In the hours since the surprise collapse of Silicon Valley Bank with its roughly $209 billion in assets, the U.S. financial system is reeling from the second-largest bank failure in the country’s history.
The rapid failure of Silicon Valley Bank left a gaping hole in the tech industry, with start-up founders and venture capitalists wondering how they are going to pay their employees, and some analysts and banking experts have reflected on the similarities and differences from the only American bank collapse larger than the one from this week: Washington Mutual.
In 2008, Washington Mutual, the country’s largest savings and loans bank at the time, held roughly $309 billion in assets when it was facing significant losses from risky mortgage lending and a run by its depositors. (In a “run,” depositors pull their money in fear that the bank may become insolvent.)
The collapse of Washington Mutual (WaMu), which was eventually taken over against its will by the federal government and then quickly sold to JPMorgan Chase, came at the height of the Great Recession and remains the largest bank failure in U.S. history.
Many banking regulators have expressed confidence that the contagion from Silicon Valley Bank (SVB) will not spread broadly through the country’s financial sector, but experts told The Washington Post that the demise of what was the country’s 16th-largest bank echoes similar liquidity issues faced by Washington Mutual almost 15 years earlier.
“The government limited the ability of WaMu to borrow cash from the Federal Home Loan Banks, and that led to their liquidity,” said Joseph Lynyak, a banking attorney at the D.C. firm Dorsey & Whitney who specializes in bank receiverships and failures. “This SVB [situation] looks and smells like a traditional Jimmy Stewart ‘It’s a Wonderful Life’ bank run. But you end up at the same place. It’s quite interesting that the two biggest bank failures in history were not a matter of running out of capital but running out of cash.”
Kenneth Rogoff, a professor of public policy and economics at Harvard University, told The Post that it’s too soon to discuss whether Silicon Valley Bank’s collapse could lead to a systemic problem, but the economy is in a significantly stronger position than it was in 2008.
That doesn’t mean the stresses over Washington Mutual in 2008 won’t be replicated by those who have accounts in smaller banks in 2023. The federal government is working to identify a buyer for the institution after a run that saw around $42 billion withdrawn from Silicon Valley Bank on Thursday alone, according to California’s Department of Financial Protection and Innovation.
“There is certainly a lot of concern out there among business people about the smaller banks,” said Rogoff, co-author of the 2009 book “This Time Is Different: Eight Centuries of Financial Folly.” “It was sort of a confluence of factors that affected SVB. On the other hand, as crises develop you often hear stories in the early days of how ‘It’s just this bank.’ But the concern certainly could be something deeper.”
Long before it was extinguished, Washington Mutual started, in part, with a fire. It was founded in 1889 as the Washington National Building Loan and Investment Association after the Great Seattle Fire ravaged much of the Pacific Northwest city’s business district. The bank, which changed its name in 1917, survived the Great Depression and eventually expanded across the country, from the West Coast to New York. The company endeared itself to customers through a family-centric slogan — “The Friend of the Family” — and quirky commercials.
The falls of Washington Mutual and Silicon Valley Bank differ in many ways, one of which is that WaMu catered to lower- and middle-income customers that other banks deemed too risky. In the early 2000s, this involved Kerry Killinger, the bank’s CEO, pressing agents to pump out loans to people regardless of their income and assets, according to the New York Times.
It was part of the public push and massive expansion for WaMu, the sixth-largest bank in the United States at the time. In the process, Washington Mutual was shaping into what Bloomberg News described as “the Wal-Mart of consumer finance.”
“We hope to do to this industry what Wal-Mart did to theirs, Starbucks did to theirs, Costco did to theirs and Lowe’s-Home Depot did to their industry,” Killinger said in 2003, according to the Times. “And I think if we’ve done our job, five years from now you’re not going to call us a bank.”
Five years later, Killinger turned out to be right: No one any longer called it a bank. On Sept. 25, 2008, the federal government seized control of Washington Mutual and placed it into receivership of the Federal Deposit Insurance Corp. (FDIC) after account holders withdrew $16.7 billion in deposits in a nine-day stretch. The FDIC sold WaMu’s banking subsidiaries to JPMorgan Chase for $1.9 billion. Soon the fall of WaMu, as well as investment banks Lehman Brothers and Bear Stearns, fueled the financial crisis.
Nearly 15 years later, some tech businesses are wondering how they’re going to pay employees next week after Silicon Valley Bank shuttered through several factors, including the Federal Reserve increasing interest rates to fight inflation. Jay R. Ritter, professor of finance at the University of Florida, told The Post that the concerns this week are far different compared to the dynamic of 2008 with subprime mortgage loans and people spending beyond their means.
“The increase in interest rates this past year was the fundamental problem for SVB, as what they were doing was more of a zero-sum game,” Ritter said.
Rogoff said friends and colleagues unaffected by the latest bank collapse have shared their worry of what could happen next — not dissimilar to some of the feelings from 2008. Rogoff said he’s confident the government would avoid “a total meltdown of start-ups in Silicon Valley,” but he wonders what’s to come after the latest large U.S. bank failure.
“It seems like a nervous moment, hopefully manageable,” Rogoff said, “but it’s hard to know.”
That uncertainty was echoed by Derrick Reyes, who says he had a personal account at Washington Mutual and a business account at Silicon Valley Bank. Reyes, 34, runs Queerly Health, a New York-based digital health start-up for the LGBTQ community. Reyes joked on Twitter about how their experience at both failing banks has made them wonder whether the economy was “held together by bubble gum and paper clips.” But Reyes told The Post the last couple of days are “eerily similar” to all those years ago.
“A notable difference is the speed at which this happened with SVB,” Reyes said. “It was one day to the next. Seeing this all play out in real time was such a contrast compared to 2008.”
Gerrit De Vynck, Rachel Lerman and Jeff Stein contributed to this report.