Biden's test: Can he show competence to avert banking chaos

President Joe Biden is confronting a significant challenge as his administration grapples with the fallout from the second- and third-largest bank failures in history

In 2016, Vice President Joe Biden warned against efforts to unravel banking regulations that Democrats had fought to implement following the nation’s financial crisis, just as the emerging Trump administration was determined to loosen those strict banking rules.

Biden argued that without the far-reaching 2010 banking overhaul known as Dodd-Frank, financial institutions would continue to gamble with consumers' cash and ultimately hurt the middle class.

“We can’t go back to the days when financial companies take massive risks with the knowledge that a taxpayer bailout is around the corner when they fail,” Biden said in a speech at Georgetown University in the waning days of the Obama administration.

Now there's a banking crisis on his watch as president, and Biden is moving aggressively to assure the public that it is contained, bank executives will be fired, deposits are safe and taxpayers aren't on the hook — measures also designed to calm jittery financial markets.

As he contemplates an announcement for a second term, Biden's ability to avert a contagion among financial institutions will test his contention that his administration represents competence and stability in contrast to the the chaos of the Donald Trump years.

His call for additional regulation, though, is likely to run into stiff resistance in the Republican-controlled House and even among some moderate Democratic lawmakers who joined Republicans to loosen some rules in a 2018 law — not to mention criticism from the still-forming 2024 Republican field that has already labeled his actions a bailout by just another name.

Privately, Biden has been adamant that the government's intervention would not be like that of 2008, when Congress authorized billions in taxpayer cash to rescue financial institutions that were deemed too big to fail. That's according to a senior White House official, who was not authorized to describe private discussion by name.

But administration officials believe that this time they had to act substantively despite bad decision-making by bank executives, given the economic risks and the potential impact on customers who did nothing wrong.

Unlike in 2008, Biden was insistent that bank executives had to pay a price, said the official, granted anonymity to discuss internal White House deliberations.

“The management of these banks will be fired,” Biden declared Monday. If an institution is taken over by the Federal Deposit Insurance Corp., “the people running the bank should not work there anymore.”

On Monday, Biden also stressed that taxpayers will not bear the cost of his administration's penalties on the two failed banks, instead tapping into an insurance fund that is paid for by bank fees. And while customers and small businesses who stashed their money with the penalized banks would be protected, Biden emphasized that investors would not.

“They knowingly took a risk and when the risk didn’t pay off, investors lose their money,” Biden said. “That’s how capitalism works.”

California Rep. Maxine Waters, the top Democrat on the House Financial Services Committee, said that Biden, like others, cannot ignore the lessons of the 2008 financial collapse and that having endured it firsthand, the president was well aware of the stakes. In conversations over the weekend, the White House assured her he was on top of it.

“I think that his main concern was how to, No. 1, take care of the depositors and avoid contagion so that we would not basically, seriously, disrupt the banking system in this country," Waters said.

Regulators put Silicon Valley Bank under FDIC control on Friday afternoon after panicked depositors rushed to withdraw all their funds within a matter of hours. That's a bank run. Top administration officials including Treasury Secretary Janet Yellen stressed that they were monitoring the situation, as reports of companies struggling to figure out how to manage their finances amid the two banks' shutdown rippled throughout the media and threatened regional banks around the country.

By Sunday night, Treasury, the Federal Reserve and the FDIC announced that all Silicon Valley Bank clients would be able to access their money, as would depositors from Signature Bank in New York, which similarly failed and would be taken over by state regulators. As administration officials were working behind the scenes, Biden was regularly briefed by his chief of staff, Jeff Zients, National Economic Council director Lael Brainard and Yellen throughout the weekend, according to the White House.

Biden also spoke with outside economists, although the White House declined to identify them.

Administration officials also worked to brief lawmakers over the weekend, although several Republicans were left off a call for senators with Treasury and FDIC officials on Sunday night. After Republicans protested publicly, and Senate Majority Leader Chuck Schumer, D-N.Y., pointed out to Treasury that GOP senators were excluded, the administration quickly convened a separate briefing for Senate Republicans on Monday afternoon.

There, several GOP senators conveyed their concerns to administration officials that Silicon Valley executives were being rescued in a way that could ultimately harm community banks in their home states, according to a person with knowledge of the call who was granted anonymity to discuss a private conversation. That would be because these banks would be assessed new fees to replenish the insurance fund that the administration tapped to aid the two failed banks' depositors.

Indeed, the political specter of the word “bailout” will linger over the White House for some time.

Republicans angling for the 2024 presidential nomination are already arguing that customers will ultimately bear the costs of the government's actions even if taxpayer funds weren't directly used. Some economists believe more fees levied on banks will just get passed onto consumers, such as increased rates for loans.

“Joe Biden is pretending this isn’t a bailout. It is," former South Carolina Gov. Nikki Haley said, arguing that depositors at other banks now are “forced to subsidize Silicon Valley Bank’s mismanagement” and that bank customers will ultimately be responsible for the costs if the insurance fund is drained.

Sen. Tim Scott, R-S.C., the top Republican on the Senate Banking Committee who is eyeing a presidential bid, also criticized what he called a “culture of government intervention,” arguing that it incentivizes banks to continue risky behavior if they know federal agencies will ultimately rescue them.

White House and other administration officials are insisting their actions are not a bailout. But Harvard University economist Kenneth Rogoff said while he agrees that the government is rightly protecting the two banks' depositors, the money spent to make them whole is “certainly a bailout.”

“The government swore after the financial crisis it was not going to bail out uninsured depositors and it was not going to bail out money funds," Rogoff said. "It basically, as I understand it, is guaranteeing everything. So that’s certainly a bailout.”

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AP White House correspondent Zeke Miller and AP chief congressional correspondent Lisa Mascaro contributed to this report.