Billionaire warns of impending bank runs if government doesn’t guarantee all SVB deposits – Economics
Billionaire Bill Ackman has warned of “far-reaching and profound” consequences if the US government allows Silicon Valley Bank (SVB) to fail without protecting all depositors. “No company will take even the slightest risk of losing a dollar in deposits because there is no reward for that risk. Without system-wide FDIC deposit insurance, more bank runs will begin Monday morning,” he warned.
The government has until Monday morning to rectify its “soon to be irreversible mistake”.
Billionaire Bill Ackman, CEO and portfolio manager of Pershing Square Capital Management, has warned of “tremendous and profound” consequences if the US government allows Silicon Valley Bank to fail without protecting all depositors.
He tweeted on Saturday that the government had until Monday morning to rectify their “soon to be irreversible mistake”, stating:
By allowing the SVB to fail without protecting all depositors, the world has become aware of what an uninsured deposit is – an unsecured illiquid claim on a failed bank.
He stressed that if JPMorgan, Citibank or Bank of America don’t acquire Silicon Valley Bank before the market opens Monday, or if the government provides a guarantee on all SVB deposits, “the huge sucking sound you’re going to hear, the withdrawal of essentially all uninsured deposits will be held by all but the ‘systemically important banks’ (SIBs).”
In anticipation of these funds being “transferred to the SIBs, US Treasury Department (UST) money market funds and short-term UST,” Ackman noted that “there is already pressure to transfer cash to maturing short-term UST and UST money market accounts.” to the substantially higher returns available on risk-free UST versus bank deposits.” The billionaire continued:
These withdrawals will siphon liquidity from local, state and other banks and initiate the destruction of these vital institutions.
“Already, thousands of the fastest growing, most innovative venture-backed companies in the US will be without payrolls starting next week,” he added. In addition, he noted that increased demand for short-term UST “will drive short-term interest rates lower, complicating Federal Reserve efforts to raise rates to slow the economy.”
The government’s failure to guarantee SVB deposits has “far-reaching and profound” consequences
Ackman explained that Silicon Valley Bank’s management made “a fundamental error” in investing short-term deposits in longer-term, fixed-income assets, so “a bank run ensued” as short-term interest rates rose.
Not only did SVB management “fuck it up,” the billionaire claimed that the Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC) “fucked it up” in their risk oversight of the banking system. “SVB should have been at the top of their watch list with more than $200 billion in assets and $170 billion in deposits from business borrowers in basically the same industry,” Ackman said, emphasizing:
The failure of the FDIC and OCC to do their jobs should not cause the destruction of thousands of our nation’s greatest potential and fastest growing companies…while permanently impairing our community and regional banks’ access to low-cost deposits.
Pershing Square’s chief executive said his “back-end review of SVB’s balance sheet suggests that even in liquidation, depositors should eventually recover around 98% of their deposits”.
He argued that the cost of the state guaranteeing SVB deposits would be “minimal” even if no franchise value was attributed to the bank. Meanwhile, “the unintended consequences of the government’s failure to guarantee SVB deposits are huge and profound and must be considered and addressed before Monday,” he warned.
Possible bank runs from Monday
In a follow-up tweet on Saturday, Ackman wrote that according to a source he trusts, “SVB depositors will receive ~50% on Monday/Tuesday and the balance based on realized value over the next 3-6 months.” The billionaire emphasized:
If this proves true, I expect there will be bank runs at a large number of non-SIB banks starting Monday morning. No company will take the slightest risk of losing a dollar in deposits as there is no reward for that risk. In the absence of system-wide FDIC deposit insurance, more bank runs begin Monday morning.
Ackman further announced on Twitter that neither he nor his company Pershing Square are directly affiliated with Silicon Valley Bank. However, he is “personally an investor in some of the lesser-known early-stage venture and biotech funds and some early-stage startups that may have some exposure to SVB,” the billionaire explained, adding that overall his “Venture exposure” to the ailing bank less than 10% of its assets.
Do you agree with Bill Ackman? Let us know in the comment section below.
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