Washington surveys the damage

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Mar 13, 2023 View in browser   By Sam Sutton Presented by Apollo Global Management Editor’s note: Morning Money is a free version of POLITICO Pro Financial Services morning newsletter, which is delivered to our subscribers each morning at 5:15 a.m. The POLITICO Pro platform combines the news you need with tools you can use to take action on the day’s biggest stories. Act on the news with POLITICO Pro. Banks will open this morning. Depositors will have access to their accounts. And three days after the collapse of Silicon Valley Bank sent shockwaves across Wall Street and the Beltway, Washington will start to unpack what the hell just happened. The federal government’s last-minute rescue for customers of SVB and Signature Bank – a regional powerhouse that was shut down by New York regulators on Sunday — was designed to calm markets that had been shaken by last week’s bank run. But while the FDIC and Fed facilities might placate the venture capitalists who had clamored for relief, concerns remain about whether it will be enough to smooth things over with skittish depositors who’ve now absorbed a weekend’s worth of “failed bank” headlines. Regulators are “worried about tomorrow morning,” Rep. Stephen Lynch (D-Mass.) told MM after a Sunday night briefing with agency officials. “They acted quickly, decisively and did the best job they could under the circumstances but there’s still that nervousness out there.” Here’s what else we’re thinking about as policymakers sift through the weekend’s chaos: Why didn’t the regulators catch this? While Silicon Valley Bank’s demise was unexpected, the problems plaguing its balance sheet could have been spotted a mile away. The bank ballooned in size during a tech-fueled bull run and more than 90 percent of its deposits weren’t insured. What’s more, its investment portfolio was heavily exposed to securities that would lose value as interest rates climbed, which left it susceptible to losses. “For every supervisor, rapid growth is a warning sign. Rapid growth in an asset class, rapid growth in the bank as a whole, because it almost always outstrips the risk management capacities of a bank when they grow so quickly,” Former Fed Governor Daniel Tarullo, who led the central bank’s regulatory policy in the Obama administration, said in an interview with Victoria Guida. “That’s the kind of thing that should’ve been a warning sign." Senate Banking’s top Republican Sen. Tim Scott criticized the rescue in a statement and said there needs to be accountability from “both from the banks and our regulators. We deserve to know what exactly happened and why.” What does this mean for bank regulations? Progressives plan to use SVB’s collapse as a cudgel to force reforms. In a joint statement, Senate Banking Chair Sherrod Brown (D-Ohio) and Rep. Maxine Waters of California, the ranking Democrat on House Financial Services, said they planned to focus on “how to strengthen guardrails for the largest banks.” As Zach wrote earlier Sunday, the recent turmoil will embolden Democrats and regulators who’ve been angling to reassess the capital buffers that are designed to help large financial institutions weather downturns. Rep. Katie Porter, a California Democrat who’s running for Senate, told MM that she would introduce legislation to undo a 2018 law that unwound some of Dodd-Frank’s requirements for mid-size and regional financial institutions. “Make no mistake, Silicon Valley Bank would have been covered by — was covered by Dodd-Frank — before colleagues on both sides of the aisle voted to weaken the regulation,” Porter said. “If I were one of the people who had voted to deregulate, I wouldn't be going on TV this weekend talking about how banking regulators should have done a better job.” How does Washington view the role of social media in the bank run?  The $42 billion bank run that ultimately crashed SVB was spurred on by investors and startup founders alarmed by the bank’s move to stabilize its balance sheet to address interest rate risks. (H/T to the WSJ for pulling together a rundown of how fears of the bank’s failure spread across Silicon Valley WhatsApp and Slack channels). “This was the first Twitter fueled bank run,” said House Financial Services Chair Patrick McHenry (R-N.C.) in a statement. “At this time, it is important to remain levelheaded and look at the facts—not speculation—when assessing the right path forward.” Former House Financial Services Chair Barney Frank, who served on Signature’s board, told Zach that the New York bank was hit with a run generated by “the nervousness and beyond nervousness from SVB and crypto.” The bank’s digital assets business made it the “unfortunate victim of the panic that really goes back to FTX.” IT’S SOMEHOW ONLY MONDAY — What questions should we be asking? Do you know of anywhere that serves coffee by IV? Have tips, gossip or scoops? Let Sam know at ssutton@politico.com and Zach at zwarmbrodt@politico.com.   A message from Apollo Global Management: Every day at Apollo, we work to lead responsibly and drive positive impact across our workplace, marketplace, and in our communities. As a leading high-growth alternative asset manager, Apollo is at the forefront of innovation, leveraging its full platform to empower retirees, build and finance stronger businesses, and drive a more sustainable future. Apollo is investing in tomorrow, today. Discover more   Driving the Week The Consumer Price Index will be released at 8:30 a.m. on Tuesday … Assistant Treasury Secretary for Economic Policy Ben Harris will speak at the American Enterprise Institute on Tuesday at 10 a.m. .. Sens. Thom Tillis (R-N.C) and John Hickenlooper (D-Colo.) will discuss crypto policy at a Bipartisan Policy Center event on Wednesday at 2 p.m. … The Producer Price Index will be out at 8:30 a.m. on Wednesday … Housing starts will be released at 8:30 a.m. on Thursday … The Senate Finance Committee will hold a hearing on Biden’s budget proposal at 10 a.m. … Senate Banking has a hearing on public transportation at 10 a.m. on Thursday … Consumer sentiment will be released at 10 a.m. on Friday More from Frank — Despite the bank being shut down on Sunday, Frank said Signature was in “good shape” and that it will probably sell for close to what the bank’s leaders believed it’s