The collapses of Silicon Valley Bank and Signature Bank this past weekend were the end point in an all-too-familiar cycle: first the boom, then the breathtakingly speedy bust, and then the bailout. We are now at the postmortem moment—when everyone wonders where the regulators were.

Silicon Valley Bank has already become notorious for how obvious its red flags were. Perhaps the most telling was the rapid growth of its borrowing from the Federal Home Loan Banks system. Banking experts know this Depression-era group of government-sponsored lenders as the second-to-last resort for banks. (The Fed is, as always, the lender of last resort.) At the end of last year, Silicon Valley Bank had $15 billion of FHLB loans, up from zero a year earlier.

“That’s the type of flag that says you need to look closely,” Kathryn Judge, a Columbia law professor who specializes in financial regulation, told me. But there’s no sign the loans triggered any regulatory attention.

Primary responsibility for the debacle lies, of course, with SVB’s management. But regulators are supposed to grasp that they exist because bankers are always tempted to take risks. Bankers want to grow too fast, borrow cheaply, lend freely, and lock their investments up unwisely for long periods in hope of gaining higher returns.

Some commentators are now reiterating calls for banking rules to be tightened, which is probably a wise move. But the collapse of the two banks proves once more that the culture of the regulators is as important as any rules, laws, or tools at their disposal.

[Annie Lowrey: You should be outraged about Silicon Valley Bank]

At least one journalist detected banks’ rising vulnerabilities, including those of Silicon Valley Bank, as early as last November; the Federal Deposit Insurance Corporation’s own chair had also warned about the problem. A few short sellers even started betting against the bank’s stock. Now, however, the combination of reckless bankers and lax regulators has left us with a financial crisis and a federal-government bailout—and the well-rehearsed spectacle of regulators promising to do better next time. (And yes, this was a bailout. Some depositors were facing losses and the federal government, backed by the public, prevented that—at as-yet-unknown scale and cost.)

One troubling aspect of this particular collapse is just how unremarkable a bank run it was, how basic its causes were. Regulators didn’t need any fancy analysis to detect the danger at Silicon Valley Bank. They just needed to notice its financial results. Granted, in 2018 Congress had loosened the post-global-financial-crisis Dodd-Frank regulations that would have required a bank like SVB to undergo more frequent stress tests, but those tests measure exotic or extreme risks. All that was required in this case was regular supervision. The bank had clear risk-control flaws and disclosed losses on its books, right there in its Securities and Exchange Commission filings.

Silicon Valley Bank’s assets had grown dramatically, quadrupling in five years, as had its deposits. Both phenomena are almost always worrying signs. The bank was also overly concentrated in one sector of the economy, and an unusually large proportion of its deposits—about 94 percent—was uninsured, above the $250,000 limit that the FDIC will guarantee per deposit.

No bank can survive if every creditor asks for their money back at once. The larger the portion of a bank’s clients that could wake up one day to realize that their deposits are not protected, the greater the risk of a run.

What Silicon Valley Bank did with those deposits should have been another warning signal. It used them to buy too many long-term bonds. As interest rates go up, bonds lose value. Nobody should have needed the warning, but the bank itself said that interest-rate risk was the biggest hazard it faced. And regulators should have noticed before the bank began borrowing heavily from the FHLB system.

[James Surowiecki: What social media is doing to finance]

In its SEC filings in the third quarter of last year, the bank’s parent company disclosed that it was sitting on losses from its bond purchases big enough to swamp its total equity. That would have been a good time for supervisors to tell the bank to get its act together.

Silicon Valley Bank was far from doing so: It hadn’t had a chief risk officer for most of that year. “Regulators had to know that, and it has to matter,” Jeff Hauser, the founder and director of the Revolving Door Project, a D.C. nonprofit that tracks the regulatory state, told me. “Once we valorize success as proof of wisdom, it’s hard for a lowly bank examiner to say, ‘This place doesn’t have a risk officer and doesn’t have a plan to address the risk on its books.’”

Bank regulators have awesome powers. They can go into a bank, examine its operations, and demand changes. The problem is that they rarely do. “The regulators are like all the conflicted agents in ratings [agencies] and other areas,” Chris Whalen, a longtime financial analyst, told me. “They go with the flow in good times and drop the ball in bad times.”

