Axios Markets

Almost no one understands how banks and bank accounts work — and the government isn't helping.

Why it matters: All stable banking systems stand on a solid bedrock of trust. When that trust is eroded, only government can rebuild it. The problem is that government actions haven't managed to rebuild the trust that was lost over the long weekend of March 10.

The big picture: The failure of Silicon Valley Bank destabilized much of the U.S. and even global banking industry by causing a massive psychological recalibration of what constitutes a "safe" place to hold money.

• Deposits are information-insensitive assets — they're, literally, money in the bank. When people even ask whether they're safe or not, that thwarts financial-stability goals.

Flashback: SVB deposits might be safe now, but for a whole day on Friday March 10, they weren't. The bank was taken over by the FDIC before most of its branches opened in California, and for the rest of that day — plus all of Saturday and nearly all of Sunday — customers with more than $250,000 in the bank were objectively terrified that they might lose most of their money.

• That fear wasn't entirely rational. People who understand how both bank balance sheets and the FDIC work knew that at a minimum uninsured depositors would have access on Monday morning to more than enough money to make payroll, and would ultimately lose little if anything.
• Many rich and influential VCs and Silicon Valley thought leaders, it turns out, don't understand how bank balance sheets and the FDIC work.

Be smart: Fear is highly contagious, and the VCs' fears spread rapidly in a way that has proved hard to quash.

• The virality of worries about deposit safety was turbocharged by the fact that it was never particularly rational in the first place to have enormous sums just sitting on deposit at a bank — not when T-bills can yield as much as 5%.
• SVB's failure therefore acted as a wake-up call that made cash-rich individuals and companies realize their money wasn't working for them and could — should — be invested more wisely elsewhere.
• From the point of view of a bank, of course, that kind of outflow is very hard to distinguish from a bank run.

What they said: "Today we are taking decisive actions to protect the U.S. economy by strengthening public confidence in our banking system" said the government's press release on the Sunday after SVB failed.

• The catch: There's no magical "public confidence" button Treasury or the Fed can push. Instead, what we got were dry press releases saying things like "the BTFP will be an additional source of liquidity against high-quality securities."
• In other words: The government relied on journalists to reshape the press releases into a compelling English-language message of "don't panic, there's nothing to worry about."

Be smart: That's just not what journalists do.

• Journalists, by nature, seek out exciting news. Panicked depositors are news, especially when they cause bank stocks to plunge. So are plunging bank stocks. Reporting on both causes more people to withdraw their deposits, not fewer.
• "Meh, move along, nothing to see here" is not a headline you'll ever see — and even if it did appear, it probably wouldn't reassure anybody.

The bottom line: If the government's aim here is to lull depositors back into their prior state of complacency, it isn't working.

The government's initial strategy, on the weekend that SVB failed, was simply to assert that public confidence in the banking system was strong, in hopes that confidence would thereby magically manifest. When that failed, the Plan B comms strategy seemed as though it wasn't entirely thought through.

Why it matters: Every bank in the country, with the possible exception of the ultra-giants sitting on more than $1 trillion in assets, now has depositors worried about the safety of their money. The banks need the government to reassure those depositors — and the government isn't doing a great job.

The big picture: The comms strategy has been spearheaded by Treasury secretary Janet Yellen and Fed chair Jay Powell, both of whom are technocrats who lean instinctively and vocationally toward carefully chosen words.

• Neither of them is a politician with a natural facility for communicating directly with the general public.

Where it stands: After the initial intervention failed to stanch the outflow of deposits from regional banks, there were three main attempts to reassure depositors.

• The first was a speech by Yellen to the American Bankers Association in which she averred a "resolute commitment to take the necessary steps to ensure that depositors’ savings and the banking system remain safe."
• The second was testimony by Yellen to Senate on Wednesday in which she used the exact same words. (Those words were then tweaked slightly on Thursday, for a subcommittee of the House Appropriations Committee, but the message didn't really change.)
• The third was the press conference by Powell after the Fed's rate-hike announcement, in which he said that "all depositors' savings and the banking system are safe."

The catch: These statements were hardly unambiguous.

• When the Economist's Simon Rabinovitch asked Powell whether we are now in a situation where "de facto deposit insurance covers all savings," Powell could have just said yes. Instead, he demurred, replying: "Well, I'm not saying anything more than I'm saying."
• Yellen also undercut her message by telling one senator that "I have not considered or discussed anything having to do with blanket insurance or guarantees of all deposits.”
• That statement sent regional bank stocks tumbling.