worth. Frank said the Treasury and regulator moves were “without question” enough to stabilize the banking system. Frank said other banks were in trouble in recent days, with the Federal Home Loan Bank telling Signature when it applied for money on Friday that “they didn’t have enough to go around because they were getting so many requests.” Frank said he felt vindicated by the government’s decision to guarantee all deposits. When he served in the House, he said he wanted to pass legislation that would expand deposit insurance, especially for businesses. Had the government announced its deposit backstop on Friday, “we wouldn’t have had the problem.” POPULISM ABOUNDS — Our Ben White: “Many Republicans gave up trying to defend corporate America when Donald Trump rode a wave of conservative populism straight into the White House. Now it’s getting even lonelier for big business in Washington. President Joe Biden ditched Trump’s brawling style. But he is keeping some of the former president’s key policies in place that are disliked by CEOs — including tariffs on imports from China and the EU and pressure on U.S. companies to cut their vast overseas supply chains to manufacture in America.” WHAT WILL THE FED DO? — Bloomberg’s Chris Anstey: “Less than a week after Federal Reserve Chair Jerome Powell opened the door to a re-acceleration in the pace of interest-rate hikes, the sudden eruption of financial strains at the US regional bank level is raising the bar on such a move.”   STEP INSIDE THE WEST WING: What's really happening in West Wing offices? Find out who's up, who's down, and who really has the president’s ear in our West Wing Playbook newsletter, the insider's guide to the Biden White House and Cabinet. For buzzy nuggets and details that you won't find anywhere else, subscribe today.     Talking Points SVB hits the Gridiron — Your MM co-host Zach donned white tie and tails for Saturday’s annual Gridiron Dinner and reports that the banking crisis had a presence throughout the evening. White House NEC Director Lael Brainard was a notable last-minute cancellation as the administration scrambled to limit any SVB contagion. Rep. Ro Khanna, a lead congressional voice on the matter, was swarmed. Attendees were also seen hitting up Treasury economist Ben Harris. Gridiron guests dished over dinner about who was to blame for the bank collapse, the politics of a government bailout of venture capitalists and what role Rep. Nancy Pelosi was playing, if any, in helping out those VC’s. Unclear if anyone got Anthony Fauci or Bill Nye’s thoughts on the SVB situation. One of Zach’s favorite skits from the night was a duet between (not) Janet Yellen and Jerome Powell to the tune of The Beatles’ “You Never Give Me Your Money.” To give you a flavor of the econ take on the classic: Powell: I am in charge of your money And making sure that it’s not worthless paper But at the slightest worry of inflation You freak out Yellen: About that price of eggs number Rates aren’t fixing the situation And in the middle of experimentation Dems freak out   A message from Apollo Global Management:   In the markets ENCOURAGING — Reuters: “U.S. stock futures rallied in Asian trade on Monday as authorities announced plans to limit the fallout from the collapse of Silicon Valley Bank (SVB), though investors were also still favouring the safety of sovereign debt.” ENERGY PRICES — The WSJ’s Tom Fairless: “Energy prices are roiling the global economy for the second time in a year. This time, it’s good news. Plunging oil and natural-gas prices are pumping up economic growth, putting money into consumers’ pockets, boosting confidence and easing pressures on government budgets.” Regulatory Corner GARY’S WATCHING — Our Declan Harty writes that Wall Street’s top regulator is promising to watch for any signs of market stability issues and misconduct. “In times of increased volatility and uncertainty, we at the SEC are particularly focused on monitoring for market stability and identifying and prosecuting any form of misconduct that might threaten investors, capital formation, or the markets more broadly,” SEC Chair Gary Gensler said in a statement released just as Asian markets opened for trading on the week. “Without speaking to any individual entity or person, we will investigate and bring enforcement actions if we find violations of the federal securities laws.”   DOWNLOAD THE POLITICO MOBILE APP: Stay up to speed with the newly updated POLITICO mobile app, featuring timely political news, insights and analysis from the best journalists in the business. The sleek and navigable design offers a convenient way to access POLITICO's scoops and groundbreaking reporting. Don’t miss out on the app you can rely on for the news you need, reimagined. DOWNLOAD FOR iOS– DOWNLOAD FOR ANDROID.     Crypto THEIR FUNDS ARE SAFE, BUT HOW WILL CRYPTO BANK MOVING FORWARD? — Bloomberg’s Olga Kharif and Muyao Shen: “The digital-asset market is coming off of a turbulent year featuring a number of high-profile blowups. Now, three shutdowns in the banking industry — SVB Financial Group’s Silicon Valley Bank, Silvergate Capital Corp. and Signature Bank — have set off a fresh set of stresses.” DONALDS' CRYPTO SANDBOX — The House Financial Services Committee's newest Freedom Caucus member, Rep. Byron Donalds (R-Fla.), wants the committee to pursue a regulatory framework for cryptocurrency that "let[s] the industry become a self-regulating industry," he told our Eleanor Mueller Friday. Whether leadership is on the same page? "I don't know yet," Donalds said. "That's just where I stand."   A message from Apollo Global Management: From teachers and firefighters to other essential workers, Apollo is helping millions of people retire better. Our asset management business seeks to generate excess returns on behalf of pensions and retirement plans and our retirement services business, Athene, provides a suite of retirement savings products to help clients achieve financial security. At Apollo, we have built out an entire ecosystem around empowering retirees. Alternative Assets. Innovative Solutions. Enduring Impact. Discover more     Follow us on Twitter Mark McQuillian @mcqdc Ben White @morningmoneyben Victoria Guida @vtg2 Katy O'Donnell @katyodonnell_ Zachary Warmbrodt @Zachary Sam Sutton @samjsutton   Follow us

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