EXCLUSIVE: Yellen Schools Biden on Bank Failures. Part II.
Our trusty anonymous source provides new NSA transcripts of White House and Treasury phone calls as the banking crisis unfolded. Satire warning.
Satire Warning. Part II.
Late Friday morning, Eastern Daylight Time. March 10
Janet Yellen was startled by the loud knock on the large, antique wooden office door, interrupting the briefing from the head of the Federal Deposit Insurance Corporation (FDIC) and senior aides over the unfolding crisis with the nation’s 14th largest bank, Silicon Valley Bank.
The Secretary of the Treasury and former Federal Reserve Board Chair also knew that meant only one thing. The President was up and on the phone, finally responding to her message from last night.
The door opened. “Madame Secretary, pardon the interruption, but the President is on the phone.”
“Excuse me,” Yellen softly begged her guests, exhaling as she slowly rose from her large conference table and walked to the phone on her desk. Gently preparing to pluck the headset from its cradle, she quickly hit the speaker button.
“Good morning, Mr. President,” she uttered calmly yet pleasantly, slowly lowering herself into her oversized desk chair. “I hope you don’t mind, but I have you on speaker. Jerome Powell is here with me, along with the chair of the FDIC and my senior team. All hands on deck this morning.”
“Janet, helluva morning,” President Biden responded. “I’ve got all these messages from donors and bundlers, a bunch of billionaires, about this bank thing in California. Were you gonna tell me about it?”
“Well, yes, Mr. President,” she pleasantly and confidently responded. “I called your office last night and spoke to your chief of staff, Jeff Zeints,” Yellen said. “He said he would get the message to you right away.”
Pause.
“Oh, I see it now,” Biden responded as he shuffled through several hand-written messages.
“The message was buried underneath one from, lemme see here, four or five from Gavin Newsom, Ted Leonsis, Mary Miller, a Napa Valley winemaker, and a couple from Penny Pritzker. You remember Penny?” Biden asked. “Good lady.”
“Yes, Mr. President, the former Secretary of Commerce,” Yellen recounted. “Her husband is the Governor of Illinois and heir to the Hilton Hotel fortune. Great friends of this Administration.
“I hope you didn’t take the calls from Mary Miller or Garen Staglin since they’re on the bank board we’re dealing with,” Yellen warned.
“So tell me about this bank thing,” Biden said. “Gavin wants me to protect all depositors at the bank—a big deal to him. Lots of tech start-ups and companies like Roku are involved. I need to keep him happy and on the team. Gotta make everybody whole.”
“Well, Mr. President, we were notified in a filing by Silicon Valley Bank late yesterday (Thursday, March 9) that they are selling over $21 billion in assets over shortfalls in deposits. A billionaire hedge fund manager, Bill Ackman, tweeted something that triggered a run on the bank.
“Jerome sent bank regulators from the Fed’s (Federal Reserve Board’s) San Francisco office to investigate. They’ve taken over the bank, and now we’re trying to sell their assets and sort out how we can protect depositors,” Yellen said, taking a deep breath as she waited for the President’s response.
“What the hell,” Biden responded. “Helluva way to wake up this morning. Jill and Hunter knew about this before I did. Then again, I don’t do a damn thing before 9 a.m. I’m headed to Rehoboth in a couple of hours for the weekend. Tell me what to do. What do you need from me? Gotta make our friends whole.”
“Well, Mr. President, the FDIC and a supermajority of the Federal Reserve Board have agreed to take over Silicon Valley bank and dismiss the board and officers. Acting on your behalf, I agreed. That’s why I called last night,” Yellen told him.
“We’re devising a plan to protect all the bank’s depositors,” Yellen quickly but calmly added. “But this isn’t going to be easy, and we have little margin for error.”
She had a lot more to say.
“We are trying to avoid the perception of a taxpayer-funded bailout of a bank and introducing moral hazard. Let’s start with the fact that the bank’s officers and shareholders will lose everything. There has to be some accountability. I’m sure you understand.”
“My God, I remember that from when Barack and I took office,” Biden responded. “What a mess. Can’t have that.”
“I have more bad news, Mr. President. Unfortunately, we’ve assumed control of another bank, Signature Bank, in New York. Another bank or two may follow. You should know that your old friend (former Democratic US Rep.) Barney Frank is on the board of Signature Bank. They’re in trouble mostly because they were increasingly crypto-heavy,” Yellen added. “You may remember that the 2008 Dodd-Frank financial reform bill was partly named after him. It was supposed to prevent these kinds of issues, but there’s no vaccine for bad management, and that law never foresaw crypto.”
