1 00:00:01,400 --> 00:00:03,533 AMNA NAWAZ: Good evening, and welcome to the "NewsHour." 2 00:00:03,533 --> 00:00:07,966 Regional banks took a beating today, suffering their deepest losses on the stock market in 3 00:00:07,966 --> 00:00:10,066 years. 4 00:00:10,066 --> 00:00:12,766 GEOFF BENNETT: It follows the failure of two major banks, and after the government's top 5 00:00:12,766 --> 00:00:17,766 financial authorities spent the weekend taking action to shore up confidence around the larger 6 00:00:18,366 --> 00:00:20,333 banking system. 7 00:00:20,333 --> 00:00:24,300 No other bank failed today, but the pain is hardly over for certain banks. 8 00:00:25,433 --> 00:00:27,566 Economics correspondent Paul Solman reports. 9 00:00:27,566 --> 00:00:32,166 PAUL SOLMAN: Markets opened this morning, and investors promptly dumped bank stocks, 10 00:00:34,133 --> 00:00:36,633 despite President Biden's efforts to reassure customers and investors. 11 00:00:36,633 --> 00:00:40,366 JOE BIDEN, President of the United States: Americans can have confidence that the banking 12 00:00:40,366 --> 00:00:41,900 system is safe. 13 00:00:41,900 --> 00:00:44,033 Your deposits will be there when you need them. 14 00:00:44,033 --> 00:00:49,000 PAUL SOLMAN: Damage control after the largest U.S. banking failure since the 2008 financial 15 00:00:49,500 --> 00:00:51,533 crisis. 16 00:00:51,533 --> 00:00:55,300 On Friday, regulators shuttered the Silicon Valley Bank, SVB, and promised that insured 17 00:00:56,766 --> 00:00:59,566 depositors would have access to their money today. 18 00:00:59,566 --> 00:01:04,533 But that left uninsured depositors with large accounts to pay their employees desperate. 19 00:01:06,566 --> 00:01:09,933 Lindsey Michaelides, who runs the start-up Strongsuit, said she wouldn't be able to pay 20 00:01:09,933 --> 00:01:12,933 her employees or even feed her own family. 21 00:01:12,933 --> 00:01:15,000 On ABC, she elaborated. 22 00:01:15,000 --> 00:01:17,600 LINDSEY MICHAELIDES, CEO, Strongsuit: We have people who just bought their first house, 23 00:01:17,600 --> 00:01:22,166 and they're scared of, how are they going to make their mortgage payment and are they 24 00:01:22,166 --> 00:01:24,200 going to lose their job? 25 00:01:24,200 --> 00:01:28,300 PAUL SOLMAN: So, yesterday, the government extended its promise to all depositors, insured 26 00:01:28,300 --> 00:01:29,300 or not. 27 00:01:29,300 --> 00:01:32,100 Now, a bit of basic context. 28 00:01:32,100 --> 00:01:37,100 Banks take deposits, on which they pay interest, and then lend out the money at a higher rate. 29 00:01:39,166 --> 00:01:42,533 But depositors can now withdraw their money in a heartbeat, while the loans can't be recalled 30 00:01:43,433 --> 00:01:45,466 or sold off that quickly. 31 00:01:45,466 --> 00:01:49,766 Until yesterday, depositors at Silicon Valley and every other bank in America had their 32 00:01:51,400 --> 00:01:54,800 deposits insured, but only up to $250,000 per person in most cases. 33 00:01:56,733 --> 00:02:01,700 Problem was, almost half of all U.S. bank accounts are greater than $250,000, and thus 34 00:02:03,866 --> 00:02:05,433 uninsured. 35 00:02:05,433 --> 00:02:09,866 In SVB, uninsured money was almost 98 percent of all deposits. 36 00:02:11,766 --> 00:02:15,566 That works so long as depositors believe the bank has enough cash in the vault. 37 00:02:15,566 --> 00:02:20,566 And the banks are forced by regulators to keep a cushion of reserves, in supposedly 38 00:02:21,433 --> 00:02:23,500 super safe U.S. Treasury bonds. 