Biden team scrambles to contain financial and political contagion from SVB

(CNN) The Biden administration’s scramble to prevent financial contagion from the Silicon Valley Bank crash is both an attempt to protect a resilient but still vulnerable economy and to prevent serious political fallout.

The Treasury Department and federal regulators have insisted there is no systemic risk to the banking system as a whole that could cause a repeat of the cataclysmic collapse of 2008 as they rush against the opening of Asian markets with measures to avoid a stampede on small or regional American markets. banks.

They rolled out emergency measures on Sunday evening that will guarantee the deposits of SVB customers. Regulators also closed Signature Bank, another institution that threatened to collapse, and assured its customers would get a similar deal. American taxpayers will not fund either move, officials said.

This quick action could ease the immediate tensions in financial markets. But it is too early to say whether the government will be forced into more drastic action in the face of growing concerns about the health of the financial sector. The suddenness of the crisis heightens the anxiety as SVB went bankrupt, seemingly out of nowhere, within 48 hours. Assurances from the White House and Treasury Secretary Janet Yellen that the banking system as a whole is sound have been another test of economic credibility for an administration battered by its handling of high inflation.

President Joe Biden plans to address Americans on Monday morning about his administration’s contingency plan to contain the failures of the two banks.

“The American people and American businesses can be confident that their bank deposits will be there when they need them,” the president said in a written statement late Sunday. “I am firmly committed to holding those responsible for this mess fully accountable and to continuing our efforts to strengthen supervision and regulation of the big banks so that we do not end up in this situation again.”

The SVB drama invoked the ghosts of 2008 and voter anger over bailouts given to wealthy bankers who caused the crisis through greed and high-risk investments, but couldn’t bear the pain of the worst financial disaster ever. followed since the 1930s, which was assumed by the public. .

Underscoring the extreme sensitivity of this story, an administration official told reporters late Sunday that extraordinary moves to insure SVB customer deposits through a federal insurance mechanism did not constitute a bailout. “These are not taxpayer funds,” the official said, adding that the bank’s equity would not be backed and bondholders would be “eliminated.”

But a political blame game was already erupting – a sign of how a dysfunctional and polarized Washington and a political system already stressed by the heated first trade of a new presidential election could struggle to cope with a truly looming financial crisis. .

Some Republicans have blamed Biden for triggering a multi-trillion dollar spending spree that caused high inflation and forced the Federal Reserve into a high interest rate strategy that left some banks more vulnerable. Others criticized federal authorities for their failure to prevent SVB’s collapse in the first place, reigniting a long-running dispute over the government’s role in the economy. Florida Governor Ron DeSantis, showing his determination to leverage every issue to bolster a culture-driven narrative for his potential presidential bid, accused SVB leaders of being more interested in diversity and diversity training. inclusion than by high finance.

A deepening crisis that necessitates congressional action would also pose an immediate problem for incoming House Speaker Kevin McCarthy, who has a narrow GOP majority and would face an enormous task lining up his members’ votes. the most radical for any government response.

But Republicans were also blamed. Senator Bernie Sanders, an independent from Vermont and a two-time Democratic presidential candidate, claimed the fate of the stricken bank was a ‘direct result’ of the ex-president’s ‘absurd’ relaxation of financial regulations Donald Trump.

The peril facing Biden

Any further economic shock would be a political disaster for an administration already scarred by multiple crises, especially as the president prepares to launch his long-awaited re-election campaign. Getting the situation under control quickly is crucial for Biden.

He would face a dire political dilemma if worsening conditions forced a president — who has rooted his administration to uplift America’s working class and middle class — to choose between bailing out wealthy bankers or letting the contagion spread. Populist Republicans, like his potential 2024 election rival Trump, would also pounce on any scenario in which Biden is seen as helping wealthy tech investors in liberal California.

A financial crisis would be an opening for Republicans who have seized on recent events, including a growing threat from China, a perceived crisis on the southern border and stubbornly high inflation to try to convince voters that an aging president is under shock.

Growing political divisions over the SVB’s failure also bode ill for a coming showdown over whether to raise the government’s borrowing limit later this year. Republicans are demanding billions of dollars in spending cuts that would prevent Biden’s agenda from doing so. But the president warns that their intransigence could shatter US solvency and plunge the US and global economies into a self-inflicted crisis.

