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Guest Column
Silicon Valley Bank should pay the price for acting like a spoiled child | Column
With strict rules and regulations, swashbuckling bankers would quickly get religion and become more cautious, the author writes.
 
The FDIC closed Silicon Valley Bank on March 10.
The FDIC closed Silicon Valley Bank on March 10. [ MATT STONE | Boston Herald ]
Published March 18, 2023

Some business owners and managers act like little children. When they partake in a risky activity, their parents warn them about it, but they do it anyway. Who needs parents who can only slow you down. But when the proverbial stuff hits the fan, they run back crying to mommy to fix their boo-boo, who is left to clean up the mess.

Murad Antia
Murad Antia [ USF ]

Silicon Valley Bank is a case in point. Financial institutions need to approximately match the “duration” — a technical metric in finance akin to time to maturity — of their assets and liabilities to limit the risk associated with unanticipated and large changes in interest rates. This is exactly what SVB did not do. They bet that rates would stay the same or go down, in which case the bank and its managers would have made a lot of money. It is a classic case of heads I (the bank) win, tales you (that is, we) lose.

But rates went up and SVB went crying back to mommy to make the ouchy go away. Mommy, in this case, is the Federal Deposit Insurance Corp. The FDIC will bail out all depositors, in many cases far exceeding the $250,000 per account FDIC insurance limit.

A similar scenario played out with the shadow banking system, exacerbating the 2008 financial crisis. And it will happen again and again if we maintain the status quo.

President Joe Biden stated that it would be other banks, not taxpayers, who would fund the bailout. He said FDIC insurance premiums would have to go up for all banks to cover the costs. But I don’t think that’s a good move. Why is my bank on the hook and why should my banking costs have to go up because of another bank’s greed?

Conservatives want less regulation. Really? Try removing all banking regulations and see what happens to our economy. Conservatives want to be tough on crime. Here is their chance. Let’s make extreme clawback provisions the law of the land. A clawback is essentially a confiscation of personal assets for those who acted irresponsibly and sketchily.

If owners and managers put the entire system at risk for their personal gain, then they give up the right to own any personal assets in the event that their business needs bailing out by us, the taxpayers. I suggest IRS levels of confiscation. You lose your $10 million home, and you will be given only enough money to buy a modest home in a modest neighborhood. If you try to hide your assets, you lose that home and all you will get is three hots and a cot in the penitentiary.

Am I being too tough? Nope. These folks would get religion very quickly. Such events will occur far less frequently. It might still happen because greed-induced stupidity and irresponsibility are impossible to eradicate.

Our system of crony — or should we say corrupt — capitalism that favors the rich and powerful at the expense of the rest of us needs to change. Let’s level the playing field for the benefit of all Americans.

Murad Antia, now retired, taught finance at the Muma College of Business, University of South Florida.