The Mirage of the FDIC’s $250,000 Limit

Happy Friday! It’s with a heavy heart we are announcing this will be the final edition of The Morning Dispatch.

New York’s city council is working to pass a law prohibiting workplace discrimination based on height and weight, so we are finally going to live out our collective dream and become the starting offensive line of the New York Jets. Aaron Rodgers has made an enormous mistake.

Quick Hits: Today’s Top Stories

• The Pentagon said Thursday an Iranian-made drone had struck a coalition base in northeast Syria, killing a United States contractor and injuring five U.S. service members and another contractor. Defense Secretary Lloyd Austin said the U.S. retaliated with “precision airstrikes” against facilities used by groups associated with Iran’s Islamic Revolutionary Guard Corps.
• In a move that brings Finland one step closer to NATO membership, Finnish President Sauli Niinisto signed a law Thursday that would allow the county to join the defensive alliance as soon as the two holdouts—Turkey and Hungary—have ratified its accession. Hungary’s parliament is slated to vote on Finland’s entry next week, and Turkey before the end of the parliamentary session on May 14. 
• More than 1 million people took to the streets across France on Thursday, to protest the country’s recently passed pension reform, many turning violent. The Paris garbage collector union will continue its strike until at least next Monday, leaving thousands of tons of trash stranded on Paris sidewalks. French President Emmanuel Macron confirmed he won’t back down from the pension changes—which raise the retirement age for most workers from 62 to 64—and compared the riots to the January 6 attack on the U.S. Capitol.
• The Washington Post reported Thursday no additional activity is expected this week from the grand jury investigating former President Donald Trump’s alleged hush-money payments to adult film star Stormy Daniels. Meanwhile, Manhattan District Attorney Alvin Bragg, who is leading the investigation, denied a request from three Republican House members to turn over details of the ongoing probe to their committees, labeling the demand “unlawful.”
• The Federal Trade Commission proposed a rule on Thursday that would make it easier for consumers to cancel recurring subscriptions. The so-called “click-to-cancel” provision would require companies to allow customers to cancel a subscription in the same mode they originally signed up—online, rather than on the phone or in person, for instance. The proposal is now subject to public comment. 
• Accenture, the global consulting firm, announced Thursday it will lay off approximately 19,000 people, or 2.6 percent of the firm’s total workforce. The cuts—which will primarily affect back-office workers rather than those in client-facing roles—will roll out over the next 18 months, with about half expected to be completed by the end of August.
• The Department of Labor reported Thursday that initial jobless claims—a proxy for layoffs—decreased by 1,000 week-over-week to a seasonally-adjusted 191,000 claims last week, suggesting the labor market remains historically tight despite continued layoffs in the tech sector.

Checking in on the Banks

“I can assure you, my friends, that it is safer to keep your money in a reopened bank than it is to keep it under the mattress.”

Ninety years after Franklin D. Roosevelt delivered those words in his first “Fireside Chat,” government officials are once again urging Americans to relax and trust the system. There’s evidence the rush to pull cash from small and mid-size banks after the collapse of Silicon Valley Bank has eased in recent days. Yet the upheaval of the past few weeks has some analysts and lawmakers suggesting reforms—chiefly, raising the $250,000 cap on deposit insurance.

As we reported previously, Silicon Valley Bank’s disintegration earlier this month marked the second-largest bank failure in the history of the United States, sending regulators scrambling. Strictly speaking, SVB’s downfall didn’t pose an inherent systemic risk—other banks weren’t directly exposed, and its clients (Disclosure: The Dispatch was a customer) were largely concentrated in the tech sector. But thanks to customers flush with venture capital money, nearly 96 percent of the bank’s deposits were above the $250,000 maximum that’s guaranteed by the Federal Deposit Insurance Corporation (FDIC). Worried panic would set in among these depositors and kick off a cascading crisis, Treasury Secretary Janet Yellen, Federal Reserve Chairman Jerome Powell, and FDIC Chairman Martin Gruenberg announced they would make all SVB account holders whole.