The San Francisco Fed, which regulated the parent company, and the California regulators, which oversaw the bank itself, could have required SVB to raise capital last year, when it was less vulnerable. They could also have required the bank to increase rates on its savings accounts—in other words, to pay people more to lend it money. That would have eroded earnings but it would’ve kept customers from fleeing. Ask Greg Becker, the bank’s chief executive, today if he would rather have reduced per-share earnings or avoided having superintended the second largest banking collapse in U.S. history.

So why don’t we have regulators who can be relied on to do their jobs?

Part of the answer is a legacy of the Trump administration’s penchant for installing regulators who are opposed to regulation. Donald Trump appointed Randal Quarles as the first-ever vice chair of banking supervision at the Federal Reserve. (The Fed did not respond to questions for this story.) Quarles saw it as his mission to relax the post-financial-crisis regime. He sent unambiguous signals about how he felt about aggressive regulators—“Changing the tenor of supervision will probably actually be the biggest part of what it is that I do,” he declared in 2017. Translation: Any sign of showing teeth and he’ll get out the pliers. And when Jerome Powell was nominated to be the chair of the Fed, in 2017, he told Congress that Quarles was a “close friend,” adding, “I think we are very well aligned on our approach to the issues that he will face as vice chair for supervision.” Naturally, Quarles supported the 2018 law to roll back stress tests—something that Becker himself had called for. Quarles also did not respond to my request for comment.

[Jerusalem Demsas: ‘Financial regulation has a really deep problem’]

This crisis raises the old issue of how strange it is that the Federal Reserve regulates banks at all. In the years leading up to the 2008–09 financial crisis, an alphabet soup of regulators ostensibly shared responsibility for banking oversight along with the Fed: The OTS (Office of Thrift Supervision), the OCC (Office of the Comptroller of the Currency), the SEC (Securities and Exchange Commission), and the CFTC (Commodity Futures Trading Commission). Banks and financial entities played these agencies off against one another to shop for the least restrictive. Policy makers and legislators knew this and toyed with changing the architecture of banking-and-securities regulation. Ultimately, their only action was to close down the least of them, the OTS, and keep the rest, each of which had its own constituency of supporters.

So the Federal Reserve kept its responsibilities. But critics argue that the Fed can never become an effective bank regulator because its chief concern is with the more glamorous business of managing the economy.

The roots of regulatory failure run deeper, however, than the Trump administration’s actions. President Joe Biden’s appointees at the Federal Trade Commission, the Department of Justice, and the Consumer Financial Protection Bureau appear to be trying to wield their powers to make the economy more efficient, safer, and more equitable. But pockets of learned governmental helplessness remain. Regulators have an ingrained fear of stepping in, making people uncomfortable, making demands, and using their clout.

The Fed’s banking supervisors should have been on heightened alert as its governors started boosting interest rates. Silicon Valley Bank faced not only the interest-rate risk to its treasury-bond holdings but also the likelihood of credit losses accumulating on its books from distressed venture-capital firms and declines in commercial real-estate values last year.

The fact that the Fed supervisors weren’t agile with Silicon Valley Bank indicates that they have failed to internalize how woefully fragile our financial system is. The U.S. has suffered repeated bubbles, manias, and crashes since the deregulatory era began under Ronald Reagan: the savings-and-loan crisis, Long-Term Capital Management, the Nasdaq crash, the global financial crisis, the financial convulsions of the early pandemic. Congress and regulators sometimes shore up aspects of the system after the event, but they have failed to foster a resilient financial system that doesn’t inflate serial bubbles. Each time, instead, the regulators reinforce a lesson that if bubble participants huddle as closely together as possible, and fail conventionally, the government will be there to save them.

“One of the most disturbing dynamics here,” Judge, the Columbia Law professor, told me, “is a loss of respect for the Fed as a supervisor, as a regulator.” That is not a good place for the industry’s chief overseer to start rebuilding confidence in the integrity of the American banking system.

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Both Donald Trump and Ron DeSantis have signaled their willingness to sell out Ukraine to the Kremlin, and the Russians have gleefully taken notice. How could this be happening in the party of Ronald Reagan?

But first, here are three new stories from The Atlantic.

