Lloyd Blankfein on the security of money: “Sort of yes”
New York (CNN) In the wake of the failures of Silicon Valley Bank and Signature Bank, and separate troubles at Credit Suisse and the First Republic, many Americans are asking the question: Is my money safe?
Lloyd Blankfein, the former CEO of Goldman Sachs, said in Fareed Zakaria GPS on Sunday that the answer is not black and white.
“The answer is kind of an ellipsis yes,” Blankfein said.
That’s because the government stripped the Federal Reserve of its ability to issue a blanket guarantee on all deposits in the system, a power it exercised in 2008.
Instead, the central bank, along with the Federal Deposit Insurance Corporation and the Treasury Department, has the power to guarantee deposits bank by bank if they identify a systemic emergency.
Blankfein said the Fed is implying that it will treat any bank run or event as systemic and use its powers, but is unable to offer a blanket guarantee up front.
“I think you can rely on that,” said Blankfein. “But in that lack of absolute certainty lies a tail risk.”
Experts say in the wake of the bank collapse do not rush to withdraw money.
“I don’t think people should panic, but it’s just wise to have insured versus uninsured deposits,” adds Jay Hatfield, CEO at Infrastructure Capital Advisors and portfolio manager of the InfraCap Equity Income ETF. to ensure your bank is FDIC insured, which most are.
Each account holder is insured up to $250,000. For example, if you have a joint account with your spouse, your money is insured up to $500,000.
When you bank through a federally insured credit union, your deposits are insured up to a minimum of $250,000 by the National Credit Union Administration, which, like the FDIC, is backed by the full trust and creditworthiness of the US government.
The future of banking
Zakaria added: “There are many people who believe that in a way this is a bailout and in a way this is another example of capitalism for the poor and socialism for the rich.”
Blankfein said the government is helping not based on which groups of depositors are affected, but because of systemic risks to the entire banking system.
The phrase being thrown around in these talks is moral hazard – meaning if those depositors are protected, “going forward, they and other depositors won’t be so careful about where they put their money.” This could lead to a repeat of the current crisis, he said.
Blankfein supported a policy change to raise the FDIC insurance limit.
“Are we going to make it compulsory for depositors to do this kind of forensic accounting analysis on banks?” said Blankfein. “We don’t let people analyze planes as we board them. We rely on the FAA. If it’s certified, we’ll get on board.”
The difference between 2008 and today is the difference in assets, Blankfein said.
In 2008, banks had “bad assets on their books” or assets that couldn’t be valued at all — think subprime mortgages that went worthless, he said.
The problem now is that “people are withdrawing their deposits, but the assets are probably good money over the long term, but have suffered a drop in value in between,” Blankfein said. He also added that banks are better capitalized due to reforms that took place after 2008.
If the current banking model persists, most Americans will think their money is only safe in banks that are too big to fail, Blankfein said.
“Is it a virtue that America has well over 4,000 banks? Most big countries have a few big banks with branches,” Blankfein said, adding that the US has banks that specialize in certain industries, like SVB with technology.
“I wouldn’t necessarily want to experiment and take that back,” Blankfein said. “But if we encourage people to only go to the biggest banks, then the sector will consolidate beyond what people find attractive.”
Blankfein said markets are predicting the Fed will hike rates by 0.25% and that it “would be okay to stop there.”
Democratic Massachusetts Senator Elizabeth Warren, a member of the Senate Banking Committee, slammed Federal Reserve Chair Jerome Powell on Sunday, saying he had failed on two of his key jobs, citing rising interest rates and his support for bank deregulation.
The Fed will announce its latest decision on its benchmark interest rate at the end of its next two-day meeting on Wednesday.
CNN’s Aileen Graef contributed to this story.