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By Miriam Raftery
Photo: CC by NC-ND
Updated March 22 with responses from East County cities and the County.
March 13, 2023 (La Mesa) – Two failed banks have been taken over by federal regulators. The Federal Deposit Insurance Corporation (FDIC) has taken control Silicon Valley Bank on Friday and Signature Bank on Monday. That’s sent ripples of concern through the financial community, also prompting La Mesa’s Treasurer to assure residents that at least 99% of the city’s assets are safe.
How did the bank failures happen?
The failures are tied to the Trump administration’s rollback of Dodd-Frank banking regulations, an action that eased restrictions on banks with under $250 billion in assets. That measure passed Congress in 2018 with overwhelming Republican support, though a few Democrats also backed the regulatory rollbacks. Both failed banks had under $250 billion in assets and would have been subject to stress tests and other regulatory scrutiny before the rollback of regulations.
Silicon Valley Bank got in trouble when many of its tech industry and business start-up customers needed money and made large withdrawals. So SVB had to start selling assets, mainly bonds, at a loss to free up funds for those withdrawals until its losses became too high, fueling a bank run by customers fearful of losing their money. That prompted the FDIC to take action. Like SVB, Signature Bank had over 90% of its deposits that were unisured, over the federally insured amount. Now, the federal government is stepping in to help restore funds for investors -- but will not bail out the banks, leaving shareholders and holders of unsecured corporate bonds to absorb the losses.
Deposits are federally insured only up to $250,000. But the FDIC, along with the Treasury Department and Federal Reserve, have announced the two bank failures posed a substantial risk to the entire banking system, should jittery investors trigger a wave of bank runs. So the feds took the rare step of announcing that to stabilize the market, it will guarantee even deposits over $250,000 at SVP and Signature banks, enabling companies with accounts their to make payroll and pay other bills.
The Fed plans to make additional funding available for eligible financial institutions to prevent runs on similar banks in the future, CNN reports.
Wall Street has reacted to that news with relief. While markets fell over 3% by Friday, late Sunday after the feds’ announcement, Nasdaq futures and S&P 500 rose 1.3% each.
Taxpayers will not foot the costs of reimbursing customers of the failed banks. Instead, regulators say shareholders and holders of unsecured corporate bonds could be on the hook.
Federal takeover of the two failed banks prompted La Mesa’s newly elected City Treasure Matt Strabone to issue a statement assuring that the City’s investment holdings “will be able to weather any difficulties in the banking industry without significant loss of funds.” The City Treasurer is responsible for maintaining and investing the City’s reserve fund, which is currently worth about $70 milion.
That’s because the city holds Certificates of Deposits (CDs) with banks across the nation, and nont of those CDS are more than the FDIC-insured limit of $250,000. Moreover, the city’s liquidity, valued around $25 million, is held by California’s Local Agency Investment Fund which is operated by the state Treasurer and “is not in any danger,” Strabone says.
However, about 1% of the City’s investment portfolio, around $1 million, is in JPMorgan Chase corporate bonds purchased by the former La Mesa City Treasurer. While there is no indication that JPMorgan Chase is in any danger of failing, Strabone says, “If JPMorgan Chase were in trouble, this investment would also be in trouble.”
He adds, “During the 2022 election campaign, I characterized the JPMorgan Chase bonds as an unwise investment and I committed to purchasing no additional corporate bonds issued by companies in the banking industry. I remain firmly committed to this.”
Strabone assures that no other city investments are at risk, adding, “La Mesans should feel confident that their city’s money is safe and will remain that way.”
East County Magazine sent a public records request to the County of San Diego and to East County's other cities -- El Cajon, Lemon Grove and Santee -- to ask if they have any money invested anywhere that is not FDIC insured, including unsecured corporate banking bonds.
Dan McAllister, the County Treasurer/Tax Collector, replied, “The County of San Diego Investment Pool is managed in accordance with California State Government Code and the County’s Investment Policy. The County invests, the same as other governmental agencies, in many different securities that are not federally insured. The County utilizes an internal credit review process to further guide investment decisions to ensure high credit quality of securities. The Investment Pool is overseen by members of the public with finance expertise, the Treasury Oversight Committee; and is audited annually by an independent Certified Public Accounting firm. Additionally, the Investment Pool has achieved the highest safety rating of AAA from Fitch. The County has not experienced any losses related to the recent banking failures. Please see our latest monthly financial report for a detailed breakdown of our holdings. Financial Reports (sdttc.com). The County has not calculated the amount that is not federally insured, but using the available reports in the preceding link would enable you to determine that amount.”
El Cajon City Manager Graham Mitchell sent this reply. “I am not sure we have a public record that will say this investment is insured, this is not, etc. Our annual investment report (coming out soon) includes language from our investment institutions that may shed some light on this. However, the short answer is that we do not have any unsecured corporate band or corporate bonds in our portfolio. However, it is far more complicated than this. When you manage a portfolio of millions in cash and even more in investments pools, there is always risk. We work hard to mitigate those risks. If you are interested in more information, our Finance Director suggested you come to city hall and he can provide background information into municipal financing, banking, and investing.”
Lemon Grove City Manager Lydia Romero responded when asked about uninsured investments, “We do not have any. All our investments are either in LAIF or CD’s, no bonds.” LAIF stands for Local Agency Investment Fund , one of the few state approved investment funds, she explained.
The City of Santee did not respond to our inquiry.
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