Breaking: the strongest evidence yet that an animal started the pandemic You should be outraged about Silicon Valley Bank. Make a to-don’t list.

Taking the Bait

State governors are not usually experts on foreign policy, but those who intend to run for president are advised to at least brush up on the subject. Alas, Florida Governor Ron DeSantis did not get that memo. Last week, DeSantis declared Russia’s massive invasion—the largest operation in Europe since the defeat of the Nazis—to be a mere “territorial dispute,” and said that the war is thus not “a vital American national strategic interest.” This was too much for many elected Republicans and even for the editorial board of The Wall Street Journal, who described the comments as “Ron DeSantis’s First Big Mistake.”

This shining opportunity to stumble came courtesy of the Fox News host Tucker Carlson, who a few weeks ago sent out questionnaires about Ukraine policy to a group of possible GOP presidential candidates. Carlson’s questions presented Republican contenders with a dilemma. On the one hand, many faithful MAGA voters, who make up the core of the GOP base, are regular viewers of Carlson’s show, and his questionnaire was a kind of early beauty pageant, an opportunity for Republican candidates to take a quick walk down the runway in front of MAGA World. On the other hand, Carlson is an irresponsible demagogue who has been exposed in the Dominion-lawsuit filings as a relentless opportunist who will bamboozle his own audience for ratings.

Since the war in Ukraine began more than a year ago, Carlson has gone on numerous unhinged rants against “the D.C. war machine,” meaning anyone who supports aiding Kyiv. (He even went off the deep end about me a few weeks ago.) Carlson claims to just be asking questions, but on Ukraine, as on many other issues, he is located right in the heart of the fever swamps.

In addition to his own bizarre perorations, Carlson also occasionally relies on input from his guest Douglas Macgregor, a retired Army colonel who for a hot second was an adviser to Trump’s last (acting) defense secretary, Christopher Miller, and whose nomination to be an ambassador foundered in part because of a history of weird and offensive statements. To give you some idea of the minefield awaiting GOP candidates, Macgregor went on last night about how the Ukrainians are getting “crushed,” and how the left has weakened the U.S. military to the point where it is almost useless. (The Pentagon’s assessment is a bit less gloomy, to say the least.) Carlson responded by asking, “[If America] became embroiled in a hot war with Russia, how long before you are arrested would it be, do you think, for saying what you just did?”

Even Macgregor didn’t bother answering that one, but it shows why, for the credible would-be candidates filling out Carlson’s questionnaire, there is no real advantage in saying anything of substance. And so, most of them didn’t, offering unexceptional responses composed mostly of political dryer lint: Kristi Noem blamed Joe Biden for being too weak to deter the Russians. Mike Pence said that regime change in Russia was up to the Russian people. Vivek Ramaswamy was more than happy to provide more detailed answers, but that is a luxury one can take while on the path to becoming a kind of GOP Andrew Yang. And Nikki Haley, in a classic cautious Nikki Haley move, waited until Carlson’s deadline for response had passed and the show on the subject had aired before answering the questions.

DeSantis, however, bit down on this giant hunk of bait, and his answers were displayed on Carlson’s show like a prize marlin.

Of course, this may have been DeSantis’s intent. He may well be trying to sound like an ill-informed isolationist, because he is trying to capture the MAGA voters who now support Trump. The former president is the undisputed world heavyweight champion of ignorant views, and if you’re going to take him on, you’d better have some stunningly ignorant views of your own to bring to the table. That’s what the Republican base wants.

DeSantis seems to know this all too well, which is likely why he’s been shoveling so much red meat out the front door of the governor’s mansion in Tallahassee to the MAGA cultural warriors. While covering his Trump-exposed flank on foreign policy, however, DeSantis has accidentally illustrated the problem of running for office in what used to be the party of Reagan: If you want to win the primary voters, you’ve got to reject everything you once believed.

Indeed, back in 2017, DeSantis the congressman—but not yet the candidate—wanted to be Reagan. When he opposed Barack Obama’s efforts to initiate a “reset” with Russia, he noted that Democrats “viewed guys like me who are more of the Reagan school that’s tough on Russia as kind of throwbacks to the Cold War.” And two years earlier, DeSantis was all about teaching the Russians a lesson for seizing Ukraine. He excoriated then-President Obama for being weak-kneed:

We in the Congress have been urging the president … to provide arms to Ukraine. They want to fight their good fight. They’re not asking us to fight it for them. And the president has steadfastly refused. And I think that that’s a mistake.

