Prominent hedge fund manager Bill Ackman warns that the California bank’s risks have now spilled over to the big banks.
His voice and influence are enormous.
Financier Bill Ackman is one of the best known and most respected financiers on Wall Street. And since the start of the new banking crisis, his voice has never been louder.
Ackman, along with technology investor David Sacks and tech billionaire Mark Cuban, has been lobbying regulators to save Silicon Valley Bank, which failed after a bank run.
The CEO of the hedge fund Pershing Square urged regulators to act as quickly as possible to avoid panic in the markets and significant damage to the global financial system. For him, inaction would be devastating.
Presumably, Ackman and other influential voices on Wall Street and Silicon Valley had been heard. The Treasury Department, the Federal Reserve, and the Federal Deposit Insurance Corporation announced extraordinary measures on March 12.
The FDIC guaranteed all SVB deposits, including those over $250,000, removing the regulatory limit.
The big banks show up with a bailout
The Fed also created a new lending facility called the Bank Term Funding Program, designed to safeguard institutions affected by the SVB collapse.
The facility provides loans of up to one year’s duration to eligible banks, savings associations, credit unions, and other depository institutions that pledge US Treasury securities, agency debt, mortgage-backed securities and other assets qualified as collateral.
These assets will be accepted as collateral at par, that is, at their original value, regardless of the rise in interest rates in recent months. Those higher rates have reduced the value of long-term bonds that were bought when rates were low. The Fed wants to prevent institutions from being forced to sell their bonds due to large losses.
While these measures have prevented markets from falling, they have not allayed fears of contagion, with mistrust centered on US regional banks and international banks. Bank of the First Republic (FRC) – Get a free reportin the United States and Credit Suisse (CS) – Get a free reportin Europe they are in the crosshairs.
In Europe, the Swiss National Bank, the country’s central bank, provided an emergency loan of nearly $54 billion to Credit Suisse to bolster its liquidity. In the US, regulators encouraged a coalition of banks to bail out First Republic Bank.
The San Francisco bank received $30 billion in deposits from 11 banks on March 16. The major banks (Bank of America, JPMorgan Chase, Wells Fargo and Citigroup) participated in the bailout plan, each with $5 billion. Goldman Sachs and Morgan Stanley each contributed $2.5 billion.
“This show of support from a group of large banks is very welcome and demonstrates the resilience of the banking system,” the Treasury Department said in a statement.
‘Half measures don’t work’: Ackman
The question is whether this announcement will help stabilize First Republic Bank, whose shares have fallen 70% since the SVB setbacks. Few details about the surprise plan have leaked, likely raising more questions.
“@SecYellen has apparently lobbied the SIBs to recycle some of the deposits they received from @firstrepublic into the FRB for 120 days,” Ackman said of the bailout plan in a lengthy tweet. “The result is that the risk of FRB default is now spilling over to our largest banks.”
The financier refers to Treasury Secretary Janet Yellen. “SIB” refers to systemically important banks, or banks whose failure may cause significant damage to the financial system and the economy as a whole.
“Spreading financial contagion risk to achieve a false sense of confidence in FRB is bad policy,” Ackman wrote. “The SIBs would never have made this low-yield investment in deposits unless pressured to do so and without guarantees that the FRB deposits would be backed if it failed.”
Ackman is furious with the regulators. He denounces the bailout plan as a half measure and warns that time is ticking if the federal government wants to avoid a major crisis.
“The press release announcing the $30 billion in deposits raised more questions than answers. The lack of transparency makes market participants assume the worst,” the financier said. “I’ve said before that hours matter. We’ve let days go by. Half measures don’t work when there’s a crisis of confidence.”
Guarantee all deposits?
He continued:
“Again, I am not long or short in the banking sector. I am simply extremely concerned about the risk of financial contagion spiraling out of control and causing serious economic damage and hardship.”
“We need to stop this now. We are past the point where the private sector can solve the problem and we are in the hands of our government and regulators. Tick-tock.”
First Republic Bank shares, which rallied 10% after the announcement, fell again in recent trading.
For Ackman, the current problem is a confidence crisis in the banking sector and “half measures” will not solve it. To emphasize his point, he noted that First Republic Bank is a well-managed bank with healthy assets. Therefore, he proposes that the FDIC announce that it will insure all deposits in US banks.
“We need a system-wide temporary deposit guarantee immediately until the expanded and modernized @FDICgov insurance system becomes widely available,” the financier suggested.
