How the FDIC Rigged the SVB Auction
By The Editorial Board April 18, 2023 6:59 pm ET Federal Deposit Insurance Corporation Chairman Martin Gruenberg testifies before a Senate Banking, Housing, and Urban Affairs hearings to examine recent bank failures and the Federal regulatory response on March 28. Photo: Manuel Balce Ceneta/Associated Press It was always hard to credit the Biden Administration’s claims that political bias played no role in its handling of the Silicon Valley Bank failure. Now we’ve learned from banking sources that the Federal Deposit Insurance Corp. snubbed nonbanks interested in buying SVB, resulting in increased costs to the insurance fund. FDIC Chairman Martin Gruenberg told Congress last month that the agency received a valid bid to acquire SVB the weekend after it failed on Friday, March 10
Federal Deposit Insurance Corporation Chairman Martin Gruenberg testifies before a Senate Banking, Housing, and Urban Affairs hearings to examine recent bank failures and the Federal regulatory response on March 28.
Photo: Manuel Balce Ceneta/Associated Press
It was always hard to credit the Biden Administration’s claims that political bias played no role in its handling of the Silicon Valley Bank failure. Now we’ve learned from banking sources that the Federal Deposit Insurance Corp. snubbed nonbanks interested in buying SVB, resulting in increased costs to the insurance fund.
FDIC Chairman Martin Gruenberg told Congress last month that the agency received a valid bid to acquire SVB the weekend after it failed on Friday, March 10. But he said the bid didn’t meet the FDIC’s statutory requirement to minimize costs to the deposit insurance fund because losses on SVB’s insured deposits were likely to be very small. The bid, he added, “was more expensive than a liquidation” would have been.
Yet, lo, on March 12 the FDIC invoked a “systemic risk” exception to its least-cost resolution requirement and guaranteed SVB’s uninsured deposits. This made SVB more attractive to potential suitors but at the price of increasing the FDIC’s liability. While the FDIC initially limited its auction to banks, it later sought to expand the pool of bidders to nonbanks such as asset managers and private-equity firms. But even then, the FDIC placed nonbanks on an unequal playing field.
The FDIC offered banks—but not nonbanks—a loss-share arrangement in which the agency agreed to take the tail credit risk on SVB’s loans. A loss-share arrangement reduced the due diligence potential acquirers had to perform to evaluate SVB’s hard-to-value loan book, but it also increased the FDIC’s potential liability.
The FDIC also offered banks—but again not nonbanks—cheap financing. This increased the FDIC’s costs and meant nonbanks seeking to bid on SVB had to quickly raise large amounts of private funds. We’re told that several nonbanks made competitive bids, but they needed more time to raise money and perform due diligence. Blackstone, for one, backed a bid by regional bank .
The FDIC insisted on closing a deal by the end of March 26, and its refusal to offer nonbanks the same terms as banks put alternative investment firms at a significant disadvantage. The winning bidder was , which acquired SVB’s $72 billion in loans at a significant $16.5 billion discount with future losses shared with the FDIC. The FDIC also financed the deal with a five-year $35 billion loan plus a $70 billion line of credit to cover potential deposit flight. The FDIC estimates that the failure and rescue will cost its insurance fund about $20 billion.
All of this shows how progressive ideology at the FDIC has cost taxpayers money. Letting nonbanks finance a takeover of failed banks, as they often take over other distressed companies, would minimize the FDIC’s liabilities. But it would anger progressives on the Senate Banking Committee who loathe private equity and view nonbanks as a threat to their political sway over the current banking system. Here’s looking at you, Sherrod Brown and Elizabeth Warren.
What is the FDIC’s plan if another midsize bank fails? The Administration won’t let big banks acquire smaller ones. Yet midsize and community banks lack the capital to swallow a bank with $100 billion to $200 billion in assets. That means we’ll probably get another sweetheart deal for a competitor to take over the failed bank and then write off a big loss to the insurance fund. Great work, guys.
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