Chris Wood says FDIC rescue of SVB is 'Uncle Sam bailing out the rich'

With around 80 percent of business in the US, several Software-as-Service (SaaS) businesses had deposited millions of dollars with the Silicon Valley Bank (SVB) as deposits.

The US Federal Deposit Insurance Corporation (FDIC) stepping in to save the depositors of the Silicon Valley Bank (SVB) beyond the $250,000 limit is akin to "Uncle Sam" bailing out the rich, said Christopher Wood, the global head of equity strategy at Jefferies, in his latest edition of the popular GREED & fear newsletter to investors.

California banking regulators shut down Silicon Valley Bank (SVB) on March 10 after a run on the lender, which had $209 billion in assets at the end of 2022. Depositors pulled out as much as $42 billion in a single day, rendering it insolvent. The US government eventually stepped in to ensure that depositors had access to all their funds.

Speaking on the SVB Bank episode, Wood shed light on the "unfortunate" yet not "particularly surprising trend" of the FDIC guaranteeing deposits of all depositors in SVB going above and beyond the mandated limit of $250,000.

"Set against this is the extraordinary, though not unfortunately particularly surprising, decision by the Federal Deposit Insurance Corporation (FDIC) to extend the guarantee of deposits to all depositors in SVB to the full amount and not only to those up to US$250,000, which is meant to be the FDIC insurance limit. This provides the latest example of Uncle Sam bailing out rich people, an approach adopted during the 2008 financial crisis which triggered lingering resentment on the entirely legitimate view that the empirical evidence proved that there was one rule for Main Street and another for Wall Street. This maxim can now be extended to Silicon Valley."

Also read: Silicon Valley Bank collapse: Here's all you need to know

The FDIC was justifying the move on the ground that 96 percent of SVB's deposits were uninsured, Woods said, as he marked out that the "moral hazard" emerging from the move was "enormous".

Wood also focused on the Fed's move to set up a new “bank term funding program” (BTFP) where collateral will be valued at par, or 100 cents on the dollar, as opposed to the mark-to-market value of those securities.

"This move has been designed to ease concerns, triggered by SVB, about the value of “assets held to maturity” on banks’ balance sheets, which account for an average 42 % of US large-cap banks’ total securities holdings and 34% of mid-cap banks," he said.

"In GREED & fear’s view, SVB was a bit of a special case while the Fed’s latest move in Big Picture terms has further advanced the long-term trend towards the ever escalating socialisation of credit risks."