Blow-ups and bailouts

Why private banks need to go

Bank patrons surprised by locked doors. Assets of four failed banks in 2023 were higher than the assets of all 25 banks in the 2008 crash. Source: FDIC. PHOTO: Li Jianguo / Xinhua / Alamy Live News
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On May 1, the implosion of First Republic Bank led to its takeover by giant JPMorgan Chase. First Republic thus nudged out Silicon Valley Bank (SVB) for the unenviable title of “second largest U.S. bank failure,” which it held since crashing on March 10. First Republic’s demise also proved that the failure of SVB and near-simultaneous collapse of Signature Bank and small cryptocurrency-focused Silvergate Bank were not isolated events, but symptomatic of a systemic and spreading disorder of the capitalist financial organism.

A banking bust case study. A deeper dive into the first-to-fail Silicon Valley helps clarify the wider dysfunction of the banking realm. SVB, the 16th largest bank in the U.S., catered to the tech industry. More than half its deposits came from venture capitalists — speculators in high-risk startups.

For all private banks, the overarching goal is making profits for investors. Banks take in deposits and use these funds to make loans and investments. Only a fraction of assets (7% in the case of SVB) exist as cash available for depositors to withdraw.

Since the 2008 financial crisis, the Federal Reserve has kept interest rates super low, meaning banks could make only small profits on loans and mortgages. This, combined with economic contraction during the pandemic, led banks to shift a growing chunk of their assets into the “sure deal” of 3- to 5-year U.S. government bonds. Bonds guarantee returns, as long as investors can afford to park their money for several years.

This beneficial scenario was upended when the Fed began jacking up interest rates as a “war on inflation.” From March 2022, it has increased rates an unprecedented nine times. When interest rates go up, the relative value of fixed, lower-interest government bonds falls. If banks need cash and have to liquidate the unmatured bonds, they take a big loss. One year into the rate hikes, U.S. banks’ collective assets shrank from these “unrealized losses” by nearly $685 billion.

SVB’s losses moved from “unrealized” into the all-too-real column as they had to sell bonds at a deficit to cover cash demands. Depositors learned of the evaporating assets and quickly moved to empty their accounts. The result was a Twitter-fueled bank run that led to SVB’s ruin.

And then the bailout. When U.S. banks go belly-up, the Federal Deposit Insurance Corporation (FDIC) steps in to supervise the carnage. The FDIC is funded by insurance premiums paid by commercial banks and backed up by the federal government. It guarantees to reimburse depositors up to $250,000 and is charged with organizing the disposal of the bank’s remaining assets.

In the case of SVB, the FDIC chose to reimburse all the deposits to the wealthy, influential tech clients, despite the fact 93.8% of these funds were above the $250K limit and thus not insured. Government officials concluded that paying off depositors was necessary to contain the crisis from spreading to other banks. The FDIC then allowed First Citizens Bank to cherry-pick SVB assets to take over — purchased at a deep discount and shored up by generous federal loans and credits.

Some pundits have claimed this wasn’t a true bailout, since the SVB corpse was taken over by another bank. They admit that FDIC funds were dispensed, but assert these will be recovered by raising premiums. Inevitably, though, the banks will protect their profit margins by passing the cost burden to consumers, both through increased fees and decreased available funds for loans. Marxist economist Michael Roberts estimates that the cost to U.S. residents for the SVB failure alone will be $20 billion.

And of course, SVB wasn’t alone. The FDIC also fully reimbursed depositors of Signature Bank, which specialized in the volatile and risky cryptocurrency market. JPMorgan Chase’s takeover of First Republic was at the bargain basement price of $10.6 billion, while the FDIC covered $13 billion of the failed bank’s lost assets. All told, the banks that crashed so far this year held more wealth than all 25 banks that failed in 2008.

It’s likely that further crises will unfold. International shock waves are spreading, evidenced by the forced takeover of Credit Suisse in Switzerland and recent warning signs from the prestigious Deutsche Bank of Germany.

What’s the solution? The Democratic Party’s mantra is for increased regulation to keep banks on the straight and narrow. While it’s true that Trump Era deregulation helped grease the skids, the fact is that federal regulations have never succeeded in controlling the voracious appetites of banks or other corporations. They have always found (or paid politicians to create) loopholes to waltz their profits through.

The other common theme is to portray financiers’ greed as a moral dilemma.

If the FDIC always bails them out, bank management has only its moral code to keep it from taking unconscionable risks. What moral code? The ultimate ethic of capitalism is to make money for stock holders, and this is hard-wired into its core. The handling of bank failures clearly falls under capitalism’s maxim that profits are private property, but risk (and loss) are public responsibility.

Take the banks into our hands. If banks can only operate successfully when the Fed backs them up and bails them out, the question becomes, “Why not eliminate the middleman?” Let depositors and loan-seekers deal directly with a centralized, publicly-owned bank. Marxists have long proposed just such a system, treating banking as a necessary social service, like the post office or fire department.

For the financial crisis of 2008-2010, the public cost of the bailouts has been estimated at $2 trillion or even more. We in effect paid for the failing institutions, only to turn them back over to private ownership and obscenely self-enriching CEOs.

The still unfolding crisis has led even a few mainstream economists to suggest it may be time to increase the role of the public financial sector. Freedom Socialist Party goes further: nationalize the entire banking industry and put it under workers’ control. Let the people set economic priorities — for healthcare, education, housing, reparations, eliminating inequity, etc. Elect boards of directors for the banks from the people who work in them and who use their services, and empower them to make the decisions that will fulfill community and national social goals.

It’s logical; it’s just; and it’s time.

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