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bank bailout
Warren Demands Probe Into Bank Failures, Urges Biden to Fire Powell
Jerome Powell "has failed," said Sen. Elizabeth Warren. "I don't think he should be Chairman of the Federal Reserve."
Mar 19, 2023
Sen. Elizabeth Warren this weekend called on federal officials to investigate the causes of recent bank failures and urged President Joe Biden to fire Federal Reserve Chair Jerome Powell, whom she has criticized for intensifying financial deregulation and imposing job- and wage-destroying interest rate hikes.
Asked on Sunday by Chuck Todd of NBC's "Meet the Press" about the possibility of Powell imposing yet another interest rate hike despite ongoing market turmoil, Warren (D-Mass.) said, "I've been in the camp for a long time that these extraordinary rate increases that he has taken on, these extreme rate increases, are something that he should not be doing."
Powell "has a dual mandate," said Warren. "Yes, he is responsible for dealing with inflation, but he is also responsible for employment. And what Chair Powell is trying to do, and he has said fairly explicitly, is that they are trying to, in effect, slow down the economy so that, this is by the Fed's own estimate, two million people will lose their jobs. And I believe that is not what the chair of the Federal Reserve should be doing."
Since the Covid-19 pandemic and Russia's invasion of Ukraine disrupted international supply chains—rendered fragile by decades of neoliberal globalization—powerful corporations in highly consolidated industries have taken advantage of these and other crises such as the bird flu outbreak to justify profit-boosting price hikes that far outpace the increased costs of doing business.
"Raising interest rates doesn't do anything to solve" a cost-of-living crisis driven primarily by "price gouging, supply chain kinks, [and] the war in Ukraine," Warren said Sunday. "All it does is put millions of people out of work."
"Jay Powell... has had two jobs. One is to deal with monetary policy, one is to deal with regulation. He has failed at both."
Powell, an ex-investment banker, was first appointed by then-President Donald Trump in 2018 and reappointed by Biden in 2021. Warren noted that she opposed Powell's nomination in both cases "because of his views on regulation and what he was already doing to weaken regulation."
"But I think he's failing in both jobs, both as the oversight and manager of these big banks, which is his job, and also what he's doing with inflation," said Warren.
Asked by Todd if Biden should fire Powell, Warren said: "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."
"Would you advise President Biden to replace him?" Todd inquired.
"I don't think he should be Chairman of the Federal Reserve," the Massachusetts Democrat responded. "I have said it as publicly as I know how to say it. I've said it to everyone."
Meanwhile, in a Saturday letter, Warren asked Richard Delmar, Tyler Smith, and Mark Bialek—respectively the deputy inspector general of the Treasury Department, acting inspector general of the Federal Deposit Insurance Corporation (FDIC), and inspector general of the Fed's board of governors—to "immediately open a thorough, independent investigation of the causes of the bank management and regulatory and supervisory problems that resulted in this month's failure of Silicon Valley Bank (SVB) and Signature Bank (Signature) and deliver preliminary results within 30 days."
Until the Treasury Department, the Fed, and the FDIC "intervened to guarantee billions of dollars of deposits," the second- and third-biggest bank failures in U.S. history "threatened economic contagion and severe damage to the banking and financial systems," Warren noted. "The bank's executives, who took unnecessary risks or failed to hedge against entirely foreseeable threats, must be held accountable for these failures."
"But this mismanagement was allowed to occur because of a series of failures by lawmakers and regulators," Warren continued.
In 2018, several Democrats joined Republicans in approving Sen. Mike Crapo's (R-Idaho) Economic Growth, Regulatory Relief, and Consumer Protection Act, which weakened the Dodd-Frank Wall Street Reform and Consumer Protection Act passed in the wake of the 2008 financial crisis. Crapo's deregulatory measure, signed into law by Trump, loosened federal oversight of banks with between $50 billion and $250 billion in assets—a category that includes SVB and Signature.
