From Credit Slips, March 17:
Oops. How the FDIC Guaranteed the Deposits of SVB Financial Group
When President Biden announced the rescue of Silicon Valley Bank depositors, he emphasized that "investors in the banks will not be protected. They knowingly took a risk and when the risk didn’t pay off, investors lose their money. That’s how capitalism works." Unfortunately, that's not how US law works.
There seems to be a gap in the Federal Deposit Insurance Act that is going to protect some investors in Silicon Valley Bank’s holding company, SVB Financial Group. The holdco’s equity in the bank will be wiped out in the FDIC receivership, but the FDIC doesn’t have any automatic claim on the holdco. This is basic structural priority/limited liability: creditors of a subsidiary have no claim on the assets of a parent.
What's worse is that the holdco, which filed for bankruptcy today, has substantial assets including around $2 billion on deposit with SVB. Almost all of that $2 billion deposit at SVB would have been uninsured, but by guarantying all the deposits, FDIC accidentally ensured that the holdco’s bondholders would be able to recover that from that full $2 billion deposit.
There any provision in the Federal Deposit Insurance Act that subordinates the claims of insiders—like corporate affiliates or executives—that exceed the insured deposit limit to other creditors. So once FDIC guaranteed all deposits, it necessarily guaranteed the deposits of the holdco and other insiders.
Now the FDIC might have some sort of tort-based claim against the holding company—breach of fiduciary duty or fraudulent transfer or the like—but that's fact-dependent, and no complaint has been filed yet. Additionally, the fact that federal bank regulators were cool with SVB (including with its solvency) until they suddenly weren't is a pretty powerful defense to any mismanagement-based claim. As for fraudulent transfers, the FDIC can only bring claims for actual fraudulent transfers—those made with actual intent to hinder, delay, or defraud creditors. That's unlikely to go very far here....
....MUCH MORE
Yeah, that's an "Oopsie".
