Start Date: March 18, 2023
At the beginning of the draconian COVID lockdowns there was a ghastly inaccurate theme that “We will all get through this together”. It was of course silly on so many levels, not the least of which is that “together” was the thing most banned by the royal decrees.
As of winter 2023 we see another example of not all having the same outcome.
WHAT HAPPENED ?
There is, or was, a regional bank known as Silicon Valley Bank. I suppose the name alone should have given some concern for excess. But Silicon Valley also produces genius and accomplishment. Sadly that was not the case here.
I have never had so much as ECON 101 but I have read that most banks have something known as a “risk officer.” As the title suggests their responsibility is, or should be, assessing risks facing the bank. Unlike the meltdown more than a decade ago, banks do have more capital and are less inclined to give out questionable loans. But the risk officer at the bank, as well as other officers, seemed excessively interested in social causes, and less so in the requirements of her job. Perhaps that is why she took another assignment. Maybe for the best, that is, if they had replaced her with someone committed to the job. But, instead, they operated without that position filled for several months while they merrily carried on and ignored risk.
Well not to they very end. The bank officers did sell millions in stock days before its closure, Some employees were given five- to six-figure annual bonuses within hours of the bank being shutdown. I am guessing this may not the case for average Americans when their employers fail.
The system in place in the U.S. is that the FDIC insures all depositors up to $250,000. You may own a house that is worth more. Your 401K or IRA at some time could be worth more. But most of us aren’t keeping more than a quarter of a million dollars in a single checking account for long periods of time. So that should have been that. But somehow it was deemed that the depositors should be covered beyond the limits, even though the system doesn’t account for that. One wonders why.
WHO ARE THE DEPOSITORS?
SVB was a bank for venture capitalists and extremely wealthy elites and even Communist Chinese businesses. Governor Gavin Newsom had a personal account as well as accounts for three of his Napa Valley wineries. He will tell you that he has his assets in a blind trust. He may not tell you about the behested gifts. If you aren’t in California you may not be familiar with the term. Any sane person would tell you that it is a polite term for a bribe, which California deems legal.
Should you find yourself needing government approval for a project you might receive a “behest” by the government official with the the power to approve or decline your application. Merriam Webster’s dictionary defines “behest” as “an authoritative order” or “an urgent
prompting”. In practice the CA government official will ask that you make a donation to a charity of their choosing. It may even be a large “behest”. While CA has limits on campaign contributions, there are no such restrictions on behest gifts. It is reported that in 2022 Governor Gavin Newsom reported over $23 million given at his behest.
When I first learned of this procedure I joked that the “charity” could be a private school where the politician’s wife works on the endowment fund. It seems that it can be even more direct. Mr. Newsom’s second and present wife is a former actress who has a a number of charities. They are deemed “non-profit” for tax purposes. In 2021 Governor Newsom “behest” Silicon Valley Bank to give $100,000 in four $25,000 donations to his wife[’s company] “California Partner’s Project”. John China, responsible for SVB’s funds management, is a founding member of the board of directors of Ms. Newton’s organization. In light of this, Governor Newsom’s praise and enthusiasm for the bailout of a bank which holds his assets and pays his wife seems a little less than objective.
HOW BAD IS IT?
I presently reside in CA and I had never heard of SVB. It isn’t Citibank or JP Morgan. But it also was not the small town bank of the cinema classic ”It’s a Wonderful Life.” SVB had roughly $175 billion dollars in deposits. Twenty some years ago that would have been roughly 10% of the national budget. That is a LOT OF MONEY. If it was distributed over a million depositors they would be covered by standard FDIC. But in fact 90% of the deposits were uninsured. So many of the deposits must have been multiple millions. One Chinese drug company had $175 million. But don’t shed a tear for them. They won’t be losing a penny. And it is all thanks to you
YES IT IS A BAILOUT
Whatever they call it, it is a bailout. And yes you will somehow pay. Other banks are being required to generate the money. While it is in their interest to stop a catastrophic run on banks, think about the construct. Imagine a dry cleaner who was holding all the massively expensive designer duds worn by the celebrities at the awards shows. Suppose that he used some bad chemicals and ruined them all. The other neighborhood dry cleaners might have sympathy, but would they have to chip in to pay for some very wealthy movie stars’ gowns and tuxes and then raise the prices for their own customers?
The banks being forced to generate the assets will have to pass on the costs in either higher fees for customers or lower returns to retiree shareholders or both. Again $175 billion dollars is not pocket change. So customers and retiree investors are going to pay Silicon Valley elites.
We often hear “pay your fair share”, always more and more. Couldn’t these billionaires and multi-millionaires help each other to some degree? Perhaps the billionaires could put $100 million toward the $50 million depositors. They in turn could put $10 million toward the investors who had between the FDIC limit and $1million. Somehow they could all take some losses above the insured limit. But they won’t and we will all pay for the Napa Valley wineries and high tech startups and the Chinese drug companies. You can decide how you feel about that, but don’t let anyone tell you it isn’t happening.
