The Bank Shot
A brief and incomplete, but hopefully entertaining history of banking regulations…
After Silicon Valley Bank went tits up (a highly-technical financial term mainly used by Texans in the banking industry) people were freaked out and by “people” I mainly mean the media who wrote tons of “The Sky is Falling” opinion pieces co-authored by Chicken Little and about the same time I was also getting emails from the AARP asking questions like “Are your savings safe?” and offering advice about just how deep the holes should be when I put my money in old coffee cans and buried them in my back yard.
Piece of advice: when you bury those money-filled coffee cans, dig the holes next to some shrubbery so you don’t forget exactly where you buried them and then when anyone asks where you invested your savings you can say you put them in a hedge fund.
(Man…that was way too much work for what turned out to be a lame joke.)
OK, so everyone was freaking out about banks and I had to draw some cartoons about it and the articles I read left a lot of questions unanswered and didn’t have nearly enough hedge fund jokes, so I did some research, but then decided I didn’t know enough about it offer any worthwhile opinions (which, to be honest, doesn’t always stop me) and put this essay to one side and decided to deal with it later.
This is later and another bank just went down.
So I re-read this piece to decide whether to junk it or post it and clearly I’ve decided to post it, so I hope you get something out of it even if it’s only the excellent advice on where to bury coffee cans full of money.
Here’s what I got so far.
The Glass Seagull
Like a lot of you or maybe some of you or possibly none of you, I wanted to know more about banking issues and until I looked it up I actually thought it was the “Glass-Seagull Act” which sounds like a play co-written by Tennessee Williams and Anton Chekov so you might want to double-check any “facts” I offer you on the history of banking reform.
Anyway, here’s what I found out:
After the stock market crashed in 1929, Senator Glass or maybe it was Senator Seagull (and as we’ve already discussed you shouldn’t be overly-reliant on me supplying actual “facts” so it’s exactly like Fox News) wanted to restore confidence in the banking system, because otherwise Jimmy Stewart wouldn’t hook up with Donna Reed in “It’s A Wonderful Life” and she’d wind up a spinster. And if you don’t know what I’m talking about, you really need to go watch that movie right now even though Christmas is seven months away.
Man…Donna Reed was smoking hot back then and if you don’t believe me, here’s a picture:
Y’know… you see these actresses when they’re older, playing suburban moms or spunky senior citizens and your reaction is “How’d they get famous?” and then you see a picture of them when they were young and realize why they were setting Hollywood on fire and to make my point here are two pictures of Myrna Loy:
And now the young Myrna Loy:
OK, so where were we before I got sidetracked into a possibly sexist rant and I think I’m giving myself the benefit of the doubt when I use the word “possibly.”
Anyway…
The Glass-Steagall Act forced banks to decide whether they were “investment banks” or “commercial banks” and as near as I can tell from the three articles I read (which were pretty vague because a lot of reporters don’t seem to understand this stuff either) commercial banks handle the day-to-day needs of regular people and businesses and investment banks handle the needs of large “publicly traded entities” and assist with mergers and acquisitions and making “sound investments” like buying a bunch of Marshall amps and Fender Stratocasters which is another one of my lame jokes that don’t help either of us understand this stuff.
Now here’s a quote from the Federal Reserve website that might be more illuminating:
Basically, commercial banks, which took in deposits and made loans, were no longer allowed to underwrite or deal in securities, while investment banks, which underwrote and dealt in securities, were no longer allowed to have close connections to commercial banks, such as overlapping directorships or common ownership. Following the passage of the act, institutions were given a year to decide whether they would specialize in commercial or investment banking.
Among other things, Glass-Steagall was trying to “prevent the undue diversion of funds into speculative operations” and that last quote also comes from the Federal Reserve website so it might even be accurate and lets us know that even back then you had bankers doing risky shit with other peoples’ savings.
So…
After Glass-Steagall, a customer could choose a bank that did simple stuff like lend money to buy homes and start businesses or choose a bank that dealt in “securities” and if you look that up – and I did – a “security” is a “tradable financial asset” like stocks, which as you may have already noticed really aren’t all that secure, and here’s what the Tennessee Department of Commerce and Insurance (hey, it’s the first thing that came up when I Googled it) has to say about it:
The term "security" is defined broadly to include a wide array of investments, such as stocks, bonds, notes, debentures, limited partnership interests, oil and gas interests, and investment contracts.
https://www.tn.gov/commerce/securities/investors/what-is-a-security.html#
OK, so you could choose a bank that was financially conservative or a bank that would take your savings and place bets on the fifth race at Aqueduct.
Glass-Steagall also created the Federal Deposit Insurance Corporation which would reimburse depositors who lost their money if the bank president decided to fill up a Samsonite suitcase with everybody’s dough and run off to Acapulco with Donna Reed which, after looking at that pinup, seems like a fairly reasonable decision especially if you could get a young Myrna Loy to go along with you.
Originally, the FDIC would only reimburse you up to $2,500, but that went up to $5,000 and then politicians kept doing what they do and raising the amount to the current level of $250,000 and I’ve heard politicians argue that now it needs to go even higher.
