WASHINGTON — On Friday afternoon, the deputy Treasury secretary, Wally Adeyemo, met with Jamie Dimon, CEO of JPMorgan Chase & Co., at Dimon’s office in New York.
The Biden administration and the Federal Reserve were considering what would be the most aggressive emergency intervention in the banking system since the 2008 financial crisis, and the question the two men debated was at the heart of that decision.
Could the failure of Silicon Valley Bank, the mega startup lender that had just collapsed, spread to other banks and create a systemic risk to the financial system?
“There’s potential,” Dimon said, according to people familiar with the conversation.
Adeyemo was one of many administration officials who entered last weekend unsure of whether the federal government needed to explicitly rescue Silicon Valley Bank’s depositors before markets opened Monday morning.
In the White House and the Treasury, some officials initially saw the bank’s swift plunge to insolvency as unlikely to spark an economic crisis — particularly if the government could facilitate a sale of the bank to another financial institution.
They quickly changed their minds after signs of nascent bank runs across the country — and direct appeals from small businesses and lawmakers from both parties — convinced them the bank’s problems could imperil the entire financial system, not just rich investors in Silicon Valley.
On Friday morning, aides met with President Joe Biden in the Oval Office, where they warned that the panic engulfing Silicon Valley Bank could spread to other financial institutions, according to a White House official. Biden told them to keep him updated on developments.
By Friday afternoon, before financial markets had even closed, the Federal Deposit Insurance Corp. had stepped in and shut down the bank.
Still, the kind of rescue that the United States ultimately engineered would not materialize publicly until Sunday, after intense deliberations across the government.
This account is based on interviews with current and former officials in the White House, Treasury and the Fed; financial services executives; members of Congress; and others. All were involved or close to the discussions that dominated Washington over a frenzied process that began Thursday evening and ended 72 hours later with an extraordinary announcement timed to beat the opening of financial markets in Asia.
The episode was a test for the president — who risked criticism from the left and the right by greenlighting what critics called a bailout for banks. It also confronted Treasury Secretary Janet Yellen with the prospect of a banking crisis at a moment when she had become more optimistic that a recession could be avoided. And it was the starkest demonstration to date of the impact that the Fed’s aggressive interest rate increases were having on the economy.
Silicon Valley Bank failed because it had put a large share of customer deposits into long-dated Treasury bonds and mortgage bonds that promised modest, steady returns when interest rates were low. As inflation jumped and the Fed lifted interest rates from near zero to above 4.5% to fight it over the past year, the value of those assets eroded. The bank essentially ran out of money to make good on what it owed to its depositors.
By Thursday, concern was growing at the Federal Reserve. The bank had turned to the Fed to borrow money through the central bank’s “discount window” that day, but it soon became clear that was not going to be enough to forestall a collapse.
Officials including Fed Chair Jerome Powell and Michael Barr, the Fed’s vice chair for supervision, worked through Thursday night and into Friday morning to try to find a solution to the bank’s unraveling. By Friday, Fed officials feared the bank’s failure could pose sweeping risks to the financial system.
Compounding the worry: The prospects of arranging a quick sale to another bank in order to keep depositors whole dimmed through the weekend. A range of firms nibbled around the idea of purchasing it — including some of the largest and most systemically important.
One large regional bank, PNC, tiptoed toward making an acceptable offer. But that deal fell through as the bank scrambled to scrub Silicon Valley Bank’s books and failed to get enough assurances from the government that it would be protected from risks, according to a person briefed on the matter.
A dramatic government intervention seemed unlikely Thursday evening, when Peter Orszag, former President Barack Obama’s first budget director and now CEO of financial advisory at the bank Lazard, hosted a previously scheduled dinner at the bank’s offices in New York City’s Rockefeller Center.
Among those in attendance were Adeyemo and a pair of influential senators: Michael Crapo, R-Idaho, and Mark Warner, D-Va. Both were sponsors of a 2018 law that rolled back regulation on smaller banks that critics now say left Silicon Valley Bank vulnerable.
Blair Effron, a large Democratic donor whose firm, Centerview Partners, had just been hired by Silicon Valley Bank to advise it on its liquidity crunch, was also there. Earlier that day, the bank had attempted to raise money to stave off collapse with the help of Goldman Sachs — an effort that, by Thursday evening, had clearly failed.
Effron and Adeyemo spoke as it became evident that Silicon Valley Bank was running out of options and that a sale — or some bigger intervention — might be necessary.
