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March 13, 2023
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THE TOP
Good Monday morning.
Don’t call it 2008, but Washington is worried about the banks again.
Federal regulators and top Biden administration officials scrambled throughout the weekend to come up with a plan to reassure financial markets and the American public following Friday’s stunning failure of Silicon Valley Bank.
The frenzy of high-level activity culminated in a pair of dramatic policy announcements from the Treasury Department, Federal Reserve and FDIC on Sunday night. Regulators hope the moves will shore up confidence in the American banking system as markets open today. What happens to the broader U.S. economy and interest rates remains to be seen.
First, Treasury Secretary Janet Yellen, Federal Reserve Chair Jay Powell and FDIC Chair Martin Gruenberg announced that deposits of Silicon Valley Bank would be “fully protected” regardless of whether they were insured. (More than 90% of the bank’s deposits were uninsured.)
The trio also announced that the $110 billion-asset Signature Bank in New York had failed and would be closed by state regulators. Signature’s depositors will be covered under “a similar systemic risk exception,” the officials said. The FDIC has now set up a “successor” to Signature Bank.
Second, the Federal Reserve and Treasury plan to stand up a new emergency liquidity facility “to help assure banks have the ability to meet the needs of all their depositors.” They’re calling it the Bank Term Funding Program.
President Joe Biden approved these actions, which represent a significant shift in federal banking policy. Biden is set to give remarks at 8 a.m. on the banking system.
Here’s Yellen, Powell and Gruenberg:
They also said “no losses will be borne by the taxpayer.”
Members and senators were briefed on Sunday night by Nellie Liang, Treasury’s under secretary for domestic finance. Treasury officials said a handful of regional banks are in a similar position as SVB, but regulators hope they’re providing a backstop for those banks.
Some Republicans complained they were excluded from the briefing, while others approved the administration’s move.
So what happens next?
Well, let’s be clear – no one should be throwing around the words “financial crisis” yet.
As we wrote last week, SVB was a weird bank. It was big – the 20th largest bank in the country by assets – but not mega-bank big. Its unusual concentration of customers and securities on its balance sheet made it vulnerable to the Fed’s rate hikes, more so than other large banks.
Signature Bank, for its part, bet heavily on the crypto sector. Like SVB, it saw a huge spike in deposits in recent years as valuations for digital assets soared. A large portion of its deposits came from crypto clients. When the Fed began raising interest rates to battle inflation – which lawmakers heartily approved – Signature’s fortunes waned.
Some trivia: former Rep. Barney Frank (D-Mass.), a key architect behind the legislative reforms following the 2008 financial crisis, sat on Signature’s board.
None of this is to say there aren’t real risks facing the U.S. banking system. However, the Biden administration’s immediate concern stemming from SVB’s failure wasn’t a financial contagion like the calamity that ripped through the banking sector in 2008.
Instead, today’s bogeyman is a social contagion, which is a fancy way of saying “people panicking all at once on social media.” And panic can be a dangerous thing to banks. House Financial Services Committee Chair Patrick McHenry (R-N.C.) called SVB’s collapse the “the first Twitter fueled bank run.”
If a lot of freaked-out customers started to pull their deposits from banks they think are exposed to systemic risks, and Wall Street continues pounding the banking sector, we could start to see some real stress in the financial system.
This brings us to the question of a federal bailout. Expect the B-word to get some serious mileage in the political discourse that follows the Biden’s administration’s response this weekend.
Yellen told CBS’s Face the Nation on Sunday morning that the Biden administration had no interest in bailing out Silicon Valley Bank’s investors.
Yet covering uninsured depositors is its own kind of bailout – one the normally free-market, semi-libertarian tech and venture capital sector spent all weekend clamoring for. One might begin to wonder what’s the point of federal deposit insurance’s $250,000 cap if political leaders are prepared to step in every time there’s signs of meaningful turbulence in the financial system.
And the decision to extend deposit insurance carries significant political risk for the rest of the banking sector. Long before SVB failed, the Fed had been doing a “holistic” review of how banks’ capital regulation works.
