Fed Failures and Bank Collapses Should Have Consequences

Also: Secretary Buttigieg can refuse to finance an environmentally disastrous new oil train route. Will he?

Don’t Let Powell’s Failures Be Ignored

Since the rapid collapse of Silicon Valley Bank and Signature Bank, people have been eager to blame those they deem responsible for the implosion of banks with combined assets of over $300 billion. While the bank executives, Congress, the Trump administration, and even the depositors deserve blame to varying extents, so does Federal Reserve Chair Jerome Powell.

Powell has been an unrepentant opponent to the regulations that could have prevented or limited the threat SVB posed to the American banking system. Powell’s Fed not only weakened regulations governing Silicon Valley Bank, but also failed to step in after its regulators concluded that SVB was exposed to significant risk from increased interest rates.

Repeal the Regulations, What’s the Worst That Could Happen?

Powell — who was first nominated as Janet Yellen’s successor to be the Chair of the Federal Reserve by President Trump before President Biden renominated him — was a strong proponent of efforts to undermine Dodd-Frank’s robust regulatory framework for regional banks. The efforts were not limited to the bipartisan legislative rollback in 2018 opposed by progressives, as the Fed worked with the FDIC and OCC to create a new regulatory framework based on the perceived systemic risk banks posed. The function of this framework was to severely curtail the oversight the Fed had over banks like Silicon Valley Bank. Included in this new framework was limiting liquidity coverage ratio requirements to include only the largest banks as well as limitations on stress tests for smaller banks — allowing SVB’s investments to avoid the stress testing it previously was previously subject to.

The regulatory rollbacks were called out as destabilizing by some, including Fed Governor Lael Brainard (who progressives had encouraged Biden to make Fed Chair over Powell), but their concerns were ignored. As a result, Powell was able to force through the changes, allowing Silicon Valley Bank to exist as the 16th largest bank in the United States without any Fed stress testing, and without the stringent liquidity coverage ratio that might have protected them from a bank run like the one that drove them to collapse.  

Ignoring the Danger in Front of Them

Though the Federal Reserve’s rule changes weakened the regulatory regime overseeing SVB, the Fed still had oversight power over the bank. The New York Times reported that the Fed was well aware that Silicon Valley Bank was unprepared for a shock to the financial system. In 2021, the Fed gave the bank six citations for their improper risk management — but none of these concerns were addressed. In July of last year, the bank was again examined by the Fed, and received a rating of “deficient for governance and controls.” 

In an attempt to rectify the issues, the Fed met with SVB officials last fall to discuss the bank’s cash reserves and its exposure to risk given interest rate hikes. Instead of being met with workable solutions, the New York Times reported that Fed officials discovered that “the firm was using bad models to determine how its business would fare as the central bank raised rates: its leaders were assuming that higher interest revenue would substantially help their financial situation as rates went up, but that was out of step with reality.” It was ultimately the bank’s lack of reserves and vulnerability to interest rate hikes that allowed it to collapse under the VC-led bank run earlier this month. These are problems Powell’s Fed was keenly aware of, but unwilling to address before it was too late.

Powell is not the only Fed leader deserving of scrutiny at this time; as our Timi Iwayemi has argued, Michael Barr, the Fed’s Vice Chair for Supervision for the eight months prior to the banking crisis, should be scrutinized for his extensive fintech and crypto ties — not made the leader of the Fed’s investigation.

As the shift into apportioning blame for Silicon Valley Bank’s collapse moves to congressional hearings beginning next week, it is crucial that the failures of Powell’s Fed are kept front and center. The regulatory body that was supposed to prevent such a collapse not only weakened rules that could’ve prevented this mess; it then ignored the risk this bank posed until it was too late. Jerome Powell may not be responsible for the bank run that ultimately toppled Silicon Valley Bank, but his policies eroded the bank’s foundation.  

Powell has already attempted to deflect blame. The New York Times reported last week that Powell has worked behind the scenes to block the Biden administration’s attempt to cast partial blame for this crisis on weak regulation. By helping to shift the initial narrative away from his own failures and those of the Fed, Powell is hoping that the narrative will settle on blaming someone else for this crisis — allowing Powell to skate by without a public retrospection of the Fed policies that led to this crisis. 

What Comes Next — DOJ and SEC Investigations

While we don’t yet know if anyone involved committed crimes at Silicon Valley Bank, Signature, or Silvergate, we need a DOJ with a demonstrated willingness to find out. And if crimes were committed, then the Justice Department must prove its willingness to hold white-collar criminals accountable. This is a ripe occasion for the “corporate crackdown” we continue calling for. We firmly believe that the path to political success for Democrats is to channel people's righteous anger at elites for whom the usual rules don’t seem to apply.

SVB, Signature and Silvergate are all currently facing probes. The DOJ and SEC are investigating SVB’s collapse, including looking into major sales of company stock by top executives in the days before the collapse. Signature Bank was already under criminal investigation by the DOJ and SEC for its work with crypto clients when it was closed last week by NY state regulators, and that investigation will continue. Silvergate likewise is being investigated for its involvement with Sam Bankman-Fried’s imploded businesses, with prosecutors set to scrutinize the degree of the firm’s knowledge of SBF’s fraudulent schemes.

