On a late summer afternoon in Bloomfield 40 years ago, the people of Iowa learned about an unofficial government principle we have seen repeated in recent weeks.
Although this has played out in various ways through the years, it ultimately comes down to the same concept: If your problem is large enough, government will step in and lend you a helping hand. But if government decides yours is not a big problem, you probably will have to fend for yourself.
And we wonder why many Americans are disenchanted with government and its sense of fairness these days.
The stark contrast between the responses to “too big to fail” and “too small to save” was evident in the way the federal government stepped in to protect depositors when Silicon Valley Bank and Signature Bank failed this month.
Every bank has a placard on its doors, at its teller stations and on its website assuring customers their deposits are protected up to $250,000 by the Federal Deposit Insurance Corporation. But at Silicon Valley Bank and Signature Bank, most depositors ignored those cautionary notices.
Ninety-four percent of customers at Silicon Valley Bank had more than $250,000 on deposit. Ninety percent of Signature Bank’s customers exceeded the FDIC coverage limit. Those percentages are about twice as large as the levels at most banks, experts said.
The amount of uninsured deposits is astronomical when you understand how big these banks were. Silicon Valley Bank had $175 billion, with a “b,” in customer deposits. Signature Bank had deposits of $89 billion. By way of context, Bankers Trust, Iowa’s largest privately owned bank, reported consumer deposits were $1.9 billion in 2022.
Many customers of Silicon Valley and Signature were venture capitalists and technology startup companies. These entrepreneurs presumably are very intelligent. They should have understood the risk of leaving tens of millions of dollars in the two banks, knowing only a sliver would be covered by FDIC insurance if the banks failed.
The banks did fail — but the depositors did not lose a nickel. That is because federal regulators and the Biden administration decided there was risk of a worse financial crisis if these depositors were not made whole.
I am not here to dispute their conclusion. I am not here to dissect the wisdom of the Trump administration’s decision to roll back some banking regulations put in place after the 2008 financial crisis. Nor am I here to harp on the Biden administration’s failure to restore some of those regulations in the past two years.
But I do wonder about the signal government sends when the big whales get taken care of in a crisis, while the small fish are left to cope on their own.
In the late summer of 1983, lots of people in Iowa were asking “didn’t they understand the risk” when the Exchange Bank in Bloomfield was shut down by state banking regulators.
There was no FDIC insurance to protect depositors, not even up to the $100,000 limit at the time. The owners of the 112-year-old bank had chosen to operate without any government oversight or regulation.
Until that late September afternoon in 1983, Exchange Bank customers were not particularly worried about the lack of government insurance coverage — much the same way Silicon Valley and Signature customers were not worried about leaving huge deposits uninsured. Exchange Bank customers believed a bank that survived the Great Depression could weather the effects of drought and a three-year downturn in the farm economy.
About 4,500 customers had $17 million on deposit when the state banking superintendent was notified by owners the Exchange Bank was in trouble. After a weeklong review of the institution’s records, the state locked the bank’s door, taped a “Closed” notice on the glass, and touched off tremendous anxiety about the future of the community, its farms and businesses, and its residents.
No one from government, not the regulators nor elected officials, discussed ways to avoid further harm to the economy of Davis County. And those 4,500 depositors ended up getting just dimes on their dollars when the bank’s assets were finally sold.
One retired farmer told a New York Times reporter days after the bank’s failure he had about $47,000 in there, proceeds from the sale of his farm equipment. “I should have spread it around,” he said of the money he lost.
Of course, the same could be said of those venture capitalists and tech company executives.
Raghuram Rajan, a finance professor at the University of Chicago, told the Associated Press, “Why is it sensible capitalism for somebody to take a risk and then be protected from that risk when that risk actually happens? It’s probably good for the short term in the sense that you don’t have a widespread panic. But it is problematic for the system long term.”
And a related question: Why is it sensible for our government to take care of the whales but not the small fish?
Randy Evans can be reached at [email protected].