“Ideally on Friday night”

14 Mar “Ideally on Friday night”

Photo by Warren Wong on Unsplash

“We’ve done a lot about transparency in terms of resolution planning. It’s all out there on the website. What we want to think about and what we’re starting to work on now is how to improve transparency about our execution plans for Title II resolution. We’ve been working on these for 10 years now, and we should probably be starting to say more things publicly . . . and we’ve been thinking about this across, you know, many dimensions. First, we look at who we need to be transparent for, we think about what message these stakeholders need to hear, and it might not all be the same, and then we think about when we need to be transparent. FDIC should just lay it all out there, say what you’re going to do every step along the way, and that pre-commitment will help improve confidence. But we also need to be mindful of the need for FDIC to have operational flexibility to adjust to the specific facts and circumstances on the ground, so that, if and when we do have to have that announcement on Friday night, ideally Friday night . . .” -Susan Baker, FDIC (http://fdic.windrosemedia.com/index.php?category=Systemic+Resolution+Advisory+Committee)

Wow.

Sadly, this is another example of: the information is out there if you care to look for it. Most people don’t. (And they count on that ignorance, quite frankly.) This is the same FDIC meeting where fat cats talked about people getting their news from tweets and not having the patience to understand how finance works. 😣

Let’s start with the Title II resolution she mentions.

“Title II, the Orderly Liquidation provision of the Dodd-Frank Act, provides a process to quickly and efficiently liquidate a large, complex financial company that is close to failing. Title II provides an alternative to bankruptcy, in which the Federal Deposit Insurance Corporation (FDIC) is appointed as a receiver to carry out the liquidation and wind-up of the company. The FDIC is given certain powers as receiver, and a three to five year time frame in which to finish the liquidation process. Title II is aimed at protecting the financial stability of the American economy, forcing shareholders and creditors to bear the losses of the failed financial company, removing management that was responsible for the financial condition of the company, and ensuring that payout to claimants is at least as much as the claimants would have received under a bankruptcy liquidation.” –https://www.law.cornell.edu/wex/dodd-frank_title_ii_-_orderly_liquidation_authority

Ring a bell? It should. We just saw this play out:

“Silicon Valley Bank, the 16th largest bank in the country, failed on Friday and was taken over by the FDIC, after a run on the bank Wednesday and customers withdrew $42 billion of deposits by the end of Thursday. SVB mostly served technology workers and startups, including some of Silicon Valley’s biggest names, such as Roku.” –https://abcnews.go.com/Business/silicon-valley-bank-collapse-treasury-fed-fdic-announce/story?id=97807268

Don’t ignore the last bit of that paragraph from Cornell:

“Title II is aimed at protecting the financial stability of the American economy, forcing shareholders and creditors to bear the losses of the failed financial company, removing management that was responsible for the financial condition of the company, and ensuring that payout to claimants is at least as much as the claimants would have received under a bankruptcy liquidation.” (emphasis mine)

If you are still not familiar with bank bail-ins and unsecured creditors, please go to my podcast episode on this topic: https://www.buzzsprout.com/1125110/12225671

“The fallout for the venture capital world from SVB’s issues is likely to be severe. The bank has said it had relationships with more than 50% of all venture-backed companies in the U.S., and some 93% of its $161 billion in deposits are uninsured. ‘If those accounts get frozen, deals can’t get met, software can’t get paid for—these kinds of delays, even by a few weeks, can be really catastrophic for business,’ one venture investor told Fortune Thursday.” –https://finance.yahoo.com/news/svb-collapse-could-lead-contagion-221110997.html  emphasis mine

So for all the hoopla about, “Well, yeah, it’s scary but I mean, ya know, FDIC insured and everything,” 93% of its deposits are NOT insured. IMO, too many people blithely look at this concept of FDIC insurance without understanding it and they assume some giant vault exists somewhere with everyone’s money, dollar for dollar, matched in duplicate. I hate to break it to you but no, that’s not how it works.

“Purpose
In 2008, large financial institutions that had always been considered ‘too big to fail’ were in dire financial straits. The government attempted to preserve some of these institutions with over $1.7 trillion in bailouts to companies such as Bear Stearns, Fannie Mae/Freddie Mac, AIG, the Troubled Asset Relief Program (TARP), Citigroup, and Bank of America. Despite the bailouts, over 250 banks failed in the period from 2008 to 2010, and Lehman Brothers, the fourth-largest investment bank in the United States, filed for bankruptcy, the largest Chapter 11 bankruptcy in U.S. history. In light of the failure of these ‘too big to fail’ institutions, Congress saw the need for a government authority to provide for efficient liquidation of large, complex financial institutions, and to eliminate the potential of future government bailouts.” -Cornell, Ibid.  emphasis mine

In other words: if the government decides not to bail these banks out, you might have to. That’s another reason why it’s so important to understand the concept of unsecured creditors as well as how banks make money. They don’t turn a profit by allowing your money to sit there in the account. It goes out in the form of loans, speculation, etc.

So let’s return to the paragraph I opened with from the FDIC SRAC meeting that occurred last November.

“First, we look at who we need to be transparent for, we think about what message these stakeholders need to hear”

As I’ve said repeatedly: Corpo America, the bankers, and the fat cats do not answer to John & Jane Q. Public. The people they feel are important are the investors, the board of directors, and the stakeholders, but not you and me.

“But we also need to be mindful of the need for FDIC to have operational flexibility to adjust to the specific facts and circumstances on the ground, so that, if and when we do have to have that announcement on Friday night, ideally Friday night . . .”

Ideally on a Friday night. To simply this – if we gotta announce the 💩 has hit the fan, let’s do it on a Friday night when all of these financial institutions are closed. Then we don’t have bank runs and no one has to call the cops on folks trying to pull their money out.

How’s that for transparency?