The SVB Bailout Will Make Things Worse

Andy Snyder|March 15, 2023

It’d be nice to be a politician.

We could say two different things at once… and folks would still hand us gobs of money.

The president made his obligatory say-nothing remarks this week about the latest Fed-induced banking mess.

Instead of telling the truth – that the system is spinning further and further out of control and the economy-wobbling crises are coming quicker and quicker – the president lied.

All is well, he said.

Don’t worry about your bank deposits. They’re fine.

Meanwhile, his underlings were wearing out the phone lines creating backstops and bailouts that aren’t bailouts.

But the president said something peculiar… something that brings the whole darn thing into question.

Off the Rails

“That’s how capitalism works,” Biden said, referring to all the shareholders who lost money when Silicon Valley Bank bit the dust.

“Investors in the banks will not be protected. They knowingly took a risk, and when the risk didn’t pay off, the investors lose their money.”

Indeed. He’s right.

That’s how it works, folks.

We get rich when things go our way. And we go broke when they don’t. Follow the rules of investing (diversification, asset allocation, etc.), and the system will almost surely reward you in the end.

But Biden and his team went off the rails for the rest of their message.

They broke the rules of capitalism when they bailed out SVB’s depositors – the same folks who willingly risked their businesses on uninsured deposits.

There are other (and safer) ways to store cash in excess of the FDIC’s $250,000 limit. Many savvy companies use them every day.

Few folks are talking about that, though. The mainstream press certainly hasn’t covered it.

SVB’s depositors didn’t seek out these alternatives. They stuck with the bank (many of them risking hundreds of millions of dollars) because of cronyism and, importantly, because of SVB’s lax standards.

You scratch our back, the bank implied, and we’ll scratch yours.

It’s why the bank was so popular with startups. Its lending rules were loose and its default enforcement even looser.

But there’s something else at play here.

It’s where the president really contradicts himself.

A Veiled Threat

You see, many small, profitless companies relied on SVB to hold their payroll cash. It was money that needed to stay liquid so employees could be paid every two weeks.

When the bank failed, depositors lost access to those funds. That meant employees’ paychecks were in jeopardy. The companies no longer had funds in their payroll accounts.

This next part is what most folks don’t know.

For small business owners, every dollar we spend and every investment we make has the potential to become a personal liability. We’re protected only by the “corporate veil” – the thin line of law that separates a business’s assets and liabilities from its owners’ assets and liabilities.

With the veil in place, owners of a corporation have no obligation to pay for the entity’s liabilities. If a company goes bankrupt, its owners don’t have to pay its debts.

When that veil is broken, though, oh boy… the folks behind it are often in a world of hurt.

The veil can be pierced in many ways. For small businesses, comingling funds is a leading cause. A small business owner can’t pay their dog sitter with corporate funds, for example. For bigger businesses and some startups, fraud and mismanagement are common causes.

But there’s another critical factor here…

Payroll.

Pay Up

As soon as employees don’t get paid, a judge has the ability to toss the corporate veil aside.

If a corporation misses payroll, suddenly its owners are on the hook. Employees can make legal claims on their bosses’ personal assets… and it’s always awkward to roll in to work on Monday in the owner’s new Mercedes.

That’s why the headlines predicted there’d be tens of thousands of layoffs if the feds didn’t step in.

To save their own assets, corporate insiders would be forced to lay off their workers – tens of thousands of them.

After all, that’s how capitalism works.

If we let that play out, Powell’s inflation fight would be over nearly instantly. The system would finally wash itself clean of all the dirty money Washington printed.

It’d be painful… just as we and so many others have warned it’d be. But it’s exactly what the math and the natural forces call for.

But capitalism and politics are two different beasts.

Biden and his party’s reelection hopes wouldn’t stand for it. They’d lose some of their best constituents if they didn’t provide a bailout that’s not a bailout.

So they did what they did.

And they’ll blame capitalism and somebody else’s regulations. They always do.

What we got is far from capitalism.

And until we get real, honest capitalism, the saga will continue. The mess will grow larger and even harder to control.