39 00:02:23,500 --> 00:02:28,233 But, as interest rates have soared, those bonds have lost value, and, therefore, banks 40 00:02:30,000 --> 00:02:32,200 don't have the cushion they once did. 41 00:02:32,200 --> 00:02:36,566 What happened last week is that depositors like billionaire investor Peter Thiel pulled 42 00:02:36,566 --> 00:02:41,566 their companies money out of SVB, which triggered a bank run not unlike during the financial 43 00:02:43,433 --> 00:02:47,533 crisis or the Great Depression, frightened depositors determined to take their money 44 00:02:48,033 --> 00:02:50,133 and run. 45 00:02:50,133 --> 00:02:53,900 Which is why Treasury Secretary Janet Yellen and Fed Chief Jay Powell and the FDIC announced 46 00:02:55,900 --> 00:02:59,666 yesterday that the government will now reimburse the uninsured depositors, to reassure the 47 00:03:01,166 --> 00:03:04,066 likes of you and me and prevent a nationwide run. 48 00:03:04,066 --> 00:03:07,466 That came as a big relief to people like Lindsey Michaelides. 49 00:03:07,466 --> 00:03:12,066 And the government also threw a lifeline to customers of Signature Bank, which regulators 50 00:03:12,066 --> 00:03:14,033 shut down over the weekend. 51 00:03:14,033 --> 00:03:16,100 But some customers remained skeptical. 52 00:03:16,100 --> 00:03:20,933 ALLYN EHRLICH, Signature Bank Customer: I'm coming here to see if I have to close my accounts 53 00:03:20,933 --> 00:03:23,066 or not. 54 00:03:23,066 --> 00:03:26,933 Hopefully, the bank will be bought by another bank, and I can keep my accounts here. 55 00:03:28,866 --> 00:03:32,400 But if they're not or if there's any question, I want to empty my accounts and bring them 56 00:03:32,400 --> 00:03:34,433 to another bank. 57 00:03:34,433 --> 00:03:38,400 PAUL SOLMAN: And as some customers lined up outside Silicon Valley Bank today, trading 58 00:03:39,566 --> 00:03:41,400 was halted in roughly a dozen other banks. 59 00:03:41,400 --> 00:03:44,066 For the "PBS NewsHour," Paul Solman reporting. 60 00:03:44,066 --> 00:03:49,066 GEOFF BENNETT: As you can see from the reaction today, plenty of questions remain about the 61 00:03:51,100 --> 00:03:53,866 government's action and the potential fallout from the collapse of these two banks. 62 00:03:53,866 --> 00:03:56,000 Simon Johnson is closely following this. 63 00:03:56,000 --> 00:04:00,700 He's a former chief economist of the International Monetary Fund and a professor at MIT's Sloan 64 00:04:01,433 --> 00:04:03,366 School of Management. 65 00:04:03,366 --> 00:04:07,266 And Anat Admati is professor of economics at Stanford's Business School. 66 00:04:07,266 --> 00:04:10,666 She has written extensively about the banking system. 67 00:04:10,666 --> 00:04:12,700 Welcome to you both. 68 00:04:12,700 --> 00:04:16,666 And, Simon, government agencies taking emergency measures to backstop the financial system 69 00:04:18,566 --> 00:04:23,000 after the collapse of two banks, that sounds eerily reminiscent of what happened some 15 70 00:04:23,600 --> 00:04:24,833 years ago. 71 00:04:24,833 --> 00:04:26,866 Help us understand why this time is different. 72 00:04:26,866 --> 00:04:28,900 SIMON JOHNSON, MIT Sloan School of Management: Well, let's hope it's different. 73 00:04:28,900 --> 00:04:32,900 Let's hope we don't get this kind of serious repercussions we experienced 2008 and in 2009. 74 00:04:32,900 --> 00:04:37,800 I think, this time, what we're what we're looking at is some relatively small banks 75 00:04:37,800 --> 00:04:41,700 that had bad assets. 76 00:04:41,700 --> 00:04:44,033 They had a lot of scared depositors. 77 00:04:44,033 --> 00:04:46,533 There was a run on those banks. 78 00:04:46,533 --> 00:04:48,300 And then people start to say, well, who's next? 79 00:04:48,300 --> 00:04:50,333 What kind of dominoes could fall? 80 00:04:50,333 --> 00:04:53,533 The government, through the Federal Reserve, the FDIC, and the Treasury Government, stepped 81 00:04:53,533 --> 00:04:56,733 in this weekend, and has attempted to stop the panic. 