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US Regulators Made Same Mistake Twice? DOJ, SEC Pressed To Probe SVB Failure

Lawmakers urged the DOJ and the SEC to launch an investigation into any civil or criminal violations by those involved in the bankruptcy of Silicon Valley Bank.

US banking system collapse

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Leading Democratic lawmakers urged the Justice Department and the Securities and Exchange Commission to launch an investigation into any civil or criminal violations by those involved in the bankruptcy of Silicon Valley Bank, the largest bank failure since the 2008 financial crisis.

On Tuesday, Sens. Elizabeth Warren, D-Mass., and Richard Blumenthal, D-Conn. sent a letter asking for a comprehensive investigation into the Federal Deposit Insurance Corporation's takeover of the failing bank, along with whether senior bank executives and other key officials involved in the collapse met their statutory and regulatory responsibilities or violated civil or criminal law.

Writing to SEC Chairman Gary Gensler and Attorney General Merrick Garland, lawmakers said, "This was a colossal failure in asset-liability risk management. However, a series of reports revealed that key SVB officials showed a pattern of risky and questionable decision-making that may have contributed to the bank’s instability and collapse and the ripple effects being felt throughout the economy.”

Silicon Valley Bank, the 16th-largest bank in the nation, was preempted after it failed to adequately hedge against rising interest rates. Last Wednesday, SVB reported it had sold $21 billion worth of securities at a loss of about $1.8 billion and that it needed to raise $2.25 billion to fulfil client withdrawal requirements and fund fresh loans. This was the turning point for the company. Such information caused a panic-induced surge of withdrawals from VCs and other depositors, sending its stock price plummeting. SVB stock plunged 60% in a single day, causing a loss of more than $80 billion in bank shares worldwide.

On Friday, SVB was shut down by California bank regulators, and the FDIC established an intermediary bank to take over the bank's insured deposits. By Sunday, the FDIC and the New York state bank regulators had taken similar action against a major source of lending for the cryptocurrency industry.

The letter was released shortly after the Justice Department and the SEC announced jointly that they would be looking into the SVB collapse. The investigation will examine stock sales made by SVB officials prior to the bank's failure in separate and preliminary phases.

Warren, a member of the Senate Banking Committee, and Blumenthal, who chairs the Permanent Subcommittee on Investigations for the Senate Judiciary Committee, wrote, "One of the enduring failures in the aftermath of the 2008 financial crisis was the inability or unwillingness of DOJ and bank regulators to hold bank executives accountable for behaviour that destroyed millions of lives and cost trillions of dollars of wealth. The nation’s bank regulators cannot make the same mistake twice.”

Warren and Blumenthal requested the agencies to investigate if SVB executives breached any insider trading rules, self-dealing rules, or transparency laws prior to the bank's collapse.

SEC Chairman Gary Gensler reiterated at the beginning of an agency meeting on Wednesday that his staff was entirely focused on uncovering and prosecuting any misconduct that might threaten investors, capital formation, or the markets more generally. Gensler made reference to the events of last week without naming any specific companies or executives.

The legislators charged SVB executives with providing the bank's founders with special treatment, including low-interest mortgage loans and excessive compensation and bonuses. Also, bank executives pushed Congress for exemptions from federal monitoring rules.

Employees at SVB apparently received their yearly bonuses on Friday, hours before the FDIC seized the bank. In a separate letter on Tuesday, Warren asked Federal Reserve Chair Jerome Powell to step aside from an investigation into SVB's business operations after Gregory Becker, the former CEO of the bank, persuaded lawmakers to remove the bank from certain Dodd-Frank Act protections.

Further, the lawmakers wrote to Gensler and Garland, "I am not prejudging this matter, and am not in a position to do so. But your agencies have extensive investigative authority and should use it appropriately.”

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