Banking system on the verge of a ‘Bear Stearns moment’: Former FDIC chair

While some observers fear a “moral hazard” from the actions of federal authorities following the collapse of Silicon Valley Bank and Signature Bank, a former Federal Deposit Insurance Corporation chairman has warned that the US banking system may be in for another “Bear Stearns moment”. is close to.

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“I think this is more than a Bear Stearns moment. I think a lot of people, including me, said that when they bailed out Bear Stearns, they increased the moral hazard. They created an expectation of further bailouts. , “said former FDIC chair Sheila Barr on “Cavuto: Coast to Coast” Friday.

The Treasury Department, the Federal Reserve and the FDIC said in a joint statement on Sunday that they were taking “decisive action to protect the American economy by strengthening public confidence in our banking system” following the SVB explosion. Depositors of SVB will have access to all their funds

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Bear Stearns collapsed in 2008 during the mortgage crisis. Due to a large industry and market downturn, Bear Stearns’ risky investment strategies had more damaging consequences than expected. Six months later, Lehman Brothers failed, and Merrill Lynch was forced to merge with Bank of America.

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Bear Stearns avoided bankruptcy by its sale to JPMorgan at a 93 percent discount to $2 per share, but eventually agreed to $10 per share. The sale was also supported by the government, and its participation sent an unprecedented message that the government would help bail out the banks.

“There’s no doubt in my mind that Lehman Brothers has already solved its problems,” Baer explained. “It would have sold itself, raised more capital, all of the above, if they hadn’t thought in the back of their minds, ‘They wouldn’t dare take us out. We’re bigger than Bear Stearns.’ That’s the problem. That’s the expectation you create. Then you don’t bailout, and … you actually seize the system, as we saw when Lehman Brothers went bankrupt.

As markets respond to the bailouts of SVB and Signature Bank as well as the rescue of First Republic, Barr said fears for the banking system are starting to mount and uncertainty is spreading.

“Fear is sitting inside; fear, not rationality. And I think the problem was they bailed out these two medium-sized banks, very small part of the overall system, in the name of systemic risk, and it created a lot of uncertainty, ” He said.

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Baer said the “immediate problem” with the state of the banking system is that “if people start to panic and take deposits out of a perfectly healthy bank, they’re going to force that bank to close.” “

“It’s the classic Jimmy Stewart problem,” she told host Neil Cavuto. “We deposit money into a bank, they lend it out, they invest it in securities, it’s not all sitting in a vault. If you try to take all the money out at once, you will are going to unnecessarily fail.” ,

According to Baer, ​​the government’s actions have created “collective confusion” that could sabotage efforts to support the banking system. While acknowledging that some banks are with problems, he also emphasized that only a small percentage of the overall banking system has problems.

,[The government is] It’s trying to say that all the uninsured are protected, which they don’t have a legal right to do, frankly, and it’s putting pressure on community banks,” she said. “It’s really troubling. Is.”

“I think it’s more of a Bear Stearns moment.” – Sheila Bair

As the former head of the FDIC, Baer shared his thoughts on what the right course of action would have been to handle the collapse of SVB and Signature Bank.

“I think the better way to communicate would be to handle these two bank failures with the regular FDIC process, which will include uninsured depositors receiving massive dividends this week,” she said. “Remind people that there are deposit insurance limits, remind people that some banks can and do fail. They need to be cautious and leave it at that.”

Since the SVB and Signature Bank bailouts, First Republic suffered collateral damage from the collapse. Customers deposited billions from First Republic, prompting the bank to shore up its finances with additional funding from the Fed and JPMorgan. That first cash infusion gave the bank — which has $213 billion in assets — about $70 billion in untapped liquidity.

On Thursday afternoon, major banks swooped in to provide $30 billion in deposits to First Republic amid fears of a major financial crisis.

JPMorgan Chase, Citigroup, Bank of America and Wells Fargo will contribute $5 billion each; According to a news release from the banks, Goldman Sachs and Morgan Stanley will deposit around $2.5 billion each. Truist, PNC, US Bancorp, State Street and Bank of New York Mellon will each provide about $1 billion.

With a fragile banking system, Baer warned that the government may need to temporarily continue bailouts to ensure that market activity does not cause additional banks to fall like dominoes.

“As much as I hate to say it, [the government] More bailouts may be needed, not less, through the system. If it’s settled, temporarily provide a blanket guarantee.”

Fox Business’ Sumner Park and Megan Haney contributed to this report.