Don’t hold me to this because I’m trying to figure it out and a lot of the articles are poorly written and short on details, but it sounds like you don’t want more than $250,000 in any one account, and according to the following article there are five different types of accounts you can have in one bank and they’d all be insured up to $250,000.
https://www.forbes.com/advisor/banking/ways-to-insure-excess-deposits
If you have more money than that:
A. Can I get a loan? And…
B. You need to spread it around and maybe use more than one bank (and apparently there’s a type of account that helps you do that), but it also sounds like someone got sloppy (hard to tell if it was the bank or the customers or both) because according to an Associated Press article:
“An astonishing 94% of Silicon Valley Bank’s deposits – including large cash holdings by tech startups – were uninsured by the FDIC.”
So way too much money in uninsured accounts and the First Republic Bank just failed and according to what I read a lot of their deposits were also uninsured, but even though I’ve read numerous stories on it (and by numerous I usually mean more than two) not one of them explained how or why that happened.
Are customers just not paying attention or do some of them have so much money they can’t find enough insured accounts to put them in, which seems unlikely because why couldn’t you just keep opening accounts in different banks?
(A probably naïve point of view that indicates I’ve never had to figure out what to do with 10 billion dollars…but I wouldn’t mind giving it a shot even though I’d need a lot more coffee cans.)
And now a plausible theory
I recently heard a theory from someone who knows more about this subject than me – which includes almost everybody – that a bank might make a risky loan to a business (like a tech start-up) if the business agrees to deposit a bunch of that loan back into the bank that made it, which might explain why so much money is uninsured.
So: I give you a hundred million dollar loan and you don’t need to use all that right away so you deposit $75 million back in my bank.
Now my bank has some extra money to play with and so far all that “money” is just a bunch of numbers we’ve agreed on because nobody is actually loading up U-Haul trucks and shipping pallets of $100 bills back and forth.
As long as the “money” remains in the financial circulation system everything’s OK because it’s all just numbers floating back and forth, but the house of cards collapses if too many people get scared and want to take their money out of the system. If that happens, then my bank has to come up with actual, real, tangible money.
Now here’s Matthew McConaughey in The Wolf of Wall Street explaining why you never let clients take their money out of the system:
Just in case you didn’t watch the video:
As long as the client’s money stays in the system it’s only imaginary money and even though the clients may be getting rich, they’re only getting rich on paper. If a client wants to cash out and walk away with his winnings, the stock broker needs to come up with another brilliant investment to keep the client playing the game.
Meanwhile, the stock brokers take their money out of the system in cold, hard cash through commissions.
According to Mr. McConaughey one of the keys to success is keeping clients on the Ferris wheel; never let them get off the ride and walk away with actual money. (He also offers some advice on masturbation which you may or may not find helpful.)
The Repeal of Glass-Steagull
Turns out, banks didn’t like being regulated and complained to the politicians who can loosen up the rules and in 1999 the Glass-Steagull Act was partially repealed so banks could go back to being commercial and investment banks which, depending on what article you read, may or may not have had something to do with the financial meltdown of 2008.
And just in case you’re keeping score, Bill Clinton signed the Gramm-Leach-Bliley Act which included the partial Glass-Steagall repeal, so both Democrats and Republicans have had a hand in screwing things up.
Next up, Dodd-Frank
OK, so after 2008 everybody was once again freaked out and it was now time to swerve back the other direction.
Barack Obama signed a law called Dodd-Frank which came up with stricter rules on banks with at least $50 billion in assets. Among other things, those banks had to undergo an annual “stress test” in which the bank president was required to make a cross-country car trip to take his or her kids to Wally World and if the bank had more than $100 billion in assets, his mother-in-law would be in the car with them.
(Just kidding, actually, the Federal Reserve would check to see if banks had enough capital to absorb losses and enough money on hand to quickly meet cash obligations and a plan in place just in case the shit hit the fan.)
The 2018 changes
To the untrained eye, it looks as though banks want to be left alone so they can do any kind of risky shit they feel like doing, so they whined and complained that all those rules were holding them back – which in retrospect, seems like a really good idea – but politicians being what and who they are, in 2018 they changed the rules again and now only banks with $250 billion in assets have to be stress tested and our favorite Presidential Knucklehead – Donald Trump – signed off on it.
At the time the rules were loosened up, the president of Silicon Valley Bank – and one more time…THE BANK THAT FAILED AND STARTED ALL THIS – argued that his bank was way too small to present a “systemic risk.” Basically, he argued that if his bank failed it was no big deal so the government should get off their backs.
Now here’s an article with a lot more information on the subject and a bunch of “experts” debating whether the changes in 2018 made SVB’s failure more likely, although I can’t help but notice that they failed to interview Matthew McConaughey and let’s face it, that dude is wildly entertaining:
https://www.cnn.com/2023/03/14/politics/facts-on-trump-2018-banking-deregulation/index.html
OK, that’s all I got so far, but it still seems like way too much.
I’ve only scratched the surface of all the issues involved, but I’m guessing the politicians will freak out again and now we’ll swerve back the other way in terms of banking regulations, at least temporarily.
In the meantime, just remember the stuff about hedge funds.
I have two theories regarding these bank failures. One is that the people running these banks know what's coming and line their pockets like wolves of wall street. They should have their money and freedom taken away. The other theory is that this is all a ruse designed to disguise and divert even more cash to Clarence Thomas and his extended family.