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Examining How Bank Failures and Rescues Have Tested Janet Yellen’s Decades of Experience

by Ethan Kim
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Treasury Secretary Janet Yellen had to act fast before the clock ran out at sunset on March 12th. She needed a plan to help the American economy and she knew just who could help: Hank Paulson, someone who already had lots of experience with solving financial crises.

During the 2008 financial crisis, Paulson who was in charge of the Treasury Department said that if you want to slow down or stop a ‘bank run’, then you need a really fast and strong government reaction. He shared this advice with Yellen.

At the start of the week, some people started withdrawing lots of money from Silicon Valley Bank. By Friday, regulators took control of the bank which made everyone worried and reminded them of how bad things were in 2008 during the Great Recession.

Janet Yellen has a special job as treasury secretary that nobody before her has ever had. She was tested in this role because she had to please different important groups like businesses, Republicans in Congress and the people who are leading President Joe Biden’s White House. These groups have lots of money and power, so it required all of Yellen’s experience studying economics and finance to know what to do.

Recently two weeks ago, Janet Yellen, the head of the Federal Reserve, held a meeting with several important people. That included lobbyists from the Federal Deposit Insurance Corporation and Office of the Comptroller of the Currency, plus leaders from Congress, like Sen. Sherrod Brown from Ohio and Rep. Patrick McHenry from North Carolina. Also joining was Jamie Dimon who is CEO of J.P Morgan & Chase Bank on Wall Street.

Paulson experienced the effects of the financial crisis first-hand. He asked Congress for permission to spend $700 billion in order to buy up bad mortgages from private companies and avoid the larger U.S. economic system from collapsing. His advice to Yellen, as she tried to fix all these bank crashes? “We must fight to keep our local banks alive.”

The Fed divides banking institutions into two categories: regional banks and community banks. Regional banks have between 10 to 100 billion dollars in assets, which makes them bigger than community banks but not as big as national ones. The Federal Reserve oversees the largest number of regional and community banks combined.

On Wednesday, March 8th, the Chief Executive Officer of Silicon Valley Bank sent out a letter saying they need to get $2.25 billion to help cover their expenses as they had experienced big losses.

The bank had a lot of money that wasn’t insured and it also invested in government bonds and mortgage-backed securities. Unfortunately, these investments became less valuable when interest rates increased. So, on Thursday, March 9th, people hurried to take out all their money at once. This caused a big problem called a “bank run”.

The next day, Yellen had a conversation with several important people including Jerome Powell (Fed Chair), Martin Gruenberg (FDIC head), Michael Hsu (acting OCC head) and Mary Daly (San Francisco Fed chair). These officials quickly decided to put Silicon Valley Bank under the FDIC’s control.

Over the weekend, some very important people from the Treasury, Federal Reserve, and FDIC (these are all places related to money) all started looking for someone who could save this bank. The officials also made sure that everyone at the bank got paid by Monday, and reassured us taxpayers that not one penny of our cash will be used in the rescue. On top of it all, they had to do it really fast so the markets in Asia would open on time for their week.

Yellen had to make sure that the Republicans in Congress were happy with her decisions. She talked with a Congressman named McHenry to see if he thought that these steps would lead to more rules. McHenry didn’t respond to Big Big News’s questions, but said at an event for American Bankers that he was in favor of the government’s choice to repay their customers.

On Sunday March 12, three financial organizations -the Treasury, the Federal Reserve and FDIC- said that a bank in New York called Signature Bank had failed which meant it was seized. They also said they would give money so all depositors at Silicon Valley Bank and Signature Bank could be protected. A few days later, another bank named First Republic received $30 billion from 11 big banks to stop more regional banks from failing.

Yellen had an idea that the bank funds could be used to save First Republic. After she talked with Dimon about her suggestion, he said they had their instructions and started gathering banks together to help. Two people who knew what happened in the private call couldn’t discuss it publicly because they weren’t authorized to do so.

The person running the office of Dimon did not answer a request for their opinion. A lot of people were interviewed to show what Yellen had done over the weekend. Sarah Bloom Raskin, who used to work for the Federal Reserve, said that now everyone needs to figure out how two banks which were thought to be minor could be such a great danger for finance in the country.

One year ago, a woman was nominated to be a Governor at the Federal Reserve (The Fed), but she didn’t get enough support from the Senate. She had already been in that role starting in 2010 and also took her oath of office at the same time as Janet Yellen, who was then Vice Chair of The Fed.

Someone important thought positively about Janet Yellen and said how capable she is to do big things in her new job leading The Fed instead of Ben Bernanke.

Yellen has to address some Republicans’ criticisms that President Biden’s spending plans are creating trouble for banks. They say that the policies have caused inflation, which is a situation when prices of things keep going higher and higher, leading the Federal Reserve to raise interest rates. This changes how banks make investments.

Senator Tim Scott said last week that when inflation goes way too high (like it’s at a 40-year high right now) then we have to do something about it. The Fed is in charge of this, but they don’t always have the best tools – they just have a big hammer which can be really bad for us.

President Biden wants Congress to make new laws that will stop the same mistakes from happening again in banks. He also wants bankers’ punishments to be tougher if they fail, like taking back their earning and making it harder for them to stay in banking.

Paulson praised Treasury Secretary Yellen by saying she listens to others a lot and understands what’s happening in the markets.

But she wasn’t done yet.

She got together a group called the Financial Stability Oversight Council on Friday to talking about what’s been happening with Deutsche Bank, which is a really big bank from Germany whose share prices had been going down recently.

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