Jeffrey Zients, Biden’s new chief of staff, and Lael Brainard, the new director of his National Economic Council, were also being pelted by warnings about the bank’s threat to the economy. As Silicon Valley Bank’s depositors raced to withdraw their money Thursday, sending its stock into free fall, Brainard and Zients began receiving a flurry of calls and texts from worried leaders in the startup community that the bank heavily served.
Brainard, who had experienced financial crises in other countries while serving in Obama’s Treasury Department and as a Federal Reserve board member, had begun to worry about a new crisis emanating from SVB’s failure. She and Zients raised that possibility with Biden when they briefed him in the Oval Office on Friday morning.
Other officials across the administration were more skeptical, worrying that the lobbying blitz Brainard and others were receiving was purely a sign of wealthy investors trying to force the government to backstop their losses. And there were concerns that any kind of government action could be seen as bailing out a bank that had mismanaged its risk, potentially encouraging risky behavior by other banks in the future.
Brainard started fielding anxious calls again Saturday morning and did not stop until late in the evening. She and Zients briefed Biden that afternoon — virtually this time, because the president was spending the weekend in his home state of Delaware.
Biden also spoke Saturday with Gov. Gavin Newsom of California, who was pushing aggressively for government intervention in fear that a wide range of companies in his state would otherwise not be able to pay employees or other operational costs Monday morning.
Concerns mounted that day as regulators reviewed data that showed deposit outflows increasing at regional banks nationwide — a likely sign of systemic risk. They began pursuing two possible sets of policy actions, ideally a buyer for the bank. Without that option, they would need to seek a “systemic risk exception” to allow the FDIC to insure all of the bank’s deposits. To calm jittery investors, they surmised that a Fed lending facility would also be needed to buttress regional banks more broadly.
Yellen on Saturday convened top officials — Powell, Barr and Martin Gruenberg, chair of the FDIC’s board of directors — to figure out what to do. The Treasury secretary was fielding back-to-back calls on Zoom from officials and executives and at one point described what she was hearing about the banking sector as hair-raising.
FDIC officials initially conveyed reservations about their authority to back deposits that were not insured, raising concerns among those who were briefed by the FDIC that a rescue could come too late.
By Saturday night, anxiety that the Biden administration was dragging its feet was bubbling over among California lawmakers.
At the glitzy Gridiron Club Dinner in Washington, Rep. Ro Khanna, D-Calif., cornered Steve Ricchetti, a top White House aide and close adviser to the president, and urged Biden and his team to be decisive. He warned that many of Biden’s major achievements would be washed away if the banking system melted down.
“I said, Steve, this is a massive issue not just for Silicon Valley, but for regional banks around America,” Khanna said, adding that Ricchetti replied: “I get it.”
Privately, it was becoming clear to Biden’s economic team that banking customers were getting spooked. On Saturday evening, officials from the Treasury, the White House and the Fed tentatively agreed to two bold moves they finalized and announced late Sunday afternoon: The government would ensure that all depositors would be repaid in full, and the Fed would offer a program providing attractive loans to other financial institutions in hopes of avoid a cascading series of bank failures.
But administration officials wanted to ensure the rescue had limits. The focus, according to a person familiar with the conversation, was ensuring that businesses nationwide would be able to pay their employees on Monday and that no taxpayer money would be used by tapping the FDIC’s Deposit Insurance Fund.
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It was a priority that the rescue not be viewed as a bailout, which had become a toxic word in the wake of the 2008 financial crisis. Depositors would be protected, but the bank’s management and its investors would not.
By Sunday morning, regulators were putting the finishing touches on the rescue package and preparing to brief Congress. Yellen, in consultation with the president, approved the “systemic risk exception” that would protect all of the bank’s deposits. The bipartisan members of the Federal Reserve and the FDIC voted unanimously to approve the decision.
That evening, they announced a plan to make sure all depositors at Silicon Valley Bank and another large failed financial institution, Signature Bank, were repaid in full. The Fed also said it would offer banks loans against their Treasury and many other asset holdings, whose values had eroded.
“Because of the actions that our regulators have already taken, every American should feel confident that their deposits will be there if and when they need them,” Biden said during brief remarks at the White House.
By Tuesday afternoon the intervention was showing signs of working. Regional bank stocks, which had fallen Monday, had partially rebounded. The outflow of deposits from regional banks had slowed. And banks were pledging collateral at the Fed’s new loan program, which would put them in a position to use it if they decided that doing so was necessary.
The financial system appeared to have stabilized, at least for the moment.
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