Bob Nardelli: SVB exec stock sales ahead of collapse ‘raised some eyebrows’
XLR-8 LLC Founder Bob Nardelli joins Yahoo Finance Live to discuss the U.S. banking fallout, how it could’ve been avoided, inflation, and the outlook for the banking sector.
- Silicon Valley Bank's holding company filed for Chapter 11 bankruptcy protection this morning just one week after the FDIC's takeover of the collapsed bank. Joining us with his thoughts on SVB's sudden meltdown and the government's response is William Isaac, former chair of the FDIC. William, thanks for joining us here this morning. First and foremost, if you were to kind of encapsulate everything that's taking place and the response that we've seen thus far, you know, how would you explain this? Just give us your perspective on it.
WILLIAM ISAAC: [LAUGHS] That's a big question. Let me take a shot at it. We've been a long period of time with not very much fiscal responsibility or monetary responsibility at the federal level. And the federal debt has grown massively from about $5.5 trillion at the end of the Clinton administration to $30 trillion-plus today. In addition, we've had a lot of monetary build up. The Fed's balance sheet has now got $9 trillion of debt. When Paul Volcker was chairman, it never went over $800 billion.
So there's been a lot of money pumped into the economy, and we have inflation. And inflation is something we've got to bring to a halt. And Jay Powell has been doing that and trying to belatedly, the Fed should have been doing it years ago. And but he's been putting-- putting the brakes on and trying to raise-- not trying to raise interest rates, but trying to reduce inflation. And the way you do that is you raise interest rates. And that reduces economic activity and brings prices down over the long haul. That's just essential. And so that was what was going on, has been going on.
Just as Jay Powell was getting ready to do that, and Silicon Valley Bank started buying massive amounts of government debt and keeping them on a balance sheet fixed rate. And that was a-- I guess something that they thought were they were hedging. But it was a terrible mistake. It's not the first time that mistake has been made. It was made in 1979 when Paul Volcker was chairman of the Fed, and I was at the FDIC.
First, Pennsylvania, the largest bank in Pennsylvania and reportedly a good bank, decided to make a heavy bet on investing in US treasuries. They did, and they lost because Volcker started raising interest rates. The value of those Treasury securities went down. The bank was insolvent, and we had to deal with it.
Silicone Valley Banks' actions here were irresponsible. I don't know. I don't know how they could have made that bet in good faith. But they did, and they lost. And it's really too bad that this has caused all these problems to be stirred up. This is something that has happened before. It's been punished before. And why they had to do it again, I don't know.
JULIE HYMAN: Bill, do you think that the cap on uninsured deposits or the cap on insured deposits, I should say, needs to go up?
WILLIAM ISAAC: I don't think it needs to go up. When I went to the FDIC in 1978, the cap was 40,000. During the S&L and banking crises of the 1980s, which were massive, the Congress raised that cap to 100,000. And the FDIC was lukewarm at best about raising that cap. But Congress did it. And then I think in the 2008, 2009 period, it was raised again to 250,000. I don't think it needs to go up. I think that's a lot of money. The FDIC was supposed to protect ordinary depositors.
JULIE HYMAN: Right.
WILLIAM ISAAC: And it wasn't supposed to protect fat cat investors at Silicone Valley Bank.
JULIE HYMAN: Well, I think there was probably a mix of them in. I just quickly want-- I want to squeeze in one more question. But before we run out of time, you did tell "Politico" that there was no doubt in your mind that there would be more bank collapses. It's been an eventful week. Do you still think that is the case?
WILLIAM ISAAC: Oh, there already has been. [LAUGHS]
JULIE HYMAN: Right.
WILLIAM ISAAC: So--
JULIE HYMAN: Do you think there'll be more from-- do you think there'll be more from here?
WILLIAM ISAAC: Yes, but people need to-- need to be calm. The federal government, the Fed, the FDIC and even the Congress if need be have a lot of power to deal with things. I hope we don't overdo our concerns. But an example, Silicone Valley Bank and the bank in New York, Signature Bank that went down, both of them, they were aberrations. They're not normal banks. They were strange banks, investment banks of sorts. And they were not run like ordinary banks.
And if you add them up together, they're $300 billion. That sounds like a lot of money. But it really isn't. It's a small, small percentage of the US economy, which I think is something like, 23-- the banking system's something like $23 trillion, something like that. And so we really have reacted very strongly, and I think too strongly to what-- to what's going on so far.
There could be more failures. I'm not going to predict there aren't any. But I don't see anything that we can't handle fairly easily in this country. We've got a lot of wealth. What I'm more concerned about is that the federal debt is way out of control, massively out of control. And the monetary policies have been far too liberal. And we need to fix that. Those are serious long-term issues that the US has got to get its hands around.
JULIE HYMAN: Bill, got to leave it there. Thanks for your time. FDIC-- former FDIC Chair Bill Isaac, appreciate your perspective. Thank you.
WILLIAM ISAAC: Thank you.