Federal Bailout Of Silicon Valley Bank Would Be Ominous Signal

The nation is watching as the federal government responds to the stunning collapse of Silicon Valley Bank (SVB). The institution had been the poster child for high-flying venture capitalists and tech startups alike, and now it joins an infamous list of financial failures.

Federal regulators are accepting bids to auction off the assets of the failed giant, and looming in the background is the FDIC guarantee of up to $250,000 per account holder.

There will be massive losses endured by stockholders and creditors of SVB, and larger investors will also take their lumps.

And the roots of the issue may be traced back to President Joe Biden’s inflationary spending and the necessary Federal Reserve response.

SVB took in a massive influx of deposits from 2019 to 2021. The figure more than tripled from $62 billion to $189 billion, leaving the institution with funds that its loan volume did not match.

In that case, these were utilized to purchase U.S. Treasury notes and mortgage-backed securities. These yielded little interest income, however, as interest rates before pandemic-fueled spending hovered at 0.25%.

That all changed with the massive federal outlays that ensued and the resulting inflation that continues to tear through the economy. Thanks to the Fed raising interest rates to roughly 4.5%, the low-yield notes and securities held by SVB became grossly unattractive.

This led to billions in paper losses as bond prices sank.

Now, of course, there are voices crying out for the federal government to step in and protect all depositors. This is a knee-jerk response hardly rooted in reality, as the Federal Reserve Board needs a “systemic risk” to proceed with a bailout.

One danger is that the bank targeted industries that are Democratic darlings, and this may sway the White House to sign checks to protect its donors.

As Anil Kashyap, a professor at the University of Chicago’s Booth School of Business explained, the SVB collapse is not a “systemic event. This is a midsize bank that was badly managed.”

Undoubtedly there will be pressure on the Biden administration to bail out its friends. That move, however, would inevitably lead to more federal control of the banking and financial industries, and even more overreach from Washington.