The Very Bad Wizards of the Banking System

On March 3, 2023, the Federal Deposit Insurance Corporation (FDIC) chairman, Martin Gruenberg, concluded his talk to the Institute of International Bankers with this statement: "My purpose today has been to emphasize that, while banks continue to report strong performance and problem banks and failures are few, risks remain on the horizon."

Mr. Gruenberg wasn't joking.

Seven days after his speech  Silicon Valley Bank (SVB) was closed by regulators.  A few days later, Signature Bank and Credit Suisse failed, and First Republic Bank required a massive infusion of cash in order to avert collapse.

On March 12, a mere nine days after Mr. Gruenberg's speech, the U.S. Treasury, the Federal Reserve Bank, and the FDIC issued this assurance as part of a joint press release:

The U.S. banking system remains resilient and on a solid foundation, in large part due to reforms that were made after the financial crisis that ensured better safeguards for the banking industry. Those reforms combined with today's actions demonstrate our commitment to take the necessary steps to ensure that depositors' savings remain safe.

This statement is, ostensibly, an attempt to bolster confidence in the banking system.

Yet why do banking industry regulators need to reassure depositors that "the U.S. banking system remains resilient and on a solid foundation" if the U.S. banking system is actually "resilient and on a solid foundation"?  Does the banking system merely appear to be in a state of disarray?  Or are crashing banks and billion-dollar bailouts just the way things go?

It's interesting to note the joint press release doesn't specify which "financial crisis" spurred  "reforms that ... ensured better safeguards for the banking industry."  Did they mean the recent SVB/ Signature bank bailouts?  Sam Bankman-Fried's FTX $32-billion crypto exchange implosion?  The 2007–2009 "Global Financial Crisis"?  Bernie Madoff's $80-billion Ponzi scheme?  Or any of the long list of financial crises that have occurred over the past hundred years under the not so keen oversight of the federal regulatory apparatus?

Since the Dodd-Frank Wall Street Reform and Consumer Protection Act is the last major legislation passed in response to a "financial crisis," the press release probably refers to the regulatory changes instituted by that particular piece of legislation.  However, touting the success of Dodd-Frank days after the collapse of three major American banks is disingenuous at best.  After all, SVB, Signature Bank, and First Republic had rested on "the resilient and solid foundation" of Dodd-Frank right until the moment they ceased to exist.

And it should be noted that one of the sponsors of the Dodd-Frank Bill, ex-Massachusetts congressman Barney Frank, sat on the board of  Signature Bank.  During the three years before Signature crashed, under the not so watchful eye of Mr. Frank, the bank's executives divested themselves of over $300 million's worth of stock.  Similarly, executives at SVB, including CEO and board member of the San Francisco Fed Greg Becker, sold $85 million's worth of shares in the two years leading up to the bank's collapse.  Executives at First Republic,  not as quick off the mark, sold off a paltry $11 million in stock in the months before the bank failed.  

Yet no one accuses any of these bank executives of "panic" when they cashed out and left a mess for the FDIC, the Fed, and, the U.S. Treasury to clean up — a mess that occurred under these regulatory agencies' uplifted noses, by the way.  Perhaps the regulators were too busy shoring up the financial system's "stable foundation" and didn't notice the rot in the edifices that their "stable foundation" supported.

And why is it that so many savvy depositors at SVB kept balances far in excess of the $250,000 FDIC coverage limit?  They didn't panic, either.  They seemed to know that the systemic risk exception would be invoked by the FDIC, and their deposits would be fully covered.  A call from California's governor to the White house and the U.S. Treasury made sure this happened.

Coincidentally, Mr. Newsom's wineries all banked at SVB.

Nor has anyone suggested that Martin Gruenberg "panicked" when, in an effort to quell the crisis, the FDIC brokered SVB's assets to First Citizens at a $16.5-billion discount to, technically, at least, keep First Citizens from failing.

All of these players are insiders — bank executives, regulatory agency bureaucrats, board members, politicians.  Some, like Mr. Becker, play two roles at once.  And none of them is hurt by their incompetence.  They crash a bank and cash out.

Yet it's those pesky "little" depositors — the everyday people whose money the banks hold in trust — who "panic" and "run" on banks.

A banker's main task is not to lose his depositors' money.  In return, the bank gets to use  a depositor's money while it is in the bank's care.  However, the banks must return a depositor's money, minus fees and charges, when the depositor wants it back.  That's the basic deal.  Not losing money entrusted to you doesn't seem too onerous a chore for a highly paid executive to handle.

Yet banks have failed.  The regulatory system has failed.  The stewards of our financial system have failed.

They just don't admit it.

This brings us to an old cliché: banking is an industry built on trust.

But how does one trust institutions that continuously fail and then tell you that they haven't?  According to the FDIC, there have been 563 bank failures from 2001 through 2023.  You can see the information here.

If "the U.S. banking system remains resilient and on a solid foundation," why are there so many bank failures?

Like the "Great and Powerful" Wizard of Oz when he ordered Dorothy and her traveling companions to "pay no attention to that man behind the curtain," days after three major banks collapsed the Treasury, the Fed, and the FDIC reassured us that "the U.S. banking system remains resilient and on a solid foundation"?

But the curtain has been pulled, the magic shown to be mere trickery, the old man behind the mirage visible for all to see.

When Dorothy, angry that the Wizard had misled her, exclaims, "I think you are a very bad man!," the wizard glibly replies, "Oh, no, my dear; I'm really a very good man, but I'm a very bad Wizard, I must admit."

The U.S. Treasury; the Federal Reserve Bank; the FDIC; and the executives at SVB, Signature Bank, and First Republic have not yet admitted they are bad bankers — very bad bankers.

Perhaps the regulators and the bankers they regulate should pay attention to the fundamental task of a bank: keeping depositors' money intact.  Risking depositors' money in a quest for greater gains through bundled mortgages, low-interest government securities, and exotic derivative trades is not responsible banking.

Like the Wizard of Oz, industry insiders will tell you what good men they are.  They'll expect you to trust their word on that.  After all, it's an industry built on trust, and they are its wizards.

Like the Wizard of Oz, they should admit that their wizardry is not very good.

That won't happen anytime soon.

A.F. Cronin is a writer living and working in Los Angeles.  He has written for American Thinker, The Federalist, and other periodicals, and his book Reading Shakespeare, a text on how to understand Shakespeare's writing, can be found on Amazon.

Image: PublicDomainPictures via Pixabay, Pixabay License.

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