"As officials sought to develop a plan responding to SVB's failure, Chair Powell muzzled regulators from any public mention of the regulatory failures that occurred under his watch."
Moreover, the Fed under Powell's leadership "initiated key regulatory rollbacks," Warren wrote Saturday, echoing criticisms that she and financial industry watchdogs voiced earlier in the week. "And the banks' supervisors—particularly the Federal Reserve Bank of San Francisco, which oversaw SVB—missed or ignored key signals about their impending failure."
It is "critical that your investigation be completely independent and free of influence from the bank executives or regulators that were responsible for action that led to these bank failures," Warren stressed. "I am particularly concerned that you avoid any interference from Fed Chair Jerome Powell, who bears direct responsibility for—and has a long record of failure involving—regulatory and supervisory matters involving these two banks."
"I have already asked Chair Powell to recuse himself from the Fed's internal investigation of this matter, but he has not yet responded to this request," wrote Warren. The progressive lawmaker said "this silence is troubling" in light of recent reporting that "as officials sought to develop a plan responding to SVB's failure, Chair Powell muzzled regulators from any public mention of the regulatory failures that occurred under his watch."
"Bank regulators and Congress must move quickly to close the gaps that allowed these bank failures to happen, and your investigation will provide us important insight as we take steps to do so," added Warren, who has introduced legislation to repeal a vital provision of the Trump-era bank deregulation law enacted five years ago with bipartisan support.
In appearances on three Sunday morning talk shows, Warren doubled down on her demands for an independent investigation into recent bank failures, stronger financial regulations, and punishing those responsible.
After lawmakers from both parties helped Trump fulfill his campaign promise to weaken federal oversight of the banking system, Powell "took a flamethrower to the regulations, saying, 'I'm doing this because Congress let me do it,'" Warren toldABC's "This Week" co-anchor Jonathan Karl. "And what happened was exactly what we should have predicted, and that is the banks, these big, multi-billion-dollar banks, loaded up on risk; they boosted their short-term profits; they gave themselves huge bonuses and big salaries; and they exploded their banks."
"When you explode a bank, you ought to be banned from banking forever."
"When you explode a bank, you ought to be banned from banking forever," said Warren, who acknowledged that criminal charges could be coming. "The Department of Justice has opened an investigation. I think that's appropriate for them to do. We'll see where the facts take them. But we've got to take a close look at this."
Not only did former SVB chief executive officer Greg Becker, who lobbied aggressively for the 2018 bank deregulation law, sell millions of dollars of shares as recently as late last month, but until federal regulators took control of the failed bank on March 10, he was on the board of directors at the San Francisco Fed—the institution responsible for overseeing SVB.
On Saturday, Independent Sen. Bernie Sanders of Vermont announced that he plans to introduce legislation "to end this conflict of interest by banning big bank CEOs from serving on Fed boards."
"We've got to say overall that we can't keep repeating this approach of weakening the regulation over the banks, then stepping in when these giant banks get into trouble," Warren said Sunday, arguing for stronger federal oversight to prevent the need for bailouts.
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Jamie Dimon Is Poised to Benefit Most From This Banking Crisis
Depositors in small and medium-sized banks are now fleeing to the safety of JPMorgan and other giant banks that have been deemed "too big to fail" because the government bailed them out in 2008.
Mar 18, 2023
Former Silicon Valley Bank CEO Greg Becker sold $3.6 million worth of shares on February 27, just days before the bank disclosed a large loss that triggered its stock slide and collapse. Over the previous two years, Becker sold nearly $30 million of stock.
But Becker won't rake in the most from this mess. Jamie Dimon, chair and CEO of JPMorgan Chase, the biggest Wall Street bank, will likely make much more.
That's because depositors in small and medium-sized banks are now fleeing to the safety of JPMorgan and other giant banks that have been deemed "too big to fail" because the government bailed them out in 2008.