Well said, congressman. Perhaps you might have a talk with the current governor of Florida.

This pandering to the MAGA base is going to get worse, because Trump continues to dominate the GOP primary field. In some areas, this featherweight posturing will be repairable: Down the road, no one is likely to be fighting over whether first graders should be assigned college texts on “critical race theory.” In other cases, such as the destruction of Florida’s public universities, the damage will be more long-lasting.

But in foreign policy, amateurish pandering to Tucker Carlson’s audience is dangerous. The Russian media are already crowing that the next American president will throw Ukraine to the wolves, a belief that could lead the Kremlin to take even greater risks than bumping into drones. Many elected Republicans and GOP presidential contenders—despite their constant fear of offending Trump—seem to recognize this, to their credit. If only Ron DeSantis were one of them.

Related:

Is Ron DeSantis flaming out already? The war in Ukraine is the end of a world.

Today’s News

Polish President Andrzej Duda pledged to give Ukraine about 12 MiG-29 fighter jets, making Poland the first NATO member nation to follow through on Kyiv’s requests for warplanes. Eleven major U.S. banks said they would deposit $30 billion into First Republic Bank amid a crisis of confidence from the bank’s customers and investors. The U.S. military released video of what it says is the collision between a Russian fighter jet and an American surveillance drone over the Black Sea.

Dispatches

I Have Notes: Nicole Chung reflects on the responsibilities of writing about the dead.

Explore all of our newsletters here.

Evening Read

Illustration by Joanne Imperio / The Atlantic

Climate Activists Are Turning Their Attention to Hollywood

By Katharine Gammon

On a warm, windy fall night in Los Angeles, I stood in a conference room at the Warner Bros. Discovery television-production offices, straightened my spine, and stared down my showrunner, preparing to defend my idea for a minor character in our near-future science-fiction series.

“This character needs a backstory, and switching jobs because she wants to work in renewable energy and not for an oil company fits perfectly,” I told the unsmiling head honcho.

His face twisted, as if his assistant had delivered the wrong lunch. “Too complicated. That just feels like a lot of information to cram into a backstory. What if her story is that she wants this job because it’s near where her brother was killed in a terrorist attack? We’d just need to invent a terrorist attack.”

Read the full article.

More From The Atlantic

How far-right movements die The January 6 deniers are going to lose. Republicans are targeting drag shows. This congressman loves them.

Culture Break

Lionsgate

Read. Heartburn, the 1983 novel by Nora Ephron whose backstory asks: What right do women have to tell their side of the story?

Watch. John Wick, Keanu Reeves’s inaugural on-screen portrayal of the eponymous assassin; the franchise’s fourth installment, John Wick: Chapter 4, hits theaters next week.

Play our daily crossword.

P.S.

Speaking of Ukraine, as we noted above in Today’s News, America’s NATO ally Poland has announced its decision to send MiG-29 jets to Ukraine. This is important for several reasons—not least of which is that Poland has gotten out in front of the rest of NATO on the issue. I thought I would take a moment here, however, to explain what a MiG-29 is for those of you who do not keep up on vintage Soviet military hardware.

The MiG-29 was designed in the 1970s and entered service in the ’80s. Russian fighters are designated by the bureau that designed them: “MiG” is the “Mikoyan and Gurevich” design bureau, named for its founding engineers, and “Su” or “Tu” in front of a jet’s name are the Sukhoi and Tupolev bureaus, respectively. (The NATO code names for all Soviet-era fighters begin with F, and this one is the “Fulcrum.”) It was meant to be roughly equivalent to an American F-16 or F-15. Although not as good as its American counterparts, it is a solid fighter and capable of taking on multiple roles, especially “air superiority,” which means what it sounds like: controlling the airspace and dominating it (as opposed to, say, bombing targets or flying missions close to the ground to support troops in battle). It’s a fine jet—at least when flown by competent pilots—and more to the point, it’s one that Ukrainian pilots will already know how to fly, because it was part of the Soviet and post-Soviet inventory for so long.

— Tom

Kelli María Korducki contributed to this newsletter.