WHO ISN’T COVERED?
The reason the government claims it is not a bailout is because the shareholders are not being covered. There is some assumption that they should be more aware of the banks financials than the depositors. Yes, if the depositor is a 90 year old pensioner in San Jose and the shareholder is some massive hedge fund. Ok. But what about the senior citizen whose 401K or pension invested in the bank? Should that person know more than the Governor, or major venture capitalists with $10’s of millions on account? That is a little harder to swallow.
THE REST OF US
It is impossible not to ask how much of this comes down to the fact that many of the depositors are very wealthy and powerful donors to the Governor and the President, people who run in the same circles as those making the decisions. It has been asked if the response would have been the same for a Waco, TX bank that serves oil drillers? No answer.
A clue comes from a recent tragedy. While not banking it does involve both economic and physical jeopardy. In February 2023 a train with 38 cars carrying toxic chemicals derailed and ignited in East Palestine, Ohio. After some consideration the lesser bad choice was to pour the chemicals in the area water and soil to avoid an explosion. The air was filled with black clouds of toxins. Tens of thousands of fish died. Farm animals died. Environmental activist Erin Brockavich said the disaster “is like one I’ve never seen”. The health effects, short and long term, are unknown. Businesses may be ruined. The homes have lost much of their value. Who would buy them? Who will move in at this time? There is a story of one couple about to sell and retire to warmer climes. They say they can never leave now.
The town has less than 5000 residents. Yet the Federal government couldn’t come up with a few dollars to put them up in a motel for a few days. FEMA deemed their problems not applicable. The government couldn’t even buy them the bottled water they were told to drink. No suggestions about how to bathe or cook. Not a single alleged environmentalist from Hollywood or the media appeared. No Leo DiCaprio or Jane Fonda. No Meryl Streep. Julia Roberts won an academy award for portraying Erin Brockavich. She describes herself as an environmental activist. Yet not a word. Not a penny. Are Megan Markle and Prince Harry too busy flying on a private jet to be given an award for environmental activism? Or are they checking on their deposits in their CA bank? Who knows? But they aren’t in Ohio.
A single mother recently testified to Congress that her seven year old asked if he was going to die from living in their house. Time will tell. These people weren’t stakeholders in the railroad company in any fashion. They could not know or affect the materials it carried. The median home price in their town is $100,000. A real estate site indicates there are approximately 2000 housing units, including rentals. For a few million dollars most could have had some time in a hotel away from the conflagration. I would guess that less than one billion dollars would buy every property in the town. Ironically, if they came to Silicon Valley CA they could legitimately register as homeless and likely qualify for permanent supportive housing. But they probably don’t want to leave. They want to be made whole like the bank depositors, or at least safe.
Think about the individuals affected in each of these diverse situations. The median income in Santa Clara County, where the Silicon Valley Bank was located, is nearly $170,000. In East Palestine, Ohio the median household income is $45,000. They are poor and white and rural. Some would say deplorable.
What about their representatives? The mayor of East Palestine has a hillbilly accent, a mountain man beard, more than a few extra pounds, and rugged work clothes. As is the case in small towns, he also has a day job and maybe worries about if it will survive the death of the town. He is not looking to make a political move. He is just begging for America to care about a community of helpless people who are victims of something over which they had no say. This mayor is, in some ways, closer to the original model for government than what we now have. Benjamin Franklin expressed a worry that public service would ever be so lucrative that citizens would seek it out.
But up in San Francisco, just a bit north of Silicon Valley, Nancy Pelosi has been in Congress for 35 years. While a “public servant” her household has amassed a fortune estimated at $130 million. How? Well by investment banking. Just like SVB? Her husband invests in industries that she and her colleagues legislate. If something fails they can rest assured they will be bailed out by the people she and her colleagues have placed in the Treasury Department and the Federal Reserve.
So it seems to be clear. The mistake the people of East Palestine made is that they are powerless and poor. They aren’t fashionably poor, urban poor, or metro adjacent poor. They are trailer park in the middle of nowhere poor. The Silicon Valley venture capitalists who won’t miss a seating at their favorite Michelin star restaurants will not be holding a bake sale for the people of East Palestine. They are on their own.
I began by recalling COVID. It was obvious at some point that all the politicians rabid about isolation seemed to be ignoring their own mandates, be it masks, or hair salons, or wining and dining. But the most revealing images came from the gala events. The Met, the Oscars, etc. The chosen were allowed to dine, hug, dance, and regale with uncovered faces. The staff would stand along the walls, dressed in black, mummified in masks and gloves, only to be seen when serving or clearing for the ruling class.
No, there will be no getting through this together.