Between the lines: All of the messages were buried within longer communications that covered a lot of ground; none of them were simple and succinct standalone statements.

• Yellen and Powell seem to be trying to communicate that, at least for the time being, any bank failure would have potentially systemic ramifications, and that they would therefore cover uninsured depositors in exactly the same way they did with SVB and Signature. For unclear reasons, however, they seem unwilling to say that explicitly.
• FDIC insurance covers deposits to at least $250,000 — SVB and Signature are examples of it going much higher than that. Depositors want to be told explicitly that other bank failures would also raise the systemic risk of deposit flight, triggering unlimited insurance.

The intrigue: The communicator-in-chief, President Joe Biden, has so far said nothing at all on the subject. Neither has the only other elected politician in the executive branch, Vice President Kamala Harris.

Our thought bubble, from Axios Communicators' Eleanor Hawkins: Clear communication here would require less in the way of acronyms, jargon, and numbers — and more in the way of narrative.

• A simple, clear, unhedged and unambiguous statement from the president, echoed repeatedly by Yellen and Powell, would go a very long way.

Popular intuitions about banking and money are nearly always wrong. How can a debt be an asset, for instance, while a checking account is a liability?

• If there's a lot of money in a bank account, that doesn't mean the bank has a lot of money. It means the bank owes a large sum of money.
• "Fiat money" isn't actually created by the government — it's created by banks, when they originate loans.

Be smart: It's not healthy when banks have soaring share prices and become some of the most valuable companies in the world.

• In June 2007, for instance, financial-services intermediaries comprised more than 22% of the entire capitalization of the S&P 500. That turned out to be a harbinger of the crisis.

Between the lines: Low share prices can be a sign of a resilient system efficiently allocating risk to those most well-equipped to take it.

• Bank depositors are protected not only by the FDIC but also by the stock market. Bank equity acts a bit like a crumple zone in a car: When shares fall in price, that's a sign that losses are being taken by those who can afford them (shareholders) rather than by those who cannot (depositors).

Catch up quick: Law professor Mehrsa Baradaran has written a fantastic kids' book explaining banking for 5-year-olds and up, which can be downloaded for free here. I can think of a few venture capitalists who would be well served by reading it.

The art market is defined by the awkward combination of the financial with the ineffable — and the influence of the former over the latter has been growing consistently for decades.

Why it matters: By shopping around its art loans, Sotheby's is revealing the degree to which the genteel protocols of the past are no longer necessary, or even desired.

Driving the news: Bloomberg reported this month that auction house Sotheby's "is pitching investors a first of its kind: a securitization of personal loans to the wealthy secured on their art collections."

The big picture: Sotheby's has been pushing the envelope of art financialization since it was acquired by French billionaire Patrick Drahi in 2019.

• Its Sotheby's Financial Services subsidiary is run by a former Blackstone executive who is loves to talk about how he's "building out a sophisticated funding framework."

How it works: Historically, art lending at places like Sotheby's was part of the suite of services that auction houses use to build up a close relationship with their best and biggest clients.

• Rather than just helping collectors buy and sell, Sotheby's could be there for them when they needed liquidity, too — and all of that would in theory help the house nab any eventual sale mandate.

Be smart: The terms of art loans allow the lender to sell artworks at well below-market prices if an interest payment is missed and the loan counts as being in default. That can cause great unhappiness and even lawsuits from borrowers.

• Between the lines: A Sotheby's relationship manager will naturally be inclined to err on the side of grace when it comes to late payments from a borrower. Such executives will want to preserve the relationship rather than ruin it by foreclosing on an artwork.
• The buyer of a securitized loan, however, has no interest in the value of the relationship and will insist that Sotheby's treat the loan in a dispassionate and narrowly profit-maximizing manner.

The bottom line: That's exactly the unsentimental signal Drahi wants to send — not only to potential borrowers but even to Sotheby's own staff.

Go deeper: Artnet's Katya Kazakina published a great profile of Drahi in December. He has "no patience for diva behavior" or expensive rainmakers, per her piece; instead, he ultra-efficiently maximizes profits by adding new fees, changing financial terms, and extracting dividends from real-estate assets.