How the failure of SVB creates a sense of deja vu

Wan Lixin
The failure of Silicon Valley Bank that threatens to trigger broader panic in the US financial sector brings back memories of similar collapses in 2008, including Lehman Brothers.
Wan Lixin

It was reported on Sunday that the United States administration had come up with a series of emergency measures to bolster confidence in the banking system after the failure of Silicon Valley Bank threatened to trigger broader panic in the financial sector.

According to these measures, the failed bank's customers will have access to all their deposits, starting from Monday, and regulators would set up a new facility to give banks access to emergency funds.

On Monday morning, a friend shared with me a short video moralizing about the 2008 bankruptcy of the Lehman Brothers, and its ramifications. The friend wondered if this is happening again.

Well, for me, there is a sense of deja vu.

It brought to my mind how the news about the disasters at many US financial institutions continued to come in late September 2008, when I was at a World Economic Forum conference in Tianjin.

As we all know now, the failures of a number of financial institutions were the culmination of the sub-prime crisis, when cheap money and soaring home prices emboldened bankers to lend indiscriminately to virtually all home buyers. Those ineligible borrowers began to default on their loans as interest rates were going up – the rates had been raised 17 times from June 30, 2004, to June 29, 2006, from 1 percent to 5.25 percent.

That was a disastrous series of events, but at the WEF conference there was also anticipation, a reasonable expectation of the era of exuberance, greed, and recklessness coming to an end.

The bankers were humbled, seemingly not so omniscient as they appeared before, but only for a short period.

The rest of the story is well known: They were bailed out, and it was business as usual again for most of them, and the memories of the disaster faded quickly.

In 2011, Wall Street occupiers brought up the issue again when they demanded the setting up of a commission charged with ending the influence of money in politics, and a one-percent "Robin Hood tax" on all financial transactions.

They sought to have banking industry regulations tightened, high-frequency trading banned, and all the "financial fraudsters" responsible for the 2008 crash arrested.

Some occupiers ended up being arrested.

So in a magazine advertisement in 2013 that I came across recently, AIG proudly announced: "We repaid every dollar America extended in support of AIG. That's US$205 billion to America from AIG, including a profit of more than US$22 billion."

No one could but marvel, or shudder, at the degree of financial alchemy implied.

So when US President Biden, referring to SVB, said in a statement that "I am firmly committed to holding those responsible for this mess fully accountable and to continuing our efforts to strengthen oversight and regulation of larger banks so that we are not in this position again," his message did sound somewhat familiar to me.

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