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Could New Regulations Have Prevented This?


We have seen several banks fail in the last few days. The failures seemingly came out of nowhere. However, there are a few commonalities among the banks that failed. I will try and connect some dots for you. I listened to a livestream from law firm Foley and Lardner. Partner Pat Daughterty said that all three banks had relationships with the cryptocurrency community. Biden appointee Gary Gensler, chairman of the Securities and Exchange Commission (SEC), was trying to break the on-and-off ramps between the cryptocurrency community and any fiat banking agency. Silvergate was first to fall. Then Silicon Valley Bank.  Then Signature Bank, in New York, where former Rep. Barney Frank (D-Mass.) was a board member. On Mar.13, Silicon Valley Bank’s largest competitor First Republic failed.

This was not former president Donald Trump’s fault, as some claim. Barney Frank heavily lobbied to change regulations in 2018 on smaller banks. Applying Dodd-Frank regulations to smaller banks killed community and regional banking. Community and regional banking kept the banking industry decentralized. That’s a good thing for risk management. The more centralized things are, the larger the point of failure.

Would the world have stopped with no bailout? Certainly, you feel a lot of empathy for startup firms that banked at these banks. They’d feel a cash crunch, but based on a presentation from international law firm Cooley I saw, most would have seen 100 percent of their cash in time as the bank went through the receivership process. Innovation would have continued, maybe at a slower pace. Venture capital (VC) firms would have had to either renegotiate deals with startups or extend loans to them. That’s really the reason the VC firms were yelling like two-year-olds having a tantrum.

Guess who the representatives for venture capitalist are? Democrat California governor Gavin Newsom, sitting vice president Kamala Harris, and former speaker of the House, Nancy Pelosi. In the aftermath of the financial crisis of 2008–09, which was exemplified by Rep. Frank’s “roll the dice” policy, the Democrats wrote and passed Dodd-Frank. It was a sweeping change to regulation and bank law.

At the time, I wrote that it was one of the worst bills to pass Congress since the Affordable Care Act and that it would do nothing to stop future failures. I have since been proven correct. Capitalistic free market economies are not brittle. They bend, but don’t break. Crony capitalistic economies are brittle and break constantly. America has a crony capitalistic economy today, and there are points of failure all over it in several industries because of over regulation.

More regulation is not going to make the banks safer. These banks fell for two reasons. First were the intentional actions by SEC Chair Gary Gensler to reign in cryptocurrency. Northwestern law professor John McGinnis was correct when he asked the question, “Will the government who creates fiat currency allow a competitor to exist?”
The second reason these banks failed is they had terrible management teams that didn’t understand the difference between accounting numbers and economic numbers. That caused them to misprice and totally avoid hedging their risk. They were derelict in duty and failed in their fiduciary responsibilities to both equity holders and depositors. Writing new regulations cannot fix stupid.
First Republic doesn’t even list a risk officer as a member of its C-suite management team. The risk officer at Silicon Valley Bank was a political science major at Harvard and also a graduate of the Kennedy School of Public Policy. Both banks were more concerned with making points about social issues than they were in the blocking and tackling operations of running a bank. Does it feel good to depositors of all these banks that bankers knew their carbon footprint better than they knew how to hedge their portfolios in the swaps and futures markets?

How then do we rectify this situation when we know writing more regulations is not an answer? In my past life, I was a commodity trader in a floor trading pit. When people made millions or lost millions of dollars, I watched with my own eyes and saw it. I think we can translate that experience to banks. If a bank doesn’t have a certain amount of assets, it cannot be a public company. It should have no access to capital markets. It must be formed like the old merchant bank’s before the cessation of Glass-Steagal. The management teams would have their money in the bank, and when the right arm was doing something the left arm didn’t like, they’d have a face-to-face discussion about it. This was always the great thing about the old Wall Street partnerships at Lehmen Bros., Bear Stearns, and Goldman Sachs. When one partner got out of line, another partner reined them in.  That sort of internal peer pressure went out the door with the ability of those firms to access public markets.

How would that change banking? With no access to capital markets, they’d have to get deposits to grow the bank. They also would have to hire qualified people that really understood banking and risk instead of hiring for reasons that made people feel good about themselves. Instead of a few super-banks, the banking industry would become more fragmented.

Do not believe, then, the spin that the taxpayer won’t be on the hook for this. Bailouts are not free. There are opportunity costs and direct costs. If the Fed expands its balance sheet and takes in all the low interest-denominated notes the banks bought, the Fed will lose money. Who backs the Fed?  The taxpayer. If they charge banks higher rates for FDIC or other insurance, those costs will find their way to your bank statement and you will bear the burden. If the Federal Reserve slows its interest-rate increases to fight inflation caused by profligate government spending, especially during COVID, that will have a different sort of economic cost to your pocketbook.

Do not be confused. You, the taxpayer, are bearing the brunt of bailouts just like you did in 2008.

Views expressed in this article are the opinions of the author and do not necessarily reflect the views of The Epoch Times.

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