Bank Failures, Rescue Test Yellen 03/25 09:40
WASHINGTON (AP) -- Working against the clock to stop a developing banking
crisis, Treasury Secretary Janet Yellen had until sunset on Sunday, March 12,
to come up with a plan to calm the U.S. economy.
She quickly turned to someone who had been through the fire before, and on a
much larger scale: Hank Paulson.
Paulson, who ran the Treasury Department during the financial crisis in
2008, counseled immediate government action. "It's really hard to stop or even
slow down a bank run. And to do that requires a powerful and quick government
response," Paulson said, recounting what he told Yellen.
A bank run on Silicon Valley Bank had begun earlier in the week. Regulators
took it over by that Friday afternoon. The move panicked shareholders and
depositors, stirring stark reminders of earlier failures that triggered the
Perhaps no treasury secretary has come to the office with Yellen's ample
resume, including service as the chair of the Federal Reserve and a lifetime of
studying economics and finance. That experience was put to a severe test as she
worked to assure multiple constituencies, including financial markets, balky
Republicans in Congress and President Joe Biden's White House economic team.
Yellen spent that crucial period two weeks ago assembling 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, R-N.C.; and
Wall Street executives such as Jamie Dimon, the chief executive of J.P. Morgan
But few could relate as well as Paulson, who had asked Congress for
authority to buy up $700 billion in distressed mortgage-related assets from
private firms to save the larger U.S. financial system.
His words to Yellen as she navigated the bank collapses: "We are fighting
for the survival of our regional banks."
The Fed defines regional banks as those with total assets between $10
billion to $100 billion, not as small as community banks and not as large as
national ones. Regional and community banking organizations constitute the
largest number of banking institutions supervised by the Federal Reserve.
The crisis became apparent on Wednesday, March 8. Silicon Valley Bank's
chief executive officer, Greg Becker had sent a letter to shareholders stating
that the bank would need to raise $2.25 billion to shore up its finances after
suffering significant losses.
The bank held an unusually high level of uninsured deposits, and many
investments in long-term government bonds and mortgage-backed securities had
tumbled in value as interest rates rose. That caused depositors on Thursday,
March 9, to rush to withdraw their funds en masse. It triggered a bank run.
On 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 place Silicon Valley Bank into FDIC
That weekend, staff from Treasury, the Fed, and FDIC began the search for a
potential buyer for the bank. Yellen and other federal officials met to ensure
the bank could make payroll by the coming Monday, and that no taxpayer money
would be used to fund the rescue. And do it all before Asian markets opened for
Yellen also had to assuage Republicans in Congress. She talked with McHenry
and other lawmakers who wanted to know whether 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 this past
week that he supported the government's decision to make depositors whole.
By Sunday evening, March 12, the Treasury, the Federal Reserve, and FDIC
sent a joint statement announcing that New York-based Signature Bank had also
failed and was being seized. Officials also said that an emergency lending
package would ensure that all depositors at Silicon Valley Bank and New
York-based Signature Bank would be protected.
In a matter of days, a third bank, First Republic was fortified by $30
billion from 11 big banks to prevent more regional institutions from collapsing.
Yellen came up with the idea of using bank funds to save First Republic and
first raised it with Powell, Gruenberg and other regulators. Then she had a
call with Dimon and broached the idea. After that call, Dimon reportedly said
"we have our marching orders" and proceeded to build a coalition of banks,
according to two people briefed on the matter, speaking anonymously because
they were not authorized to discuss details of a private conversation.
A representative from Dimon's office did not respond to a request for
This account of Yellen's actions during that weekend is based on more than a
A former Federal Reserve governor, Sarah Bloom Raskin, said Yellen and other
policymakers will now have to determine "how two banks that many didn't think
would pose a systemic risk to the banking system" could so threaten the
nation's financial health.
A year ago, she withdrew her name as a Fed governor nominee after not
receiving enough Senate support. She had previously served from 2010 to 2016
and took her oath of office at the same time as Yellen, a vice chair at the
Brown, who urged President Barack Obama to nominate Yellen to succeed Ben
Bernanke as Fed chair, said people "realize how competent she is and in how
she's charged with doing big things in the administration."
Now, Yellen has to respond to accusations that the Biden administration is
bailing out risky banks. Some Republicans have put the blame on Biden
administration spending, which they say triggered 40-year high inflation,
forcing the the Fed to raise interest rates to tame prices, in turn impacting
banks and their investments.
Sen. Tim Scott, R-S.C., said at an American Bankers Association event last
week that "when you go to a 40-year high level of inflation, the truth of the
matter when inflation is that high, you should immediately go into action, the
Fed doesn't have a scalpel, it has a hammer and it hurts."
Biden has since called on Congress to strengthen the rules for banks to
prevent future failures and to allow regulators to impose tougher penalties on
the executives of failed banks, including clawing back compensation and making
it easier to bar them from working in the industry.
Paulson said "we're really fortunate to have a smart, experienced treasury
secretary," describing Yellen as "one who reaches out to gets a range of
opinions and talks to market participants on a real time basis."
But her test is not over.
She called a meeting of the Financial Stability Oversight Council on Friday,
to discuss, in part, the developments at Deutsche Bank, the German
multinational investment bank whose stock was tumbling.