While the banking sector and its Republican allies have spent the past year arguing bank capital is plenty strong – too strong, even – this kind of aggressive government action in response to two banks failing is plain evidence that there are gaps in the framework.
It’s an awkward situation for the GOP. Exactly one week ago, Sen. Tim Scott (S.C.), top Republican on the Senate Banking Committee, sent a letter to the Fed along with several colleagues that warned the central bank against “unjustly increas[ing] capital requirements.”
If Republicans want to keep fighting the Fed on this, they can. For now, they’re pivoting to the federal government’s response. Scott said in a statement Sunday night that “[b]uilding a culture of government intervention does nothing to stop future institutions from relying on the government to swoop in after taking excessive risks.”
There’s also a lot of debate also whether the Fed should continue to raise interest rates when it meets later this month. We’ll have much more on this in our Midday edition.
– Brendan Pedersen, Jake Sherman, John Bresnahan and Heather Caygle
WASHINGTON AND THE WARS
Senate will take up AUMF repeal this week
Scoop: The Senate will begin voting this week on legislation to repeal the Iraq war authorizations, setting up final passage around the 20th anniversary of the George W. Bush-era invasion.
Senate Majority Leader Chuck Schumer will file cloture Tuesday on a bipartisan bill that scraps the 1991 and 2002 authorizations for the use of military force against Iraq’s government, which the United States now counts as a security partner in the region. The repeal push has been led by Sens. Tim Kaine (D-Va.) and Todd Young (R-Ind.).
Schumer’s move puts the Senate on track to take an initial procedural vote on Thursday and pass the bill as early as next week. The measure is expected to easily overcome a GOP filibuster, with all Democrats and more than a dozen Republicans in support. It cleared the Senate Foreign Relations Committee last week on a bipartisan 13-8 vote.
It’s been more than a half-century since both chambers of Congress voted to repeal an authorization for the use of military force. The House repealed the 2002 Iraq authorization two years ago — with substantial GOP support — but the Senate never voted.
So the Senate’s actions over the next couple of weeks will represent a rare effort to reassert Congress’ authority over matters of war and peace. And it’s one that President Joe Biden has already said he supports.
On March 20, 2003, the U.S. invaded Iraq with the goal of toppling Saddam Hussein’s regime. The war began based on the Bush administration’s assessment that Hussein possessed weapons of mass destruction — which turned out to be false, of course.
The war formally ended in 2011, but the United States eventually led a coalition of nations to eradicate the ISIS terrorist group, which had gained a foothold in Iraq following the American withdrawal. The 2002 authorization in particular served as a key legal justification for the Obama administration’s counterterrorism operations targeting ISIS.
Today, the Iraqi government is a valuable ally, especially for efforts to counter Iran. Lawmakers have tried for several years to repeal the authorizations if only to ensure that future presidents don’t abuse outdated authorities in order to circumvent Congress’ war-making powers.
Proponents of repeal have pointed to former President Donald Trump’s use of the 2002 AUMF to legally justify the airstrike that killed top Iranian military official Qasem Soleimani in Iraq. They argued that Trump abused the 2002 authorization by stretching it beyond its intent, which was to target the Iraqi government, and risked a direct conflict with Iran in doing so.
Few lawmakers dispute that the authorizations, as written, have outlived their usefulness and should either be repealed or rewritten. But opponents of the Kaine-Young bill argue it would send the wrong signal to adversaries seeking to exploit perceived U.S. pullbacks from the region.
Those concerns are particularly acute when it comes to Iran, whose proxies are operating throughout Iraq and have targeted U.S. troops there. There was a robust debate on this point at the Foreign Relations markup last week when Sen. Ted Cruz (R-Texas) offered an amendment addressing threats from Iran.
The Chinese-brokered pact between Iran and Saudi Arabia may also impact this floor debate.
As we’ve noted before, the bill’s path in the House is uncertain. Many of Speaker Kevin McCarthy’s allies and the conservatives who helped him get to the speakership are co-sponsors of the House version, so they’ve got some leverage. If repeal gets a House floor vote, it would pass easily with dozens of Republicans backing it.
