Federal regulators are racing to contain the fallout from Friday’s collapse of Silicon Valley Bank. News reports indicate that the Federal Deposit Insurance Corp. (FDIC) started an auction for the bank on Saturday that is scheduled to wrap up this afternoon. If that auction fails to produce a buyer, the government is reportedly considering plans to safeguard the $150 billion of uninsured deposits at the bank. Analysis from various sources (including conversations I’ve had with reliable sources at the bank) suggest that the bank’s deposits are well protected by the underlying assets of the bank. (Related to this, the price of the stable coin issued by Circle, an internet company, dropped to ~87 yesterday after it was disclosed that $3.3 billion of the $40 billion backing the coin was held at SIBV but recovered to the high 90s today.) But because of the nature of financial institutions and the assets they hold, it is essential that a viable plan be announced before the market opens tomorrow to prevent depositors at other regional banks from pulling their deposits (which may happen to some extent anyway) and to insure that Silicon Valley Bank’s depositors have access to their money (beyond the $250,000 federally insured amounts that they will be able to withdraw tomorrow whether a deal is reached or not).

In order to protect depositors in full, the FDIC may have to use the “systemic risk exception” which requires the approval of the Treasury Secretary, the FDIC and the Federal Reserve Board (2/3 of the Fed’s six sitting board members must approve). This requires these parties to view failure to protect depositors as a systemic risk. There may be other things that could be done such as the Fed providing an emergency backstop program under its emergency powers (which seem to have few limits if its actions during the pandemic are indicative) but in the end any decisions will be both analytical and political. Anything viewed as another bailout of Wall Street (or Silicon Valley which is pretty much the same thing politically) is going to be a tough political sell. Even though many of SIBV’s depositors are start-up companies, they are owned by or affiliated with deep-pocketed venture capital firms who are not politically sympathetic.

Once the smoke settles, some obvious lessons need to be banged into some heads. Depositors need to be much more alert to how their deposits are invested. Banks must be much savvier about how they manage their assets - lending money to the U.S. government for 10 years at 1-2% is just flat out dumb yet that is precisely what SIBV did in size. And bank regulators must be more vigilant regarding banks whose assets skyrocket in size as were SIBV’s. The risk at this bank was hiding in plain sight.

Bubbles make everyone drop their guard. Now a lot of people are getting punched in the face. Mike Tyson reminded us how that turns out. Everyone better put up their fists because more punches are coming.