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

by Michael Nguyen
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Treasury Secretary Janet Yellen was in a rush because she only had until sundown on Sunday, March 12th to come up with a plan to save the United States’ economy from crashing. She asked for help from someone who had been in her situation before but on an even bigger scale: Hank Paulson.

During the 2008 financial crisis, Paulson, who led the Treasury Department, suggested that the government should take prompt action. He said to Yellen: “It’s almost impossible to stop or even slow down a bank run, and hence it needs quick help from the government”.

People had started to take money out of Silicon Valley Bank earlier in the week. On Friday, it was so bad that the government had to take control of the bank. When this happened, many people got scared and started thinking about what caused the last big financial disaster – called The Great Recession.

Janet Yellen is different from other Treasury Secretaries because she has had a lot of experience in economics and finance. She faced a hard job of trying to make sure that all kinds of people, including financial companies, Republicans in Congress and President Joe Biden’s economic advisors are all happy with her work.

Two weeks ago, Janet Yellen called together a group of people which included Federal Reserve officials, regulators from two important organizations, a few politicians and bosses from Wall Street like Jamie Dimon (who is the head of JP Morgan & Chase).

Paulson was trying to help stop bad things from happening to the US economy. He was asking Congress for permission to buy $700 billion worth of mortgage-related things from businesses. Paulson told Yellen that it was important to protect America’s local banks or they could be in danger.

The Federal Reserve controls different kinds of banks. Regional banks are the ones with assets worth from 10 up to 100 billion dollars, not as small and simple as community banks, but also not as big as national ones. Out of all the banks run by the Fed, regional and community banking organizations have the highest number.

On Wednesday, March 8, the CEO of Silicon Valley Bank, Greg Becker, informed everyone that the bank had been losing money and needed to get $2.25 billion to stay afloat.

The bank had a lot of money that it hadn’t insured and many investments that had gotten less valuable when interest rates went up. So people freaked out on Thursday, March 9, and tried to get all their cash out as soon as possible – this caused something like a stampede which is called a ‘bank run’.

The day after tomorrow, Yellen talked with Jerome Powell (the head of the Federal Reserve), Martin Gruenberg (the boss at FDIC) , Michael Hsu (acting lead of OCC) and Mary Daly (chair of San Francisco Fed). Quickly, regulators moved to put Silicon Valley Bank into control by FDIC.

At the weekend, people from the Treasury, the Fed and FDIC worked together to find someone who would take over the bank. Yellen and other government officials met to decide how they could make sure that the bank had enough money for everyone’s paychecks by Monday and also to figure out a way of helping without using any taxpayer money. All this needed to be done before the Asian markets opened for their week.

Yellen had to make some Republicans in Congress happy. She spoke with McHenry and other politicians who were wondering if the actions taken by the government would mean more rules and regulations. McHenry didn’t give his thoughts to Big Big News, but at a recent American Bankers Association event he said that he was pleased with the government’s plan to protect people’s money in banks.

By Sunday night, March 12th, the Treasury, Federal Reserve and FDIC told everyone that a bank called Signature Bank had gone bankrupt and was being taken over. They also said that they would make sure all customers of Silicon Valley Bank and Signature Bank get their money back.

Within a few days, 11 large banks gave First Republic $30 billion to keep other local banks from folding too.

Yellen came up with an idea to use the money from banks to save First Republic. She talked about this plan with Powell, Gruenberg, and other officials in charge. Then she had a phone call with Dimon and brought it up again. After that phone call Dimon said they should “get started” and he got other banks on board to help out, according too two people who heard about the conversation but weren’t allowed to talk about the details.

We asked Dimon’s office for comment, but no one answered. According to about a dozen interviews, Yellen did something important over the weekend. A former Federal Reserve governor, Sarah Bloom Raskin, was surprised because two banks that at first weren’t thought to be dangerous ended up causing trouble in the financial system.

A year ago, she tried to become a governor of the Federal Reserve but didn’t get enough support from the Senate. In 2010-2016 she was already an official at the Federal Reserve and took her oath alongside Yellen, who became a vice chair at that same moment. People now know how educated Yellen is and that she is supposed to do big things in the administration. This was supported by President Obama’s nomination of Yellen to take over Ben Bernanke as head at the Fed.

Yellen is facing accusations that the Biden administration is helping out banks that can be risky. Some Republicans say this help is what caused inflation to skyrocket, so the Fed had to make interest rates higher in order to control prices. This could hurt banks and their investments.

Senator Tim Scott recently spoke at the American Bankers Association event and said that when inflation reaches a 40-year high, it is important to take immediate action. He also added that the Federal Reserve doesn’t have the ability to respond carefully (scalpel) so they tend to act harshly (hammer) which can lead to negative consequences.

President Biden wants Congress to make new rules which would help prevent banks from going bad. He also wants it to be easier for people in control of the bank to get punished, such as taking away their pay or not allowing them to do the job anymore.

Secretary Paulson said that Treasury Secretary Yellen is doing a good job because she listens carefully and talks with people who work at banks all the time.

But she’s still not done.

On Friday, she gathered a group to talk about the problems of Deutsche Bank, which is a very big bank in Germany and its stocks have been going down.

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