Who gets bailed out? Who gets left out?

A security guard looks out a door as customers line up at Silicon Valley Bank headquarters on March 13, 2023 (Photo by NOAH BERGER/AFP via Getty Images)

Last Friday, Silicon Valley Bank (SVB) — which held deposits for thousands of tech startups — collapsed. The failure was sparked by SVB executives mismanaging the bank's assets and fueled by venture capitalists like Peter Thiel, who encouraged the companies they invested in to pull out their funds en masse. Within hours, a bank with $200 billion in assets was insolvent. 

SVB was closed, and the Federal Deposit Insurance Corporation (FDIC) took over. Under the law, the first $250,000 deposited in a bank account is fully insured by the federal government. Larger account holders would have to wait for the FDIC to sell SVB's assets before they had access to more money. And many of the startups that banked at SVB had very large accounts. More than 90% of SVB's deposits were uninsured. 

Ultimately, companies and individuals that banked with SVB would have recovered most, if not all, of their money. But it would have taken time for the FDIC to sell SVB's assets and return more of the cash to larger depositors. 

But the startups that banked with SVB, and the venture capitalists that fund them, insisted waiting would be catastrophic. An open letter from Y Combinator, a "startup accelerator" that makes early investments in companies pleaded with the federal government to take action to "save innovation in the American economy." The letter asked Treasury Secretary Janet Yellen to "backstop" 100% of all deposits at SVB, giving companies immediate access to their money. The failure to do so would "set back US competitiveness by a decade or more" and "could lead to financial crisis and layoffs of more than 100,000 workers." 

The Y Combinator letter was signed by "over 5,000 CEOs and founders." And it was echoed by panicked pleas by venture capitalists and investors online. 

@jason @Jason

YOU SHOULD BE ABSOLUTELY TERRIFIED RIGHT NOW — THAT IS THE PROPER REACTION TO A BANK RUN & CONTAGION @POTUS & @SecYellen MUST GET ON TV TOMORROW AND GUARANTEE ALL DEPOSITS UP TO $10M OR THIS WILL SPIRAL INTO CHAOS

This strategy worked, and on Sunday, the Department of the Treasury, the Federal Reserve, and the FDIC released a joint statement announcing SVP "[d]epositors will have access to all of their money starting Monday, March 13." This was possible by invoking the "systemic risk" exception, which gives the federal government access to a separate pool of insurance funds, called the Deposit Insurance Fund. If the Deposit Insurance Fund runs out of money, it "will be recovered by a special assessment on banks." 

Let's be clear: this is a bailout, which is a government intervention to prevent private loss. While the bank itself and stockholders were not bailed out, depositors were. The price of the bailout will be borne by the banking industry in general. And these costs will be passed down to anyone who does business with a bank.

The depositors were not responsible for the mismanagement by SVB executives, but they took on that risk. There are cash management strategies and insurance products that can provide additional certainty for businesses with large amounts of cash. But doing business that way is a bit more expensive and inconvenient. So most depositors at SVB chose to leave their deposits over $250,000 uninsured. 

Nevertheless, the federal government's announcement was cheered not just by the tech industry but corporate America in general. The U.S. Chamber of Commerce, which represents nearly every major corporation in the United States, issued a press release applauding "the swift action by banking regulators to resolve the liquidity crisis at Silicon Valley Bank." It was necessary, the Chamber said, to "allow businesses to make payroll, pay their rent, and still keep an eye towards growth."

It's good news that, as a result of the SVB's collapse, people who work in tech startups will not miss a paycheck or lose their job. But it also raises the question of which groups are deemed so important that protecting their interest requires quick and decisive collective action and which groups can be permitted to suffer. What is considered a crisis that must be avoided, and what is simply an unfortunate turn of events?

No bailout for poor kids

In March 2021, as part of the American Rescue Act, the federal government expanded the Child Tax Credit. The expanded credit was both larger in size per child and fully refundable, so it was available to all families, regardless of income. Beginning in July 2021, it was paid to eligible families as a monthly benefit so they did not have to wait to file their annual taxes. 

The expanded Child Tax Credit was wildly successful, lifting millions of children out of poverty. The monthly payments were spent "on basic household needs and children's essentials: the most common item is food." The payments were effective in meaningfully reducing "family food insufficiency, particularly among children in families with low and moderate incomes." After the July payment alone, "food insufficiency rates among families with children dropped by 24 percent." After two months of payments, "2 million fewer adults report[ed] that their children, specifically, did not have enough to eat." But the expanded credit was slated to expire at the end of 2021. 

The Biden administration offered a variety of proposals to extend the Child Tax Credit expansion. Traditionally, the Child Tax Credit enjoyed bipartisan support. It is, after all, about promoting the well-being of families. 

But all of the proposals were opposed by the business community. There was no letter from Y Combinator urging the government to take action to avoid a "crisis" in child poverty. Venture capitalists did not tweet in all caps about child poverty being a systemic risk to the health of the economy. And the U.S. Chamber of Commerce spent millions lobbying against an extension. In an open letter, the Chamber said it was concerned about "large amounts of transfer payments that are not connected to work." In other words, it was concerned with the size of the expanded Child Tax Credit and the fact that it was available to all families, regardless of income. 

In the end, the U.S. Chamber of Commerce's argument won the day. It convinced all Senate Republicans and a handful of Democrats to oppose extending the expanded Child Tax Credit. 

According to a study by the Center on Poverty and Social Policy, as a result of the decision to let the expanded child tax credit expire in December, 3.7 million children fell into poverty. The child poverty rate increased from "12.1 percent in December 2021 to 17 percent in January 2022" — a 41% increase. 

No one bailed out those kids. 

No bailout for homeowners

In the wake of the financial crisis of 2008, the federal government allocated hundreds of billions of dollars to bail out large financial institutions like AIG, Citigroup, and Bank of America. These institutions had invested heavily in toxic assets, including financial instruments made up of subprime mortgages. The bailout was promoted as an essential step to save the economy. Today, many of the beneficiaries are richer than ever. 

But not everyone was bailed out. In 2008, 861,664 families lost their homes to foreclosure, and there were more than 3 million total foreclosure filings. Overall, there were "7.8 million foreclosures...during the 10 years between 2007 and 2016." Although there were some modest efforts to finance mortgage restructuring and other relief, the government did not swoop in to save families. People are still grappling with the consequences.