they probably pretty much had very little choice if they were going to make payroll and sort of keep keep current with payments with their operating budgets.
00:40:14:01 - 00:40:38:19
Guest 3
And again, these are industrial firms in a certain sense, they're not financial firms. And so in that sense, it's kind of helpful to have that that capacity. Right. The second category might be those who were sort of coerced in a sense by SBB, which seems to have been something like an only game in town. It doesn't seem to have had many competitors, at least when it came to sort of tech focused, tech sector centered banks.
00:40:38:19 - 00:40:56:08
Guest 3
Right. And it appears to be the case that SVB said, look, if we're going to make loans to you people, you're going to have to keep the proceeds in your accounts with us. Right. In a sentence, it was almost like a kind of access point for the industry as a whole, and it had a certain degree of coercive power in that in that respect.
00:40:56:08 - 00:41:13:21
Guest 3
And so some of those depositors might have kind of felt like they had to make a deal with the devil just in order to be part of this particular sector. And there's a way to deal with that. Of course, it's called antitrust. And we could try to make sure that there are multiple banks of this kind within any given sector and including within any given region of that sector.
00:41:13:21 - 00:41:33:03
Guest 3
And that would be a problem that we have to deal with. But the depositors the second category of depositors might not be at fault for the third category and I'm sure some do meet this are probably like those that you just also referred to, but there might have been just risk cavalier people who sort of thought, well, you know, the feds always come in and bail out rich fuckers.
00:41:33:03 - 00:41:54:02
Guest 3
And so, you know, this kind of, you know, I don't give a I don't give a flying whatever because I'm going to be rescued because I'm big and important that I contributed $1,000,000 to so-and-so's campaign. Right. And for those people, of course, we ought not to have any sympathy. But the question is, how do we different? Can we can we identify them and distinguish them then from the others who are more innocent depositors?
00:41:54:12 - 00:42:16:22
David Sirota
I mean, I said it before, I'll say it again. And I know it's a controversial I have no sympathy for the, you know, roku's of the world or anyone else who didn't do any risk management just left there, you know, hundreds of millions of dollars in an uninsured account, then suddenly saying, like, oh, like, how do you even have a you apparently don't have a CFO if that's what's going on, and then you just expect the government to swoop in.
00:42:17:05 - 00:42:45:05
David Sirota
But I also I also think this I don't think we want to live in a society where money can be put into a bank account and it can just vanish. I think that like that, I mean, maybe it just speaks to the fact that I grew up with grandparents who remember the Great Depression and real bank runs and how horrifying that is and destabilizing to an entire society, and, by the way, sets conditions for fascism and authoritarianism.
00:42:45:10 - 00:43:09:23
David Sirota
Like, I just think this balance between you don't want to help the tech the rich tech guy who do any risk management. But you also don't want to create a situation in which millions and millions of people one can't be can't get paid because their employer loses their deposits. And to where the presumption that when you put money into a bank, it could disappear.
00:43:10:04 - 00:43:32:05
David Sirota
That is just a fundamental bedrock of society, civilization. And so I think the regulators trying to figure this out, I think this is one of the biggest questions moving forward in how they figure it out, and hopefully they can figure it out a lot better. The regulators and the lawmakers moving forward from this, I mean, that's what I'm hoping for and that's what we're going to continue reporting on here at the Lever.
00:43:32:05 - 00:43:40:17
David Sirota
Robert Hackett is a professor of law at Cornell University. Julia Rock, of course, is one of our reporters here at The Lever. Thanks to both of you.
00:43:41:00 - 00:43:41:20
Guest 2
Thanks so much.
00:43:42:06 - 00:43:44:19
Guest 3
So honored. Thank you so much, David. And thanks, Julius. Well.
00:43:45:06 - 00:44:04:12
David Sirota
That's it for today's show. As a reminder, our paid subscribers who get leisure time premium, they get to hear our bonus segment with author Steven Cohn, one of the world's leading experts on whistle blower law. We talked to him about how you can blow the whistle on corporate and government malfeasance and how you can protect yourself in the process.
00:44:05:00 - 00:44:33:07
David Sirota
Listeners can subscribe to lever time premium by heading over to Lever News.com. When you subscribe, you get access to all of the Levers website, our weekly newsletters and our live events. And that's all for the criminally low price of just eight bucks a month or 70 bucks for the whole year. One last favor please be sure to like subscribe and write a review for lever time on your favorite podcast app and make sure to head over to Lever News.com and check out all of the incredible reporting our team has been doing.
00:44:33:20 - 01:12:24:03
David Sirota
Until next time. I'm David Sirota. Rock the Vote. The Lever Time podcast is a production of the Lever and the Lever podcast Network. It's hosted by me. David Sirota, our lead producer is Jared Takayama. Sorry, our lead producer is Jared Jahangir and our editor is Denis Gola. You can find all of our past episodes at Lever Time podcast or on all of the major podcast players.
01:12:26:13 - 01:12:45:19
David Sirota
That's it for today's show. As a reminder, our paid subscribers who get lever time premium, they get to hear our bonus segment with author Steven Cohn, one of the world's leading experts on whistle blower law. We talked to him about how you can blow the whistle on corporate and government malfeasance and how you can protect yourself in the process.
01:12:46:08 - 01:13:14:15
David Sirota
Listeners can subscribe to lever time premium by heading over to Lever News.com. When you subscribe, you get access to all of the levers website, our weekly newsletters and our live events. And that's all for the criminally low price of just eight bucks a month or 70 bucks for the whole year. One last favor please be sure to like subscribe and write a review for Lever Time on your favorite podcast app and make sure to head over to Lever News.com and check out all of the incredible reporting our team has been doing.
01:13:15:02 - 01:13:41:22
David Sirota
Until next time. I'm David Sirota. Rock the Boat. The Leisure Time podcast is a production of the Lever and the Lever Podcast Network. It's hosted by me, David Sirota. Our lead producer is Jared Jacang Maher and our editor is Dennis Golin. You can find all of our past episodes at Lever Time podcast or on all of the major podcast players.