Perhaps thanks to this assurance, the worst-case financial Armaggeddon some had predicted didn’t materialize. But many U.S. depositors were still nervous, and their stress hit the medium-to-little guys the hardest.

JPMorgan analysts estimate the “most vulnerable” U.S. banks have lost $1 trillion in deposits over the past year, and about half of that was in March alone. Bank stocks have also dropped since SVB’s collapse, driving the S&P 500 banks index on Thursday to its lowest close since November 2020 after Moody’s Analytics warned of the risk regulators “will be unable to curtail the current turmoil without longer-lasting and potentially severe repercussions within and beyond the banking sector.”

Regional banks in particular have raced to stay solvent. First Republic, headquartered in San Francisco, is especially troubled, with depositors having withdrawn about $70 billion since SVB’s collapse. To make ends meet, the bank accepted a $30 billion loan from a collection of banks organized by regulators last Thursday. Yet its stock price has continued tumbling and on Friday, Moody’s downgraded the bank’s credit rating to junk status.

Meanwhile, in one week this month, banks borrowed a record $153 billion from the Fed to deal with the crunch. “The sharp increase in banks’ emergency borrowing from the Fed’s discount window speaks to the funding and liquidity strains on banks,” Moody’s analyst Jill Cetina said in a note. Still, the relatively favorable lending terms indicated the Fed considered the banks stable, just in need of liquidity to manage a passing strain.

Other signs indicate the storm may be passing. Western Alliance reported last week withdrawals had slowed and it had plenty of cash on hand, and officials claim that’s becoming a broader trend. “Since our administration and the regulators took decisive action last weekend, we have seen deposits stabilize at regional banks throughout the country,” White House spokesman Michael Kikukawa said this week. “In some cases, outflows have modestly reversed.”

Still, nobody’s resting easy as the Federal Reserve keeps raising interest rates—a critical ingredient in SVB’s failure—and depositors remain nervous. 

To put the fear fully to bed, some mid-size and small banks say the FDIC should extend a blanket deposit guarantee for the next two years.“Doing so will immediately halt the exodus of deposits from smaller banks, stabilize the banking sector, and greatly reduce the chances of more bank failures,” the Mid-Size Bank Coalition of America reportedly wrote to regulators last week. “Notwithstanding the overall health and safety of the banking industry, confidence has been eroded in all but the largest banks.” 

Last time officials implemented a temporary FDIC limit increase—from $100,000 to $250,000 during the 2008 financial crisis—it didn’t remain temporary. But Yellen said Wednesday the Biden administration isn’t working on increasing the cap, though the question might come up later amid talk of broader banking reforms. 

Congress is ultimately responsible for raising the limit, and lawmakers are split on whether doing so is a good idea. Sen. Elizabeth Warren told CBS News’ Face the Nation that lifting the limit, possibly into the millions, would be “a good move.” Others are more hesitant. GOP Rep. Patrick McHenry of North Carolina, chairman of the House Financial Services Committee, said he wanted to consider “the moral hazard of having more risk-taking in the financial sector” before raising the deposit insurance cap.

The House Freedom Caucus, meanwhile, blasted the idea of making all depositors whole. “Any universal guarantee on all bank deposits, whether implicit or explicit, enshrines a dangerous precedent that simply encourages future irresponsible behavior to be paid for by those not involved who followed the rules,” the group said in a statement.

Some analysts argue that ship sailed with SVB, and large depositors will now assume they’re fully insured if push comes to shove. “If the U.S. Treasury was willing to trigger a systemic risk exemption for Silicon Valley Bank—which was not very big at the time, which was not very hectic—then it will do it again,” said Nicolas Véron, a senior fellow at economic think tank Bruegel and the Peterson Institute for International Economics. “You don’t require a change of law, you just require the Treasury to invoke the same systemic risk exception in every future case—and I think that’s very likely.”

This precedent will be either undone—or solidified—if another troubled bank such as First Republic goes down. If officials make depositors whole again above the $250,000 line, it would strengthen Véron’s argument that regulators have put themselves on the hook to protect all deposits at America’s some 4,800 insured commercial banks. 