“That’s a good line, ‘no vaccine for bad management;’ I’ll have to remember that,” Biden noted.
“I don’t understand this crypto stuff,” Biden quickly added, almost yelling. “Makes my head hurt. I know I’ve got a bunch of billionaires contributing or raising money for my campaign. Most of ‘em come from the finance and technology world. And they’re all calling me nonstop.
“Hell, we’re getting calls from the Chinese embassy. It seems some of their citizens have accounts in these banks, too. The Russians can’t be far behind. Make ‘em stop!”
“Many people don’t understand crypto, Mr. President,” Yellen sighed, unable to avoid an eye roll. “I’m happy to come to the White House to explain it sometime. I made the offer several months ago, and it still stands.
“But as for actions, as we try to sell the bank’s assets, we’ve taken many calls asking us to cover all the deposits. We now know that 83 percent of SVB’s deposit money, from a small donor base, is not insured - beyond the FDIC insurance limit of $250,000. That is very unusual. This is a niche bank. That’s bailing - excuse me, covering - the deposits of many very wealthy tech entrepreneurs.”
Biden slurped on a beverage.
“You can ask any bankers who call you if they’d like to buy a bank,” Yellen snarked. “We have no takers thus far.”
“Please tell me that I don’t have to go to Congress with a bailout package like TARP (Troubled Asset Relief Program),” Biden said, reminiscing about the 2008 legislative fiasco when the House first voted down, then approved TARP after a massive stock market retraction and a complicated financial bailout package largely devised by then-Treasury Secretary Henry “Hank” Paulsen during the final weeks of the George W. Bush Administration.
“That should not be necessary, Mr. President. The FDIC charges banks a fee to be covered by deposit insurance. Ideally, funds should be there to cover all deposits at affected banks. If necessary, the FDIC will slap a surcharge to cover it. We discussed a new loan program for banks to help guarantee all deposits, cover withdrawals, and avoid a run.
“We’ll just have to overlook that the banks’ customers are the ones ultimately paying these bank insurance fees, including small community and regional banks,” Yellen added. “Republicans will still call it a taxpayer-funded bailout.”
“I like how you’re thinking,” Biden responded with relief. “You and (chief of staff) Jeff work this out. No more run on the banks, and no taxpayer-funded bailouts,” Biden ordered. “But make everybody whole! Don’t screw with my contributors!
“Can’t we blame Trump for this? That’s what Kamala says we should do,” Biden asked in a rare nod to his Vice President. “Bernie (Sanders), too. It always seems to work with the media. God, it’s amazing how easy it is to pin stuff on Trump.”
Yellen caught herself beginning to roll her eyes again in front of Powell and her senior team.
“Well, Mr. President, I’d be careful with that,” Yellen cautioned. “Many Democrats supported the bipartisan deregulation bill signed by your predecessor, but that has nothing to do with this bank failure. That bill makes it easier for community and regional banks to serve local and small business customers,” Yellen explained. “You’ll get pushback from Senators like Tim Kaine and Mark Warner, both Democrats from Virginia and loyal supporters of yours. Senator Warner is on the Senate Banking Committee. Senator Kaine is up for reelection next year.
“If I’m asked in hearings next week, I won’t be able to say with a straight face that deregulation is to blame for the bank’s failure,” Yellen firmly told the President. “It’s clear that SVB, a national bank, failed to hedge their long-term, low-interest investments against fast-rising interest rates on short-term loans.”
Powell glared at Yellin, almost daring the Secretary to blame the bank crisis on his Federal Reserve Board’s escalating interest rates to combat inflation. Powell was ready with his retort, a forty percent increase in the money supply over two years during and following the pandemic. He carefully included a Trump year in his calculation.
Powell dared not mention how the President and a Democratic Congress hosed the economy with $7 trillion in new spending since Biden took office, but the number stuck firmly in his head. He wasn’t being tossed under the bus alone, he promised himself.
“Damn,” Biden muttered.
“One thing is becoming clear, Mr. President,” Yellen continued. “If we cover all depositors of SVP, we will have to be willing to do it for every bank and every depositor, American or foreign, whether in East Palestine, Ohio, or on Wall Street. That invites moral hazard. There are good policy reasons why we limit deposit insurance. Before Dodd-Frank, after all, it was $100,000 per depositor.
