Cronkite school of journalism at
Arizona state university.
Geoff: This was the first of two
days of hearings about the
failure of silicon valley bank,
and the role of federal
regulators in all of this.
We'll hear more in a moment
about how lawmakers from both
parties criticized top officials
today, but first, let's break
down some of the basics behind
the second largest bank failure
in U.S. History.
Economics correspondent Paul
Solman is our guide.
Paul: The collapse of silicon
valley bank.
First, what happened?
>> Svb is a large bank that
essentially failed.
>> And why?
I asked economist Dana Peterson.
>> First of all, it was highly
concentrated in an industry, the
tech sector, that's really not
doing that well right now.
Paul: And the depositors were?
>> Many of the folks who were
invested in svb were very high
net worth individuals, meaning
they had tons of money.
And you also had a number of
startup companies in the tech
sector.
So you had companies that need
money for payroll and cash.
Paul: Of course banks usually
love such depositors.
But svb didn't have enough
corporate or individual
borrowers to loan the money to.
What does a bank do then?
>> You can lend to the
government.
Uncle Sam and auntie Sammy are
very happy to borrow from the
public.
And they paid decent rates of
interest, of course.
Paul: Interest on Sam and
Sammy's iou's, that is, their
government bonds.
But that was a few years back.
But th the tech sector turned
sour, and the depositors had to
start withdrawing their money.
To come up with the cash, svb
had to sell some of those bonds.
Guaranteed safe by the
government.
But, says Johnson --
>> Problem is there is interest
, rate risk, which means as
interest rates go up, the value
of the bonds go down.
Paul: Why when interest rates go
up, does the value of bonds go
down?
>> Well, it is the value of the
old bonds, the bonds that were
issued at a previous interest
rate, Paul, because now the
government is borrowing, paying
a higher interest rate.
Paul: I thought this might
benefit from a bit of show and
tell, at the treasury itself.
Simple when you stop to think
about it.
The bank had bought billions of
dollars of U.S. Treasury bonds
at a low rate of interest.
Suddenly, it had to sell some to
come up with the cash to pay off
fleeing depositors.
Meanwhile, interest rates had
gone up.
Today's bonds are paying a much
higher rate of interest than
these.
So which would you rather have?
Obviously, this one, which means
this one's worth less.
The price goes down, the bank
loses money.
And, says Sam Johnson -- Simon
Johnson --
>> Depositors thought about
that, noticed it in some
fashion, and decided to pull out
even more money.
>> And that's what happened.
>> Every cent of it.
>> Just remember this thing is
not as black as it appeared.
>> It's a wonderful life
Paul: As he told Jeff last week
--
>> We all saw that when the
money had been invested in
mortgages.
They did not have all the cash
paid no bank does.
Every bank makes investments on
some of their deposits.
>> I will take mine now.
>> No, but you are thinking of
this place all wrong, as if I
had the money back in a safe.
The money is not here.
Paul: The bank has made loans.
Either you call in the loan or
if you cannot do that, you
cannot pay the depositors.
Either way, the bank is in
serious trouble and may not
survive.
Paul: So who done it?
Putting them all in one basket,
long-term bonds, quick trigger
depositors.
Inflation that hiked interest
rates, killing the value of
long-term bonds, and the likes
of senator Elizabeth Warren
loosening regulation starting
back in 2018.
>> We need to learn from what
has just happened with these
banks and go forward by
tightening regulations.
It is just that simple.
Paul: Simon Johnson agrees.
>> News regulation was very
important.
He changed the tone of
supervision.
The bank was very poorly
supervised.
Amna: What is the fix -- Paul:
What is the fix?
>> The federal deposit insurance
corporation with the permission
of the treasury secretary
invoked a special provision of
law and said that they would
stand behind the deposits of
every depositor at signature
bank and silicon valley bank
even if they had a lot more than
$250,000 in the bank.
Paul: The federal reserve also
came to the rescue.
>> We have the tools to protect
depositors when there is a
threat of serious harm to the
economy or to the financial
system and we are prepared to
use those tools and I think
depositors should assume that
their deposits are safe.
Paul: So we are at the federal
reserve.
What is the fed's role in all of
this? >> A lender of last
resort.
They lent hundreds of billions
of dollars to the banks.
Paul: The key question, what
does the future hold?
>> The economy was already
slowing down partly because the
federal reserve has raised
interest rates a lot now, the
banking crisis is going to slow
it further.
Banks are going to be more
reluctant to lend and that means
borrowing and less spending in
the economy.
Paul: But that's what the fed
wanted to begin with.
Slow down the economy.
>> Absolutely.
As Jay Powell, the fed chair,
said in his press conference the
other day, the credit crunch
that's caused by the banking
crisis is somewhat going to
substitute for interest rate
increases.
Paul: Thus concludes Wessell.
>> The fed won't have to raise
interest rates so much.
Paul: Because the banking crunch