Researchers disagree about how such a change would affect bank behavior, but regardless, it would be a change from the status quo. “It’s a departure from nearly 90 years of U.S. policy,” Véron said. “The U.S. will end up with probably different banking structures as a consequence, but it will take time to unfold.”

TikTok CEO Unites Lawmakers—Against TikTok

If you read Monday’s TMD (🔒), you might remember we were hoping TikTok CEO Shou Zi Chew would show up for his testimony before the House Energy and Commerce Committee prepared with a fun little viral dance for lawmakers. He did—kind of.

Testifying on the Hill has become a rite of passage for the top executives of large tech companies, but yesterday’s hearing—focused on TikTok’s data security and its effects on young users—was particularly grueling. The video platform’s reputation with lawmakers on both the left and right was already pretty bad heading into the hearing, and Chew’s testimony did little to assuage their national security and privacy concerns. In fact, he may have only strengthened lawmakers’ bipartisan resolve against the company.

Witnesses generally get some breathers over the course of a typical congressional hearing, as they alternate between answering questions from lawmakers who are sympathetic to their point of view and other lawmakers who are not. Not yesterday. But Chew was subjected to more than five hours of grilling, with each member of Congress seemingly more skeptical than the last. “Thank you Mr. Chew for bringing Republicans and Democrats together,” GOP Rep. Dan Crenshaw of Texas joked at one point. “Appreciate that.”

Chew’s main goal on Thursday was to create some distance in lawmakers’ minds between TikTok and the Chinese Communist Party (CCP). “ByteDance is not owned or controlled by the Chinese government,” he claimed, referring to TikTok’s parent. “It’s a private company. Sixty percent of the company is owned by global institutional investors, 20 percent is owned by the founder, and 20 percent is owned by employees around the world.”

Chew also repeatedly highlighted the company’s “Project Texas” plan, which would force TikTok to house U.S. user data on Oracle servers in the United States and create a government-approved oversight panel to monitor access to the data. “Only vetted personnel operating in a new company called TikTok U.S. Data Security can control access to this data,” Chew claimed. “All protected U.S. data will be under the protection of U.S. law and under the control of the U.S.-led security team. This eliminates the concern that some of you have shared with me that TikTok user data can be subject to Chinese law.”

In theory, the proposal should address lawmakers’ biggest concern: that China’s sprawling national security law could force ByteDance to hand over American data to the CCP if requested. With Project Texas, TikTok would essentially create a structure in which neither ByteDance nor Chinese employees subject to the CCP’s whims would have access to U.S. user data.

But lawmakers weren’t buying it. Democratic Rep. Anna Eshoo of California told Chew the idea that the CCP does not have access to user data—and has not requested it—is “actually preposterous.” When Chew claimed TikTok does not censor content about China’s Uyghur genocide or the Tiananmen Square massacre, GOP Rep. Cathy McMorris Rodgers of Washington reminded him that lying under oath is a crime.

Crenshaw was similarly skeptical. “If the CCP says, ‘Hey ByteDance, you’re gonna do what we say and you can’t tell anyone about it,’ because by law, according to that 2017 national intelligence law, they have to do it,” he said. “That’s our concern. Maybe you haven’t done it yet, but my point is that you might have to.”

As if on cue, the Chinese Commerce Ministry on Thursday publicly opposed any forced sale or divestment of TikTok, saying that any sale involving the export of technology would require government approval. The statement did not help Chew’s case with Congress. “The CCP believes they have the final say over your company,” Rodgers told Chew.

As for Project Texas, the devil is in the details. Reports from former TikTok employees indicate deficiencies and vulnerabilities in the plan. National security experts have also cast doubt on the effectiveness of the data security measures. “[TikTok] highlights efforts to prevent data from ‘flowing out’ of the United States, but this is an effort to obscure the fact that data does not need to move ‘out’ of the United States to be leveraged by ByteDance and ultimately the Chinese Communist Party,” said Klon Kitchen, a cybersecurity expert and former Dispatch contributor. “Even if every line of TikTok’s code was initially reviewed and validated, there is simply no way to maintain reliable, real-time situational awareness on a code base this large and that is frequently updated.”