“What the hell do you mean by ‘moral hazard?’ Biden asked Yellen. “I keep hearing that phrase. What the hell does it mean?”
“It means people making investment decisions without responsibility or accountability for the consequences, knowing they are likely to be bailed out for bad decisions,” Yellen explained. “By insuring all bank deposits, we’re creating a moral hazard. Again, that’s why Congress limits deposit insurance. Under extraordinary circumstances, we can expand that. This is one of those times. We’re also discussing whether to cover all deposits at par,” she added.
“What do you mean, ‘at par?’” Biden asked. “Sounds like a golf term. I’m a terrible golfer. Not a fan.”
“They’re not unrelated, actually,” Yellen responded. “At par means at full value. Usually, in these circumstances, depositors take a haircut of 10 or 20 percent. Insurance wasn’t designed to cover everything, but this is about stopping the spread,” a term Yellen thought Biden might grasp. “We’ll do what we must, even if it looks increasingly like a bailout that taxpayers may ultimately have to subsidize. We’ll mask it as best we can.
“There will be no East Palestine on my watch,” Yellen quickly rose from her chair and blurted, uncharacteristically but softly pounding her fist into her table. She immediately regretted throwing her Cabinet colleague, Transportation Secretary Pete Buttigieg, under the bus for his slow and controversial nonresponse to the Norfolk Southern rail accident in southeast Ohio.
“What the hell do you mean by that?” Biden asked. “Pete’s done a fine job. It’s Trump’s fault. Pete told me so. Deregulation. Pete knows disasters.”
Pause.
“Mr. President, I encourage you to enjoy Rehoboth while we work this weekend to find buyers for the shuttered banks’ assets, calm the public, and prevent contagion on Monday morning,” Yellen calmly segued. “I will keep you apprised over the weekend and let you know if we need anything else.”
“Jeff says I have to wake up early and give a talk at 9 a.m. on Monday or Tuesday morning. People want to hear from their President on this,” Biden said. “I gotta get a win out of this. Forget the moral hazard thing. Make my donors whole! This wasn’t their fault.”
Yellen shuddered. “I will help you write that speech, Mr. President,” Yellen asserted, her eyes darting towards her Assistant Secretary for Public Affairs, who scurried out of the room. “We have to be very careful. This has global implications. The Swiss are very nervous and face a potential bank failure. European regulators will be furious with us, but I hear you: no taxpayer bailout, no contagion, make all depositors whole, in reverse order of significance.
“It’s a tall order, and there will be tradeoffs. Still, it’s a challenge we will do our best to meet,” she added, taking a deep breath as she began to regret next week’s congressional hearings.
“You should know I’ll be pressed by Congress this week on whether I would do this for community and regional banks, protecting all depositors at par. I’ll have to say it depends on a specific bank failure’s potential to contribute to contagion. That may not play well in places like East Palestine, Ohio, and elsewhere in America.
“You know, double standards - bailouts for thee, but not for me,” Yellen blurted, wading uncharacteristically into political rhetoric. It made her uncomfortable.
“I’m hearing from Senators who already think we’re steering people away from community and regional banks to favored larger national institutions, like Citibank, JP Morgan, Chase, and Bank of America,” Yellen emphasized. “That’s where SVB depositors sent most of their money when the bank run began.
“And be aware, if we choose to cover all depositors, it will be every depositor, including foreign nationals,” Yellen emphasized slowly. “And that includes many Chinese and Russian tycoons we haven’t sanctioned and others who have parked millions of dollars in US banks. We have no idea if there are any Chinese or Russian accounts at SVB, Signature, or any other bank we’re watching. We need to be ready for that.
“This may get messy,” Yellen warned.
“Got it, Janet, thanks—helluva brief. Slurp. Just don’t try to wake me up before ten this weekend. Call Jeff.
“I gotta go. Susan Rice (Domestic Policy Advisor) is waiting to brief me on ‘social credit scores’ before I board Marine One for Rehoboth. Something she’s always pushing. She thinks this banking crisis will help with that.
“And let me know if you run into any of Hunter’s accounts,” Biden added as Yellen and Powell exchanged glances. “Wait, dammit, I missed another call from him, too. And my brother, Jim! Jeez, this is getting complicated. Gotta go. I might call you back.”
Both hang up.
Disclaimer: Any resemblance to persons and events past or present is intended.