These investigations are likely to be lengthy, outlasting the current spotlight fixed on the banks’ collapse. But whether they reach their resolutions in 100 or 500 days, it’s imperative that the Justice Department not cushion any culpable bank executives' fall, as was the Trump DOJ’s modus operandi (and, sadly, that of Eric Holder’s Justice Department as well). These bank failures came after decades of wrist slaps for reckless behavior; the 2008 bank bailout and subsequent failure to hold Wall Street executives accountable is still seared into the public memory. With corporate and white collar criminal prosecutions at an all-time low in 2022, we are still looking for evidence of progress on the Biden administration’s purported commitment to increased accountability for white collar criminals.

The American Prospect’s Robert Kuttner saw the recent news that former Wells Fargo executive Carrie Tolstedt is facing up to 16 months in prison for overseeing the bank's "systematic looting of its customers" as a possible harbinger of a shift in the DOJ’s historical reluctance to charge individual bankers. We hope the coming months will bring enough data to show such a pattern. 

While We’re on the Subject of Corporate Crimes…

Let’s not forget that the struggle towards recovery in East Palestine, Ohio, as with so many other manmade environmental disasters, continues beyond its time in the limelight. And accountability for railroad company Norfolk Southern is far from assured. Often missing from the discussion about corporate accountability is that prevention is even better than a cure, particularly because clean-up efforts — whether that’s literally cleaning up toxic waste, or pushing the boulder of corporate accountability up a hill — will never be a full restitution. Best is that it doesn’t happen. And if it does happen, better to ensure that it can’t happen again. 

Which is why, with the toxic derailment in East Palestine still visible in our collective rearview mirror, it is mind-boggling that the Department of Transportation is considering approving $2 billion in tax-exempt bonds for a new oil train route along the Colorado River, one of the most important and imperiled sources of drinking water in America. 

In 2020, the federal Surface Transportation Board approved a plan for a new 88-mile railway connecting Utah’s oil-rich Uinta Basin to the national rail network. The Guardian reported that this connection would enable the region to quadruple its crude oil production, spurring an additional 350,000 barrels of oil extraction a day. It would also send up to five two-mile-long oil trains every day along more than 100 miles of the drought-ridden Colorado River, which supplies drinking water for at least 40 million people, including 30 tribal nations, and irrigates approximately 15 percent of American farmland. 

A derailment there could be catastrophic. The Colorado River is already in a debilitating fossil-fueled drought, with major reservoirs facing dangerously low water levels, and many communities facing water shortages. It is already a hotbed of high-stakes interstate and tribal litigation, including a decades-old ongoing fight led by the Navajo Nation to try and force the U.S. government to account for the tribe’s water needs, which is currently before the Supreme Court. The federal government should not add more fuel—literally—to the fire by enabling a new crude oil train route that could further endanger the river and the communities who depend on it.

The railway is a project of asset manager DHIP Group and railroad holding company Rio Grande Pacific (which owns four regional lines in Nebraska, Idaho, Texas and Louisiana), in partnership with Utah’s independent political subdivision, the Seven County Infrastructure Coalition. It would almost solely transport oil, and enable fossil fuel companies to exploit untapped oil reserves at a time when leaving oil in the ground is a scientific imperative to preserve the habitability of our planet. The companies are seeking $2 billion in taxpayer-subsidized bonds from a $30 billion pool held by the Department of Transportation, money which has previously only been used to subsidize highway and passenger rail infrastructure projects. 

After taking heat for his failure to quickly respond to the situation in East Palestine, Transportation Secretary Pete Buttigieg has the opportunity to respond proactively to the environmental disasters portended by the Uinta railway project, and refuse to finance it. If all goes as planned with the railroad, the greenhouse gas pollution it enables will cause significant damage. Any accidents along the rail line would just deepen already unacceptable ecological violence and public harm. 

What choice will Secretary Buttigieg make?

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Want more? Check out some of the pieces that we have published or contributed research or thoughts to in the last week:

Justice Department Revokes Trump-Era Support for Fossil Fuel Companies in State-Level Climate Cases 

Why Is Larry Summers So Obsessed With Tech Bros?

RELEASE: Michael Barr's Fintech Partnerships May Cloud Judgment Of SVB Autopsy

Hack Watch: Two Percent Is Just A Number

Warren Says Trump-Picked Jerome Powell Has “Failed” as Chair of Federal Reserve

Regulatory Failure 101: What the Collapse of Silicon Valley Bank Reveals

Google stacks its legal team with former DOJ employees as it faces antitrust cases

Democrats Face a Terrible Reckoning on Bank Bailouts

Silicon Valley Congressman Fundraising With Whiny Venture Capitalist

Powell Faces Bipartisan Chorus Calling for Independent SVB Probe

Barney Frank defends role at Signature Bank: ‘I need to make money’