Last Friday afternoon, the deputy Treasury secretary, Wally Adeyemo, met with Dimon at his office in New York. He asked Dimon whether the failure of Silicon Valley Bank could spread to other banks. "There's a potential," Dimon responded. Presumably, Dimon knew such contagion would mean vastly more business for JPMorgan. In a note to clients on Monday, bank analyst Mike Mayo wrote that JPMorgan in particular is "battle-tested" in volatile markets and "epitomizes" how the largest U.S. banks have shed risk since the 2008 financial crisis. "Recent industry developments should further its ability to gather core funding and act as a source of strength."
Recall that the 2008 financial crisis generated a gigantic shift of assets to the biggest Wall Street banks, with the result that JPMorgan and the other giants became far bigger. In the early 1990s, the five largest banks had accounted for only 12% of U.S. bank deposits. After the crisis, they accounted for nearly half.
After this week, they'll be even bigger.
Their giant size has already given them a huge but hidden federal subsidy estimated to be $83 billion annually—a premium that investors and depositors willingly pay to these enormous banks in the form of higher fees and lower returns, because they're too big to fail. Some of this hidden federal subsidy goes into the pockets of bank executives. Last year alone, Dimon earned $34.5 million. (Greg Becker is a piker by comparison.)
The 2008 financial crisis generated a gigantic shift of assets to the biggest Wall Street banks, with the result that JPMorgan and the other giants became far bigger. After this week, they'll be even bigger.
Jamie Dimon was at the helm in 2008 when JPMorgan received $25 billion from the federal government to help stem the financial crisis brought on largely by the careless and fraudulent lending practices of JPMorgan and other big banks. Dimon earned $20 million that year.
In March 2009, President Obama summoned Dimon and other top bank executives to the White House and warned them that "my administration is the only thing between you and the pitchforks." But Obama never publicly rebuked Dimon or the other big bankers. When asked about the generous pay Dimon and other Wall Street CEOs continued to rake in, Obama defended them as "very savvy businessmen" and said he didn't "begrudge peoples' success or wealth. That's part of the free market system."
What free market system? Taxpayers had just bailed out the banks, and the bank CEOs were still raking in fat paychecks. Yet 8.7 million Americans lost their jobs, causing the unemployment rate to soar to 10%. Total U.S. household net worth dropped by $11.1 trillion. Housing prices dropped by a third nationwide from their 2006 peak, causing some 10 million people to lose their homes.
Rather than defend those CEO paychecks, Obama might have demanded, as a condition of getting bailed out, that the banks help underwater homeowners on Main Street.
Another sensible proposal would have been to let bankruptcy judges restructure shaky home mortgages so that borrowers didn't owe as much and could remain in their homes. Yet the big banks, led by Dimon, opposed this. They thought they'd do better by squeezing as much as possible out of distressed homeowners, and then collecting as much as they could on foreclosed homes. In April 2008, Dimon and the banks succeeded: The Senate formally voted down a bill that would have allowed bankruptcy judges to modify mortgages to help financially distressed homeowners.
In the run-up to the 2020 election, Dimon warned against policies that Bernie Sanders and AOC were then advocating, including Medicare for All, paid sick leave, and free public higher education. Dimon said they amounted to "socialism." "Socialism," he wrote, "inevitably produces stagnation, corruption, and often worse—such as authoritarian government officials who often have an increasing ability to interfere with both the economy and individual lives—which they frequently do to maintain power," adding that socialism would be "a disaster for our country."
Dimon also warned against "over-regulation" of banking, cautioning that in the next financial crisis, big institutions like JPMorgan wouldn't be able to provide the lending they did during the last crisis. "When the next real downturn begins, banks will be constrained—both psychologically and by new regulations—from lending freely into the marketplace, as many of us did in 2008 and 2009. New regulations mean that banks will have to maintain more liquidity going into a downturn, be prepared for the impacts of even tougher stress tests, and hold more capital," he wrote.
