Ok, for you folks that aren't bank mavens, I'm going to dumb this way down.
Banks take in money and lend (or invest) it to other folks. The idea is that somebody deposits money at your bank, and then you lend it to someone else at a higher rate. You can lend the money to businesses (business loans), homeowners (mortgages) or corporate entities (bonds), or even the federal government (bonds).
Now if you lend $1 million to a business and they go bankrupt, you may only get a portion of your loan repaid. Ouch, you lose money! That's why you are careful to loan to a number of different businesses (diversify your loan portfolio) and carefully evaluate each loan so you don't give money to deadbeats.
Sometimes you can find enough good loans. So instead, you invest in bonds. In the case of SVB Bank, they decided to loan a shitload of money to our government (at a long-term fixed rate). They didn't diversify their investments smartly.
SVB bought a bunch of bonds right before inflation kicked in and raised interest rates. When you buy long-term fixed-rate bonds, if interest rates go up (& the interest rate your bonds pay is now below market), the value of your bonds drops like a rock. SVB bet the ranch on these bonds.
Any idiot with an accounting or business degree could see that rising interest rates were a massive threat to SVB. Including the government bank regulators that regularly look at banks' financial position!
Did they catch this? Of course not, because they're just as inept as the goofballs running the bank. Are you beginning to learn a lesson about trusting government regulators to do their job?
BTW: If bank regulators had done their job, the bank failure could have been avoided, other bank stocks could have avoided being routed in the last few days and taxpayers wouldn't be paying to bail out these idiots. Oh well!
It's not just bank regulators who f-ck up. Did the SEC do its job in responding to continual calls about this dude Bernie Madoff? Nope, they let him operate for years and botched their oversight as well. Check out the link below for that one.
Oh, I almost forgot. Have you ever heard of the Dodd-Frank Act? It changed how our government regulates banks? Done back in the Obama years. Frank was the Chairman of the House Financial Services Committee. It turns out that Barney Frank is on the Board of Signature Bank, making sure that it's run properly and depositors are safe.
That bank also failed yesterday, making it the 3rd largest bank failure in US history. You starting to catch on yet?
The Banking Education of Barney Frank
The Dodd-Frank author has a Signature failure moment.
By The Editorial Board, WSJ
Life is full of irony, but it’s hard to think of a richer one than Barney Frank sitting on the board of the failed Signature Bank. The former Congressman who was the scourge of Wall Street, the co-author of the Dodd-Frank Act that was supposed to keep the banking system safe, wasn’t able to prevent his bank from becoming one of the first casualties of the latest bank panic.
It’s amusing to think of Mr. Frank cashing a check as a bank director, but then even left-wing former Congressmen have to make a living. And in Mr. Frank’s case it has been a nice one, with cash compensation of $121,750 and stock awards of $180,182 in 2022 alone. He’s been on the board since 2015. Perhaps out of office and late in life, Mr. Frank developed a strange new respect for capitalism.
Mr. Frank once famously said he wanted to “roll the dice” to ramp up lending on Fannie Mae and Freddie Mac before they failed. Signature seems to have done the same as it dove into crypto during the Federal Reserve-fueled financial mania.
In recent interviews, Mr. Frank is blaming crypto for the bank’s demise in the wake of the Silicon Valley Bank (SVB) closure on Friday. He told Politico that Signature was in good shape as recently as Friday, but was then hit by “the nervousness and beyond nervousness from SVB and crypto.” He said the bank is the “unfortunate victim of the panic that really goes back to FTX,” the failed crypto exchange.
Mr. Frank seems to blame regulators for taking a needlessly hard line against Signature because of crypto. “I think that if we’d been allowed to open tomorrow, that we could’ve continued,” Mr. Frank told Bloomberg. “We have a solid loan book, we’re the biggest lender in New York City under the low-income housing tax credit.”
We sympathize with Mr. Frank because the Biden Administration really does want to purge the U.S. banking system of any dealings with crypto companies. It may be that the regulators decided to roll up Signature Bank because of its crypto association. It wouldn’t be the first time regulators saw an opening in a crisis to achieve a political goal by other means.
If Mr. Frank is right, he now knows how hundreds of thousands of other people in business feel when regulators panic for political reasons and look for businesses to shut or blame.
As for the failure of Dodd-Frank’s regulatory machinery to prevent the latest bank failures, Mr. Frank is taking no blame. He says the reforms made the system sturdier, and he also dismisses claims by Sen. Elizabeth Warren that some modest Trump-era changes in bank rules for mid-sized banks made a difference.
“I don’t think that had any effect,” Mr. Frank told Bloomberg. “I don’t think there was any laxity on the part of regulators in regulating the banks in that category, from $50 billion to $250 billion.” He ought to know from where he sat on the Signature board.
Mr. Frank is getting a painful education in the difficulty of running a company when politicians don’t like the business you’re in.