SVB’s investors will get $2b in public bailout money
Also, Silicon Valley is apparently a neighborhood in Manhattan?
This Monday (Mar 20), I’m doing a remote talk for the Ostrom Workshop’s Beyond the Web Speaker Series.
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 guarantied $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 —…