But as was demonstrated again this past week, American capitalism needs strict guardrails. Otherwise, it is subject to periodic crises that summon bailouts. The result is socialism for the rich while everyone else is subject to harsh penalties: Bankers get bailed out, and the biggest banks and bankers do even better. Yet average people who cannot pay their mortgages lose their homes. Meanwhile, almost 30 million Americans still lack health insurance, most workers who lose their job aren't eligible for unemployment insurance, most have no paid sick leave, child labor is on the rise, and nearly 51 million households can't afford basic monthly expenses such as housing, food, child care, and transportation.
Is it any wonder that so many Americans see the system as rigged against them? Is it surprising that some of them become susceptible to dangerous snake-oil peddled by demagogues?
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This Big Bank Bailout Brought to You by Donald J. Trump
And yes, this is definitely a bailout. What happened in 2018 was effectively allowing SVB and other banks to still benefit from insurance without having to pay for it.
Mar 13, 2023
There are two key points that people should recognize about the decision to guarantee all the deposits at Silicon Valley Bank (SVB):
- It was a bailout
- Donald Trump was the person responsible.
The first point is straightforward. We gave a government guarantee of great value to people who had not paid for it.
We will get a lot of silly game playing on this issue, just like we did back in 2008-09. The game players will tell us that this guarantee didn’t cost the government a penny, which will very likely end up being true. But that doesn’t mean we didn’t give the bank’s large depositors something of great value.
If the government offers to guarantee a loan, it makes it far more likely that the beneficiary will be able to get the loan and that they will pay a lower interest rate for this loan. In this case, the people who held large uninsured deposits at SVB apparently decided that it was better, for whatever reason, to expose themselves to the risk by keeping these deposits at SVB, rather than adjusting their finances in a way that would have kept their money better protected.
This would have meant either parking their deposits at a larger bank that was subject to more careful scrutiny by regulators, or adjusting their assets so that they were not so exposed to a single bank. They also could have taken ten minutes to examine SVB’s financial situation, which was mostly a matter of public record.
For whatever reason, the bank’s large depositors chose to expose themselves to serious risk. When their bet turned out badly, they in effect wanted the government to provide the insurance that they did not pay for.
This brings us to the second point; this is Donald Trump’s bailout. The reason this is a bailout is that the government is providing a benefit that the depositors did not pay for. It also is, in effect, a subsidy to other mid-sized banks, since it tells their depositors that they can count on the government covering their deposits, even though they are not insured and the bank is not subject to the same scrutiny as the largest banks.
This is where the fault lies with Donald Trump. It was his decision to stop scrutinizing banks with assets between $50 billion and $250 billion that led to the problems at SVB.
Prior to the passage of this bill, a bank the size of SVB would have been subject to regular stress tests. A stress test means projecting how a bank would fare in various bad situations, like the rise in interest rates that apparently sank SVB.
If regulators had subjected to SVB to a stress test, they would have almost surely recognized its problems. They then would have required it to raise more capital and/or shed deposits.
But Trump pulled the regulators off the job. This is wrongly described as “deregulation.” It isn’t.
Deregulation would mean both eliminating the scrutiny of SVB and ending insurance for the bank. (In principle that would mean ending all deposit insurance, not the just the insurance for large accounts that is at issue here.)
What happened in 2018 was effectively allowing SVB to still benefit from insurance without having to pay for it. It is comparable to telling drivers that they don’t have to buy auto insurance, but will still be covered if they are in an accident. Or, perhaps a better example would be telling a restaurant that it is covered by fire insurance, but it doesn’t have to adhere to safety standards.
It is dishonest to describe this as “deregulation.” It is the government giving a subsidy to the banks in question. It is understandable that the banks prefer to describe their subsidy as deregulation, but it is not accurate.
Anyhow, this bailout is the Donald Trump bailout. He touted the 2018 bill when he signed it. We are now seeing the fruits of his action.
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