He and Ben Bernanke, the Fed chair, insisted that a taxpayer bailout of Wall Street was the only way to avoid another Great Depression. Paulson asked Congress for $700bn to bail out the financial industry. So did Citigroup (to which Robert Rubin, Clinton’s former treasury secretary, had moved after he successfully pushed for the Glass-Steagall repeal), which had bet heavily on risky mortgage-related assets. AIG, an insurance giant that had underwritten hundreds of billions’ worth of credit on the Street, faced collapse. The treasury secretary, Hank Paulson, former CEO of Goldman Sachs, and Timothy Geithner, president of the New York Fed, arranged a rescue of the investment firm Bear Stearns but allowed Lehman Brothers to go under. When the bubble burst in 2008, the Bush administration moved to protect investment banks. That was more than four times the profits made in all US manufacturing. By the mid-1980s, the financial sector claimed 30% of corporate profits, and by 2001 – by which time Wall Street had become a gigantic betting parlor in which the house took a big share of the bets – it claimed a whopping 40%. But deregulation made finance exciting and exceedingly profitable. In the 1950s and 60s, when banking was boring, the financial sector accounted for just 10 to 15% of US corporate profits. Once banking was deregulated, such a crash was inevitable. “I have found a flaw,” he told a congressional committee.
Pickaxe we need to go deeper free#
Alan Greenspan, chairman of the Federal Reserve from 1987 to 2006, called it “a once-in-a-century credit tsunami”, but pressed by critics, Greenspan acknowledged that the crisis had forced him to rethink his free market ideology. It was the direct result of financial deregulation. Then, of course, came the 2008 financial crisis, the worst collapse since 1929. That lasted until the 1980s when Wall Street financiers, seeing the potential for big money, pushed to dismantle these laws and regulations – culminating in 1999, when Bill Clinton and Congress repealed what remained of Glass-Steagall. But the Roosevelt administration enacted laws and regulations requiring banks to have more money on hand, barring them from investing their depositors’ money for profit (in the Glass-Steagall Act), insuring deposits and tightly overseeing the banks. In the early 1930s, such bank runs were common.
Remember the scene in It’s a Wonderful Life where the Jimmy Stewart character tries to quell a run on his bank by explaining to depositors that their money went to loans to others in the same community, and if they’d just be patient, they’d get their deposits back? As a result, these startup and tech companies had to withdraw more of their money from the bank to meet their payrolls and other expenses.īut the bank didn’t have enough money on hand.
And, as interest rates rose, the gusher of venture capital funding to startup and tech companies slowed, because venture funds had to pay more to borrow money. The value of the Silicon Valley Bank’s holdings of Treasury bonds plummeted because newer bonds paid more interest.
Flush with their cash, the bank did what banks do: it kept a fraction on hand and invested the rest – putting a large share into long-dated Treasury bonds that promised good returns when interest rates were low.īut then, starting a little more than a year ago, the Fed raised interest rates from near zero to over 4.5%. During the pandemic, startups and technology companies enjoyed heady profits, some of which they deposited in the Silicon Valley Bank. The surface story of the Silicon Valley Bank debacle is straightforward.
0 kommentar(er)
