Work against the clock to stop a breakthrough banking crisisSecretary of the Treasury Janet Yellen until sunset on Sunday, March 12, to come up with a plan to calm the US economy.
He quickly turned to the one who had been through the fire before, and on a larger scale: Hank Paulson.
Paulson, who ran the Treasury Department during the financial crisis in 2008, advised immediate government action. “It is really difficult to stop or slow down the bank’s operations. And to do that requires a strong and quick government response,” Paulson said, recounting what he told Yellen.
A bank is running Silicon Valley Bank started earlier in the week. It was replaced by regulators on Friday afternoon. The move spooked shareholders and depositors, evoking reminders of earlier failures that triggered the Great Recession.
Perhaps no treasury secretary has come into office with Yellen’s extensive resume, including serving as chairman of the Federal Reserve and a lifelong study of economics and finance. That experience was put to a severe test as he worked to secure many constituencies, including financially marketsBalky Republicans in Congress and President Joe Biden’s White House economic team.
Yellen spent significant time two weeks ago meeting with Federal Reserve officials; regulators at the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency; lawmakers, including congressional leaders on banking – Sen. Sherrod Brown, D-Ohio, and Rep. Patrick McHenry, RN.C.; and Wall Street executives like Jamie Dimon, the chief executive of JP Morgan & Chase.
But few can relate as well as Paulson, who has asked Congress for the authority to buy $700 billion in distressed mortgage-related assets from private companies to save the larger financial system. US.
His words to Yellen as he navigated the bank collapse: “We are fighting for the survival of our regional banks.”
The Fed defines regional banks as having total assets between $10 billion and $100 billion, not as small as community banks and not as large as nationals. Regional and community banking organizations comprise the largest number of banking institutions regulated by the Federal Reserve.
The crisis became apparent on Wednesday, March 8. The chief executive officer of Silicon Valley Bank, Greg Becker sent a letter to shareholders saying that the bank needs to raise $2.25 billion to increase its finances after suffering in many losses.
The bank held an unusually high level of uninsured deposits, and many investments in long-term government bonds and mortgage-backed securities fell in value as interest rates rose. . That is why the depositors on Thursday, March 9, hastily withdrew their funds. This caused a run on the bank.
The next afternoon, Yellen spoke with Fed Chair Jerome Powell, FDIC head Martin Gruenberg, acting head of the OCC Michael Hsu and San Francisco Fed chair Mary Daly. Regulators rushed to put Silicon Valley Bank to FDIC receivership.
That weekend, staff from the Treasury, the Fed, and the FDIC began looking for a potential buyer for the bank. Yellen and other federal officials are meeting to make sure the bank can make payments by Monday, and that no taxpayer money will be available to fund the bailout. And do it all before Asian markets open for the week.
Yellen also needs to take advantage of Republicans in Congress. He spoke with McHenry and other lawmakers who wanted to know if the actions would lead to more regulation. McHenry did not respond to a request for comment from The Associated Press, but said at an American Bankers Association event last week that he supports the government’s decision to make depositors whole.
On Sunday evening, March 12, the Treasury, Federal Reserve, and FDIC sent a joint statement announcing that the New York-based Signature Bank also failed and was arrested. Officials also said an emergency lending package would ensure all depositors at Silicon Valley Bank and New York-based Signature Bank would be protected.
In a few days, a third bank, First Republic bolstered by $30 billion from 11 major banks to prevent more regional institutions from collapsing.
Yellen came up with an idea to use bank funds to save the First Republic and it was first raised by Powell, Gruenberg and other regulators. Then he had a call with Dimon and broached the idea. After that call, Dimon reportedly said “we have our marching orders” and continued to build a coalition with the banks, according to two people briefed on the matter, who spoke on condition of anonymity. because they are not authorized to discuss the details of a private conversation.
A representative from Dimon’s office did not respond to a request for comment.
This account of Yellen’s actions during that weekend is based on more than a dozen interviews.
A former Federal Reserve governor, Sarah Bloom Raskin, said Yellen and other policymakers now need to figure out “how two banks that many don’t think present a systemic risk to the system in banking” could threaten the country’s financial health.
A year later, he His name was withdrawn as a nominee for the Fed governor after not receiving enough support in the Senate. He previously served from 2010 to 2016 and was sworn into office at the same time as Yellen, a vice chair at the time.
Brown, who urged President Barack Obama to nominate Yellen to replace Ben Bernanke as Fed chair, said people “realize how capable she is and how she’s been charged with doing great things.” in administration.”
Now, Yellen must answer the accusations that the administration of Biden bailing out risky banks. Some Republicans blame the Biden administration’s spending spree, which they say has fueled 40-year high inflation, forcing the Fed to raise interest rates to push prices down, affecting banks and their investments.
Senator Tim Scott, RS.C., said at an American Bankers Association event last week that “when you go to 40-year high inflation levels, the fact of the matter is when inflation is that high, it has to be you to go into action immediately, the Fed doesn’t have a scalpel, it has a hammer and it hurts.
Biden called on Congress to strengthen rules for banks to prevent future failures and allow regulators to impose tougher penalties on executives of failed banks, including repossessions. in compensation and facilitation to prevent them from working in the industry.
Paulson said that “we are very fortunate to have a smart, experienced treasury secretary,” describing Yellen as “someone who reaches out to get a variety of opinions and communicates with market participants in real time. “
But his attempt was not over.
He called a meeting of the Financial Stability Oversight Council on Friday, to discuss, in part, the developments at Deutsche Bankthe German multinational investment bank whose stock has plummeted.