82 00:04:56,733 --> 00:04:59,266 And I think, so far, they have been quite effective. 83 00:04:59,266 --> 00:05:03,566 GEOFF BENNETT: Anat, the government's expansive response here to stabilize the banking system, 84 00:05:04,733 --> 00:05:06,633 do you think that will be enough? 85 00:05:06,633 --> 00:05:08,133 ANAT ADMATI, Stanford University Graduate School of Business: We don't know for sure 86 00:05:08,133 --> 00:05:10,500 because there are a lot of hidden losses in the system. 87 00:05:10,500 --> 00:05:12,733 And it's just fragile all the time. 88 00:05:12,733 --> 00:05:17,733 So, if you put a lot of backstops on it, then you will stem at least some runs. 89 00:05:19,533 --> 00:05:22,100 But a lot of these accounts, deposit accounts, are very large. 90 00:05:22,100 --> 00:05:24,200 So they are very finicky. 91 00:05:24,200 --> 00:05:26,266 And they could run. 92 00:05:26,266 --> 00:05:29,566 Now, when they raise the insurance limit to infinity, then people will stay home. 93 00:05:29,566 --> 00:05:32,000 And that's what they did during the financial crisis as well. 94 00:05:32,000 --> 00:05:37,000 GEOFF BENNETT: And, Simon, if the government says that we're going to guarantee deposits 95 00:05:39,000 --> 00:05:43,400 above the established $250,000 threshold, doesn't that in some way reward irresponsible 96 00:05:46,033 --> 00:05:48,066 behavior? 97 00:05:48,066 --> 00:05:51,100 I mean, what's the point of bank risk management at all if the federal government is going 98 00:05:51,100 --> 00:05:53,766 to come in and backstop it? 99 00:05:53,766 --> 00:05:57,200 SIMON JOHNSON: No, I think what rewards irresponsible risk management is when you keep the management 100 00:05:57,200 --> 00:05:59,200 on and when you protect the equity holders. 101 00:05:59,200 --> 00:06:01,400 That's not what happened over the weekend. 102 00:06:01,400 --> 00:06:05,866 Silicon Valley Bank, and in the other bank that failed, management has been removed, 103 00:06:07,000 --> 00:06:09,966 and the equity holders have gone to zero. 104 00:06:09,966 --> 00:06:13,766 The question of depositors is different, I think, particularly in this situation, particularly 105 00:06:13,766 --> 00:06:17,400 in the modern world, particularly when Silicon Valley Bank, for example, on Thursday, about 106 00:06:17,400 --> 00:06:22,166 a third of their U.S. deposit base tried to leave, withdraw on the same day, same business 107 00:06:22,166 --> 00:06:24,100 day. 108 00:06:24,100 --> 00:06:28,166 That's a digital economy phenomenon, I think, the intensity of that kind of run. 109 00:06:29,566 --> 00:06:32,633 And, honestly, I think it's time to ensure all of deposits. 110 00:06:32,633 --> 00:06:34,533 I understand not everyone's ready to go there. 111 00:06:34,533 --> 00:06:36,733 And the government hasn't done that yet. 112 00:06:36,733 --> 00:06:41,100 But once you do that, as Anat said, you stop anybody's incentive to move to another bank. 113 00:06:43,000 --> 00:06:46,500 There has to be then, of course, very strong supervision, and high capital requirements 114 00:06:46,500 --> 00:06:48,533 and very effective regulation. 115 00:06:48,533 --> 00:06:51,333 And we have struggled on all of those over the past 15 years, but that's what you're 116 00:06:51,333 --> 00:06:53,366 going to need going forward. 117 00:06:53,366 --> 00:06:55,966 GEOFF BENNETT: So, Anat, as you well know, the blame game here in Washington is well 118 00:06:55,966 --> 00:06:58,000 under way. 119 00:06:58,000 --> 00:07:01,966 There are lawmakers pointing to what happened back in 2018 under the Trump administration, 120 00:07:03,900 --> 00:07:07,000 when some of the Dodd-Frank regulations were rolled back for midsized banks. 