McCarthy has also promised an open amendment process for legislation, so the AUMF repeal could be tacked onto a larger measure like the annual defense policy bill.
Also this week: The Senate will hold a procedural vote as soon as Wednesday on Eric Garcetti’s nomination to serve as U.S. ambassador to India. Just two GOP senators — Todd Young of Indiana and Bill Hagerty of Tennessee — voted for Garcetti in the Foreign Relations Committee, but a few more are expected to back him on the floor.
There could be one or two Democratic defectors on Garcetti, but we expect him to be confirmed with a majority of Democrats and a handful of Republicans.
We don’t have any update this morning on Senate Minority Leader Mitch McConnell’s health status following a fall, but we expect him to return as soon as he possibly can.
— Andrew Desiderio and John Bresnahan
The week ahead in investigations
The House is out this week, but GOP-led investigations are still chugging away during the recess. Here’s what to watch.
Letter deadlines: House Republicans eager to learn more about the federal government’s knowledge of Covid-19’s origins are looking to hear back from the State Department and FBI this week.
House Oversight and Accountability Committee Chair James Comer (R-Ky.) and Rep. Brad Wenstrup (R-Ohio), the chair of the select subcommittee on the coronavirus pandemic, wrote to FBI Director Chris Wray and Secretary of State Antony Blinken seeking details “involving the origins of COVID-19 and the CCP’s efforts to cover it up.”
Today is the deadline for Wray and Blinken’s responses. A State Department spokesperson said the administration “will continue to use every tool to figure out what happened” and share that information with the public.
“President Biden has directed every element of our intelligence community to put the effort and resources behind getting to the bottom of the origins of COVID-19,” the spokesperson told us.
The FBI declined to comment.
On Thursday, Jonathan Davidson — the Treasury Department’s assistant secretary for legislative affairs — will sit down for a transcribed interview with the Oversight Committee. The interview is part of Comer’s effort to understand why Treasury hasn’t turned over Suspicious Activity Reports flagged by banks with regard to Hunter and James Biden’s business dealings.
Letter updates: Comer fired off letters last month to Blinken, Defense Secretary Lloyd Austin and USAID Administrator Samantha Power requesting information on conditions for U.S. assistance to Ukraine.
The Biden administration responded last week and offered Comer “an interagency briefing for your Members and Committee staff to address your questions and to provide requested information.” Check out the full letter, from State Department Legislative Affairs Assistant Secretary Naz Durakoglu, here.
The Department of Transportation also responded to Comer’s letter on the East Palestine, Ohio, train derailment on March 10. Read the letter here, where DOT took time to point out “several erroneous suggestions and assertions” in the Kentucky Republican’s request.
“The Department of Transportation has not produced documents at this time and committee staff will be following up with the department about the committee’s request,” an Oversight spokesperson told us.
Also, Comer requested information from Serbian politician Vuk Jeremić on any potential communication with Hunter and James Biden. Comer heard back from Jeremić’s attorney and isn’t pleased with the response.
Comer said Jeremić is “choosing to hinder our investigation” and vowed to continue “pressing [Jeremić] for answers.”
— Max Cohen
THE LEADERS
Tomorrow, our third profile of The Leaders launches, featuring Rep. Emilia Sykes (D-Ohio). Sykes spoke to us about the role of northeast Ohio in reviving manufacturing in the United States and new opportunities for technological innovation in the state’s agriculture sector.
Check out our past two profiles on Oklahoma Gov. Kevin Stitt and Atlanta Mayor Andre Dickens today.
… AND THERE’S MORE
| → | New on the scene: Bloomberg Television will relaunch its political show, “Balance of Power,” beginning this evening. The show will move from New York to D.C. and air at 5 p.m. on weekdays. The new iteration will include more original reporting and roundtable conversations led by Washington correspondents Annmarie Hordern and Joe Mathieu. |
– Jake Sherman
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Presented by Apollo Global Management
One size rarely fits all. That’s why Apollo provides custom capital solutions designed to help companies achieve their ambitious business goals. Think Credit New