Pluralistic: SVB's investors will get $2b in public bailout money (18 Mar 2023)

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An old fashioned corner bank. Its sign has been replaced with the SVB logo. Peeking above the bank is an ogrish caricature of a capitalist in a top-hat, yanking on a golden, dollar-sign-shaped lever. He holds aloft a $100 bill, which he has plucked from a bouquet of C-notes poking out from the bank roof. Below him is a weeping, shattered Humpty Dumpty, sitting in a pool of tragic yolk.

SVB's investors will get $2b in public bailout money (permalink)

We were told that the Silicon Valley Bank bailout wasn't a bailout: in a bailout, it's the investors who get public money; but with SVB, it was the depositors. But, of course, the owners of SVB were also depositors in their own bank. All in all, SVB's owners are entitled to $2B in public money.

When Biden said, "investors in the banks will not be protected. They knowingly took a risk and when the risk didn’t pay off, investors lose their money. That’s how capitalism works," he was ignoring the fact that this isn't how the law works.

Writing on Credit Slips, the incomparable Adam Levitin – the best source on bankruptcy law writing on the web today – breaks it down: "creditors of a subsidiary have no claim on the assets of a parent." That means that the FDIC has no claim on the assets of the now-bankrupt holding company that owned SVB:

Which means that when the FDIC makes all the depositors at SVB whole, they will transfer $2b to the "investors" whom Biden promised "will not be protected." If you're interested in the minutiae of this, Levitin's piece is short and clear – there's no automatic tort-based claim that would let the FDIC get the money back from the investors, because SVB isn't classed as a really big bank (a "G-SIB").

As for Dodd-Frank's "source of strength" doctrine, it "doesn't create any concrete financial liability—it's just exhortatory."

Bankruptcy law does give priority to regulators seeking capital to keep depositors whole, but that applies only when the bank makes "a specific promise to do so." All this means that "the FDIC seems to have accidentally guaranteed $2 billion for the creditors of SVB Financial Group without any offsetting claim."

No source has been better for understanding the SVB debacle than Credit Slips, asking questions and raising issues that no one else has even noticed – like, why didn't SVB use CDARS or another reciprocal deposit service (where banks stash money on behalf of depositors with one another to keep balances below the insurable limit)?

I first found Credit Slips thanks to its outstanding coverage of the bankruptcy of the Sacklers, the intergenerational crime-family that made billions by starting and fueling the opioid crisis, and managed to keep those billions thanks to a series of breathtakingly corrupt, extremely complex legal maneuvers:

SVB's owners are attempting their own bankruptcy law hack, and Credit Slips is on the case, analyzing the bank owners' claim that SVB is actually a Manhattan company, despite being based in, you know, Silicon Valley:

In its filings, the company claims its "principal place of business" is its modest offices at 387 Park Avenue South (and not the massive headquarters building it maintained in Santa Clara, which SVB lists as its HQ on its "Bank Holding Company Report, Systemic Risk Report, Consolidated Financial Statement, and Parent Company Only Financial Statement for Large Bank Holding Companies."

SVB isn't incorporated in NY, it has no bankrupt NY affiliate and does not keep its principle assets in NY. Despite the obvious absurdity of its claim to being headquartered in New York, SVB's officers swore to it on penalty of perjury.

Why would they do this? They're judge-shopping. They evidently believe they'll get a better deal from a judge in the Southern District of New York than they would in the Northern District of California.

Like, maybe they think the SDNY will let them protect the $2b the FDIC has promised them.

SVB lobbied for lax regulation – including lower reserves – and failed to take basic steps to protect their depositors that comparable banks engaged in. They suborned their regulators, evading the prudent supervision that would have prevented a bank from taking shares in 3,000 of their depositors' businesses and building a balance sheet whose deposits were "90-100% uninsured ‘hot money’ deposits by venture capitalists to bet on unhedged long-term bonds":

As Matt Stoller writes, SVB extended below-cost loans to insiders as part of its "white-glove" service, and promised depositors personal audiences with top tier VCs each time they deposited $100m. All of this created the utterly foreseeable, absolutely preventable systemic risk that the public is now bailing out, to the tune of $175b.

Weighed against that $175b price-tag, the $2b that we're about to shower on the architects of this collapse may seem like small potatoes. But as the old saying goes, $2b here, $2b there, pretty soon we're talking real money.

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