121 00:07:09,000 --> 00:07:12,100 In your view, what does responsible, practical regulation look like for regional community 122 00:07:14,166 --> 00:07:16,133 midsized banks? 123 00:07:16,133 --> 00:07:19,766 ANAT ADMATI: Well, I have ideas about what regulation should look like for all banks. 124 00:07:19,766 --> 00:07:22,300 They always say, oh, the small banks are not a problem. 125 00:07:22,300 --> 00:07:24,366 But then they are a problem. 126 00:07:24,366 --> 00:07:28,900 All banks are a problem when they are run, with basically taking the upside and leaving 127 00:07:30,333 --> 00:07:32,400 the downside to others, much more than they need to be. 128 00:07:32,400 --> 00:07:36,900 So, you can have a bloated system in that way where, you know, everything's fine until 129 00:07:36,900 --> 00:07:39,066 it's not. 130 00:07:39,066 --> 00:07:42,900 So, the -- what Simon just mentioned, what I have been advocating for is a lot more what 131 00:07:43,700 --> 00:07:45,633 they call capital. 132 00:07:45,633 --> 00:07:49,166 But I think you have to be very careful that it's not thought of as some cash reserves 133 00:07:49,166 --> 00:07:54,166 held on the sideline, but as equity funding coming from investors that cares about the 134 00:07:54,800 --> 00:07:56,700 downside. 135 00:07:56,700 --> 00:07:59,500 Right now, there's too little care about the downside in the private sector. 136 00:07:59,500 --> 00:08:03,466 And when the downside comes, then they go running to the government. 137 00:08:03,466 --> 00:08:08,300 GEOFF BENNETT: Simon, will this change the way the Fed calculates the next rate hike, 138 00:08:08,300 --> 00:08:09,300 what happened over the weekend? 139 00:08:09,300 --> 00:08:10,300 (LAUGHTER) 140 00:08:10,300 --> 00:08:11,300 SIMON JOHNSON: I think so. 141 00:08:11,300 --> 00:08:13,266 Geoff. 142 00:08:13,266 --> 00:08:14,500 I mean, we will have to, obviously, see how the rest of the week plays out. 143 00:08:14,500 --> 00:08:16,533 A couple of problems for the Fed here. 144 00:08:16,533 --> 00:08:19,500 One is that it's their raising of interest rates that has caused some of these issues 145 00:08:19,500 --> 00:08:21,433 for banks. 146 00:08:21,433 --> 00:08:24,033 Now, why the Fed's own supervisors didn't flag that, very interesting question. 147 00:08:24,033 --> 00:08:25,566 They're going to have sought that one out. 148 00:08:25,566 --> 00:08:27,666 And then, of course, there's issues for the real economy. 149 00:08:27,666 --> 00:08:30,566 Are there going to be problems because some people couldn't make payroll or because credit 150 00:08:30,566 --> 00:08:34,066 is becoming -- going to become a little more shy under these circumstances? 151 00:08:34,066 --> 00:08:36,333 That is all going to have to be factored into the Fed's decision-making? 152 00:08:36,333 --> 00:08:41,333 GEOFF BENNETT: And, Anat, how do regular people know if their bank is well-managed, if they 153 00:08:42,966 --> 00:08:46,600 happen to have their money stored away with small regional banks? 154 00:08:46,600 --> 00:08:50,633 ANAT ADMATI: That's a great question, Geoff, because we don't. 155 00:08:50,633 --> 00:08:52,666 And that's the whole idea. 156 00:08:52,666 --> 00:08:56,066 We want to just trust that it's taken care of, and the job of people to take care of 157 00:08:56,066 --> 00:09:01,066 it, just like the job of ensuring our safety on the roads, is of the policeman or, in this 158 00:09:03,600 --> 00:09:05,666 case, their supervisors and regulators. 159 00:09:05,666 --> 00:09:08,966 And they're the ones that are supposed to know that the assets are down in value, and 160 00:09:08,966 --> 00:09:13,033 that there are a lot of uninsured deposits to this bank who are going to be unpleasantly 161 00:09:13,033 --> 00:09:14,300 surprised. 162 00:09:14,300 --> 00:09:18,066 So the key to all of it is effective regulation. 