The Regulatory Blunder That Gave Us the Silicon Valley Bank Disaster

Joe Weisenthal (0:10)

Hello, and welcome to another episode of the Odd Lots Podcast. I'm Joe Weisenthal.

Tracy Alloway (0:15)

And I'm Tracy Alloway.

Joe Weisenthal (0:17)

So Tracy, we obviously, I think, have a sense of why Silicon Valley Bank failed. We just published a really good episode with Dan Davies, like sort of like talk about where things went wrong on the sort of deposit side and failing to balance assets and liabilities and the issues, strengths and weaknesses of the business model.

But then the other question, there are many, many more questions beyond just like why they failed.

Tracy Alloway (0:42)

Yes, I mean, some of the big ones that are emerging are where were the regulators, right?

You know, people were already analyzing SVB's balance sheet, you know, certainly the week before it collapsed and for some time before that. And you could see these vulnerabilities when it comes to duration exposure. And again, that's something we talked about with Dan Davies.

And then the other thing, I guess just in general is, it's not like bank failures are that unusual over the course of history. So this is the first big one, I guess, since the 2008 financial crisis. And so it's obviously garnering a lot of attention, but we do have bank failures throughout history from time to time. And it kind of begs the question of, well, if we're going to keep having them in different ways, and if the government or the Federal Reserve are going to keep coming in and rescuing them in various ways, should we maybe do something to the system to make it different?

Joe Weisenthal (1:45)

What were the failures? And can we at least, you know, we're always going to be fighting the last war, cliche, obviously, but what does it tell us about weaknesses in the system? And there may be things that we could do. And of course, there's things that people are talking about on the sort of written law side, which is like, okay, maybe we need more banks to have greater liquidity, ability to meet withdrawals, et cetera. I think some of the smaller, more regional banks don't have as stringent requirements on that front as the really large banks.

And then people are talking about supervision. And I don't think supervision gets as much attention as the sort of written laws, but it's essentially, well, why did the supervisors, the bank regulators, allow the bank to create this confluence of risks, this big sort of very specific mismatch between the nature of its assets, the nature of its deposit base that allowed it to unravel really quickly?

Tracy Alloway (2:40)

Absolutely. And then of course, with the Fed announcing this new facility, which is quite a dramatic one, you have a question of, okay, if we're just gonna guarantee all the US bank deposits out there, then should we maybe make a more fundamental change to the banking industry itself, right? And actually, Matt Klein over at The Overshoot, I think you tweeted this, but he had that great first line in his most recent newsletter about how basically banks are these private investment funds that are grafted on top of critical infrastructure.

And that structure is designed to extract subsidies from the rest of society by basically threatening people with banking crises whenever one of them is allowed to fail. And we saw that last week, right? We saw especially a bunch of VCs coming out and saying, if you don't rescue all the SVB depositors right now, this is gonna happen to all the banks. And so you kick off that privatization of profits versus publicization of losses argument over and over and over again.

Joe Weisenthal (3:47)

That's been really clear in this particular episode.

There's something about this story really raises some uncomfortable things because it's not coming in like a wholesale financial collapse that's related to the collapse of the economy like in 2008 or 2009 It's this very specific industry that sort of got it in trouble. Anyway, we could go on and on, but I'm excited we do have the perfect guest for us to talk about the role of regulators, the role of regulatory failure, the role of the Fed in all of this and the history of banking and how we got here. We're going to be speaking to Lev Menand. He is a professor at Columbia Law School, written a lot about the Fed and regulation. So, Lev, thank you so much for joining us.

Lev Menand (4:30)

Thank you so much for having me.

Joe Weisenthal (4:31)

So just very top line view, what would you say was the main regulatory failure with SIV, with SVB?

Lev Menand (4:42)