Lawmakers also focused on the harmful effects of TikTok on younger users of the app, citing examples of dangerous content trends resulting in the deaths of children—one trend involves kids taking dangerous levels of Benadryl.

Outside the hearing room, things weren’t looking much better for TikTok. As Chew fielded questions, the Committee on Foreign Investment in the United States (CFIUS)—a body that reviews international transactions for potential national security risks—released a thinly-veiled swipe at the company. “As a general matter, CFIUS does not comment on transactions,” the review body said in a statement emphasizing the importance of data security. “In every case the committee reviews, however, CFIUS takes all necessary actions within its authority to safeguard national security and will not clear any transaction unless it determines there are no unresolved national security concerns.” As we wrote Monday, CFIUS is currently threatening TikTok with a nationwide ban if it doesn’t divest its Chinese ownership. 

There was one TikTok ally in D.C. this week: TikTok influencers. Over 20 popular TikTok creators were on Capitol Hill to show their support for the app. Democratic Rep. Jamaal Bowman—one of the only members of Congress to publicly oppose a TikTok ban—joined some influencers in defending the company.

Still, it seems the prospect of significant restrictions or a ban is growing more likely, and Chew’s testimony did little to stop that trajectory for the company.

“This hearing really couldn’t have gone any worse for TikTok,” said Brendan Carr, a Republican commissioner on the Federal Communications Commission. “The number one job I think that they had today was to try to establish some level of credibility, some level of trust. I think you saw, on a bipartisan basis, it wasn’t there.” 

Worth Your Time 

• A few weeks after law students at Stanford heckled and shouted down conservative 5th Circuit Judge Kyle Duncan as he attempted to give a talk on campus, Jenny Martinez—the law school’s dean—released a remarkable 10-page letter to students and faculty making clear what transpired was unacceptable. “Our commitment to diversity, equity, and inclusion is not going to take the form of having the school administration announce institutional positions on a wide range of current social and political issues, make frequent institutional statements about current news events, or exclude or condemn speakers who hold views on social and political issues with whom some or even many in our community disagree,” the letter reads. “I believe that focus on these types of actions as the hallmark of an ‘inclusive’ environment can lead to creating and enforcing an institutional orthodoxy that is not only at odds with our core commitment to academic freedom, but also that would create an echo chamber that ill prepares students to go out into and act as effective advocates in a society that disagrees about many important issues. Some students might feel that some points should not be up for argument and therefore that they should not bear the responsibility of arguing them (or even hearing arguments about them), but however appealing that position might be in some other context, it is incompatible with the training that must be delivered in a law school. Law students are entering a profession in which their job is to make arguments on behalf of clients whose very lives may depend on their professional skill.”

Presented Without Comment 

Also Presented Without Comment

Also Also Presented Without Comment 

Toeing the Company Line

• In the newsletters: Sarah bemoans (🔒) the nuisance that is the presidential candidate questionnaire and Nick takes a page (🔒) from Rush Limbaugh’s playbook in the hopes of sinking Donald Trump in the primary. “I’m not inviting Democrats to cross over and vote for whichever Republican happens to be in second place for the sake of prolonging the primary, as Limbaugh did in 2008,” he writes. “I’m inviting them to cross over and vote for whichever Republican is best positioned to defeat Donald Trump. We cannot do another four years of this. The country will break.”
• On the podcasts: David French makes his triumphant return to the Dispatch Podcast, joining Sarah, Steve, and Jonah for a discussion of the Trump hush-money case, the 20th anniversary of the Iraq war, and … Buffalo Wild Wings?
• On the site today: Price explains why Idaho is considering bringing back the firing squad and Kevin debunks New York Gov. Kathy Hochul’s claim that her state is facing a housing shortage.

Let Us Know

Would you support reform to protect deposits of more than $250,000? Why or why not?