163 00:09:18,066 --> 00:09:19,733 And we just didn't have that. 164 00:09:19,733 --> 00:09:22,000 GEOFF BENNETT: What does effective regulation look like, in your view? 165 00:09:22,000 --> 00:09:26,400 SIMON JOHNSON: Well, I think the cornerstone of effective regulation is to have, as Anat 166 00:09:26,400 --> 00:09:30,500 said, very strong levels of equity, and real equity, not fake equity -- and there's many 167 00:09:30,500 --> 00:09:33,500 ways that it can be fake -- the real equity that can absorb losses. 168 00:09:33,500 --> 00:09:36,366 So, Silicon Valley Bank obviously didn't have enough equity. 169 00:09:36,366 --> 00:09:41,133 They were running a $200 billion bank on a couple of billion dollars of equity at the 170 00:09:41,133 --> 00:09:42,133 end. 171 00:09:42,133 --> 00:09:43,300 That doesn't work. 172 00:09:43,300 --> 00:09:44,300 That's when depositors start to worry. 173 00:09:44,300 --> 00:09:46,233 That's how you get panic. 174 00:09:46,233 --> 00:09:50,166 So, first and foremost, get the equity right, larger buffers, more resilient buffers. 175 00:09:50,166 --> 00:09:53,666 And then, of course, you have to have sensible regulation about, how much risk is a bank 176 00:09:53,666 --> 00:09:55,766 like that allowed to take? 177 00:09:55,766 --> 00:10:00,233 Again, Silicon Valley Bank, we already know took a lot of risk, funnily enough by buying 178 00:10:02,666 --> 00:10:06,066 government bonds, but they bought long government bonds, which were very exposed to -- which 179 00:10:06,066 --> 00:10:07,700 fall in value when interest rates rise. 180 00:10:07,700 --> 00:10:09,733 And they funded themselves with short-term deposits. 181 00:10:09,733 --> 00:10:13,433 So they pay more on deposits, the value of their assets is less, they have no equity. 182 00:10:13,433 --> 00:10:16,300 And that was the realization people came to on Wednesday of last week. 183 00:10:16,300 --> 00:10:21,300 End of Thursday, the bank is gone completely, because they couldn't find enough liquidity 184 00:10:22,166 --> 00:10:23,100 to match their withdrawals. 185 00:10:23,100 --> 00:10:25,200 One day, that's all it took. 186 00:10:25,200 --> 00:10:27,233 GEOFF BENNETT: Anat, what do you see as the ripple effect here for the tech sector? 187 00:10:27,233 --> 00:10:31,700 ANAT ADMATI: Well, the tech sector got saved because they wanted to make payroll, and the 188 00:10:33,266 --> 00:10:35,333 government didn't want panic. 189 00:10:35,333 --> 00:10:39,666 So they kind of could breathe a little easier in terms of their deposits. 190 00:10:39,666 --> 00:10:42,133 The tech sector funds itself in all kinds of ways. 191 00:10:42,133 --> 00:10:44,500 A bank is not usually the way they fund themselves. 192 00:10:44,500 --> 00:10:45,700 They go to venture capital. 193 00:10:45,700 --> 00:10:47,766 They fund themselves in other ways. 194 00:10:47,766 --> 00:10:52,100 So, the tech sector has its own problems right now, the crypto turmoil, all kinds of other 195 00:10:52,600 --> 00:10:54,700 things. 196 00:10:54,700 --> 00:10:58,533 But, I mean, this banking part of it is just a wakeup call on the fragility of banking, 197 00:11:00,500 --> 00:11:01,633 basically. 198 00:11:01,633 --> 00:11:03,466 And the bank couldn't raise equity. 199 00:11:03,466 --> 00:11:05,000 That was a huge flag. 200 00:11:05,000 --> 00:11:07,633 That means that they were too deep in the hole by that time. 201 00:11:07,633 --> 00:11:12,600 It was for the regulators and for the supervisors to know that that was really an accident waiting 202 00:11:14,066 --> 00:11:16,100 to happen. 203 00:11:16,100 --> 00:11:17,700 GEOFF BENNETT: Anat Admati and Simon Johnson, thank you both for your insights. 204 00:11:17,700 --> 00:11:18,700 Appreciate it. 205 00:11:18,700 --> 00:11:18,833 ANAT ADMATI: Thank you.