Regulators need to report SVB executives' potential 'outrageous and indefensible' behavior to Congress to avoid mistakes made after the 2008 financial crisis, 2 top Democrats say

• The political and economic fallout over Silicon Valley Bank's abrupt closure and depositor bailout continues.
• Sens. Elizabeth Warren and Richard Blumenthal are calling on the SEC and DOJ to look into the collapse.
• They want the agencies to probe whether bank executives potentially violated the law.

As the ripple effects of the Silicon Valley Bank collapse and subsequent bailout are still felt across the economy, Senators Elizabeth Warren and Richard Blumenthal are demanding an investigation into what exactly happened.

In a letter to Attorney General Merrick Garland and SEC Chairman Gary Gensler, the Democrats called on the respective agencies to look into the circumstances surrounding the collapse — and to probe whether bank higher-ups or officials may have violated the law.

The two lawmakers want to ensure that the Justice Department and SEC are taking into account issues that played out following the 2008 financial crisis — and ensuring they do not happen again.

"One of the enduring failures in the aftermath of the 2008 financial crisis was the inability or unwillingness of DOJ and bank regulators to hold bank executives accountable for behavior that destroyed millions of lives and cost trillions of dollars of wealth," the lawmakers wrote in the letter. 

"The nation's bank regulators cannot make the same mistake twice," they continued. "I am not prejudging this matter, and am not in position to do so. But your agencies have extensive investigative authority and should use it appropriately."

If laws were broken, the senators tell the agencies that "you should prosecute them aggressively." They also note that the agencies may "find that behavior that contributed to the collapse was outrageous and indefensible, but may not have run afoul of federal law." If that's true, then they call upon the DOJ and SEC to report what did happen to Congress, so it can consider legislation to stop that from happening again.

Multiple reports on Tuesday said that the Justice Department and SEC were investigating the bank's collapse, with the Wall Street Journal reporting that the probe is looking into SVB's officers selling off stocks just days before the collapse. The Department of Justice did not immediately respond to Insider's request for comment.

Warren and Blumenthal wrote in their letter that "SVB officials showed a pattern of risky and questionable decision making" that may have contributed to the bank's collapse. They also noted the lack of stress tests that would have helped regulators determine whether the bank could respond to rising interest rates. 

Warren, and other Democratic lawmakers, have placed the blame for the lack of those tests on a 2018 partial rollback of 2010 legislation — the Dodd-Frank Act — that was intended to protect consumers from abusive financial practices following the 2008 financial crisis. 

Under its original iteration, the Dodd-Frank Act would subject banks holding over $50 billion in assets to more intense regulation and stress tests, basically meaning that regulators would ensure everything at those banks were on stable and solid footing.

But the Trump-era rollback of that original legislation raised the threshold for regulation from $50 billion to $250 billion, meaning that banks with under $250 billion in assets — like SVB — would not be subject to increased scrutiny.

"Let's be clear. The failure of Silicon Valley Bank is a direct result of an absurd 2018 bank deregulation bill signed by Donald Trump that I strongly opposed," Senator Bernie Sanders wrote in a statement on the bank's collapse.

Warren and Blumenthal are calling for federal agencies to investigate bank officials that lobbied Congress for regulatory rollbacks, SVB executives that received "oversize" compensation packages and bonuses, and whether SVB may have inadequately disclosed risks and financial problems, among other things. 

Whether any regulatory change will come as a result of the collapse is unclear, especially as Republicans rally around the messaging that SVB's failure was due to "woke" politics rather than its balance sheet. But Warren has been persistent in her message, already introducing legislation alongside Rep. Katie Porter to roll back the 2018 changes.

"In 2018, I rang the alarm bell about what would happen if Congress rolled back critical Dodd-Frank protections: banks would load up on risk to boost their profits and collapse, threatening our entire economy — and that is precisely what happened," Warren said in a statement on the legislation. "President Biden called on Congress to strengthen the rules for banks, and I'm proposing legislation to do just that by repealing the core of Trump's bank law."