The scramble to avoid a crisis

In retrospect, the timing of the SVB crisis was propitious as it gave Yellen a weekend to put in place a stabilization plan with the global markets shut. Officials worked feverishly behind the scenes and briefed leaders and rank-and-file members of Congress.

The sweeping actions Sunday night by Yellen, Federal Reserve Chairman Jerome Powell, and Federal Deposit Insurance Corporation Chairman Martin J. Gruenberg were aimed at preventing panicked investors from withdrawing funds from other banks, threatening thus their survival, and also to enable companies with large deposits to payroll and ensure their viability.

All weekend, Yellen sought to be a calm voice, simultaneously seeking to prevent the situation from spiraling out of control – in its economic and political dimensions.

“Let me clarify that during the financial crisis, there were investors and owners of large systemic banks that were bailed out, and we are certainly not looking (to do that),” Yellen told CBS News on Sunday.

“And the reforms that have been put in place mean we’re not going to do it again.”

Shalanda Young, director of the White House Office of Management and Budget, also sought to allay public concerns, insisting that the US banking system as a whole was now “more resilient”.

“He’s got a better base than before the financial crisis (2008). A lot of that is because of the reforms that were put in place,” Young said on CNN’s “State of the Union.”

But the risks of the SVB drama are still acute for Biden. There is growing debate, for example, over whether the Federal Reserve should ease its tough interest rate strategy – with markets expecting another 50 basis point hike soon – to avoid further expose vulnerable banks.

Sheila Bair, one of the top banking regulators during the 2008 crisis, told CNN the Fed should “take a break.” And California Democratic Rep. Adam Schiff echoed those concerns, telling CNN’s “newsroom” on Sunday that Congress needed to know if the central bank was considering “the possibility that some institutions may not be able to manage such a rapid increase in rates”.

The debate underscores Biden’s jam on the economy. Should the Fed suspend its rate strategy, the inflation that is hammering voters and politically corrosive for the president could worsen after some recent signs of slowing. But if the Fed continues, the risks that its actions will hurt the broader economy and increase unemployment could increase.

As the SVB crisis intensified, the political stakes also increased

In his early comments on the crisis, McCarthy was subdued, apparently seeking to contain the risk of a run on banks in his home state of California, while pointing to the quality of SVB’s client assets, given that One option was a takeover of another, larger bank.

“The administration has tools to deal with this,” McCarthy said on Fox. “So I wouldn’t live off of someone putting something on Twitter. Let the administration actions work here before anyone takes up a position in their own bank.”

But McCarthy also twisted the knife on Biden, days after he dismissed the president’s new budget as a multi-trillion dollar spending spree. And the speaker tried to exploit the SVB crisis to improve his position on the debt ceiling showdown. “High debt leads to inflation,” he warned. “And what about inflation? You see with this bank, the interest rates going up, where they’re stuck in bonds and things. We have seen the pain this causes to American citizens.

South Carolina Republican Rep. Nancy Mace pointed to the difficulty McCarthy would face in mobilizing any congressional action if the crisis spreads and the administration asks for help.

“I wouldn’t support a bailout,” Mace told CNN’s Kaitlan Collins on “State of the Union” Sunday morning. She added: “We cannot continue to bail out private companies because there are no consequences for their actions.”

Fierce bipartisan resistance to banker bailouts is shared on both sides of the aisle, underscoring how the long-term consequences of unpopular efforts to stave off the 2008 crisis still weigh heavily on national politics, potentially limiting power of the government to respond to any new major disaster in the banking system.

Ahead of the administration’s announcement on Sunday evening, Democratic Rep. Ro Khanna, who represents the California district where SVB is headquartered, made calls for the administration to do more to make customers of the entire institution, while laying off the bank’s managers.

“The market in our country with FDR has always been that investors and shareholders lose. I have no sympathy for the leaders, no sympathy for the people who own shares there. But the depositors are protected,” Khanna said. on CBS News “Face the Nation.”

Republican presidential candidates were also looking for an opening.

Former South Carolina Governor Nikki Haley warned: “It is not the responsibility of the American taxpayer to intervene. The era of big government and corporate bailouts must end.”

Meanwhile, DeSantis’ attempt to blame the bank’s diversity, equity and inclusion programs served as a reminder that, unlike Biden, a potential nominee has no responsibility for the broader economy.

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