Following the collapse of Silicon Valley Bank, owned by its holding company SVB Financial Group, hedge fund manager Bill Ackman called for immediate action from the government.
“The gov’t has about 48 hours to fix a soon-to-be-irreversible mistake,” Ackman said. By allowing SVB to fail without protecting all depositors, people are left to face the ugly prospect of realizing what an “unsecured illiquid claim” on a failed bank is, he suggested on Twitter.
Ackman also raised the possibility of bank runs on all, but the “systemically important banks,” under either of the following scenarios:
- If SVB is not acquired by JPMorgan Chase & Co., Citigroup, Inc. or Bank of America Corp. before the market opens on Monday
- The government isn’t guaranteeing all of SVB’s deposits.
Ackman sees the first possibility as remote. These withdrawn funds will likely be transferred to SIBs (social impact bonds), U.S. Treasury money market funds and short-term U.S. Treasury money market accounts due to substantially higher yields available on risk-free treasuries versus bank deposits.
The withdrawals will likely drain liquidity from community, regional and other banks and begin the destruction of these important institutions, he added.
The increased demand for short-term U.S. treasuries will drive short rates lower, complicating the Fed’s efforts to raise rates to slow the economy, Ackman said. Also, thousands of innovative venture-backed companies may find it tough to meet payroll expenses, he said.
The government could have stepped in on Friday to avert the crisis by guaranteeing SVB’s deposits for penny warrants, Ackman said. This, according to the fund manager, would have helped preserve the franchise value of the bank and allow the transfer of the institution to a new owner in exchange for an equity injection.
He also flagged the possibility of his fund participating in the process.
“This approach would have minimized the risk of any government losses, and created the potential for substantial profits from the rescue,” he said. It’s now unlikely that a potential buyer would emerge to acquire a failed bank, he added.
“The government’s approach has guaranteed that more risk will be concentrated in the SIBs at the expense of other banks, which itself creates more systemic risk,” Ackman said.
He blamed SVB’s senior management as well as the FDIC and OCC for the fiasco,
“The FDIC’s and OCC’s failure to do their jobs should not be allowed to cause the destruction of 1,000s of our nation’s highest potential and highest growth businesses (and the resulting losses of 10s of 1,000s of jobs for some of our most talented younger generation) while also permanently impairing our community and regional banks’ access to low-cost deposits,” Ackman tweeted.
In a Twitter conversation, Elon Musk was open to the idea of buying Silicon Valley Bank when a tweet was mentioned Twitter’s possibility of buying the bank.
I’m open to the idea
— Elon Musk (@elonmusk) March 11, 2023
“I’m open to the idea”, Musk said in a response on Twitter.
He made a series of stocks last year with Tesla that propelled him to buying Twitter at $44 billion.
No indication is given if he’ll buy the bank or if there will be a government bail out.
SVB invested deposits long-term Treasury bond that was seen as a return on investments than the short-term investments. Long-term bonds soared after interest rates increased as inflation was surging.
“SVB was a very important bank in the venture capital ecosystem,” said investor Ryan Gilbert, founder of venture capital firm LaunchPad Capital said. “It’s a bank that we worked with significantly. They held our deposits when we had deposits with them, and they extended lines of credit and other loans to many companies.”
“They understood startups, they probably understood startups better than any other bank. So it’s a big loss, that they no longer going to be in business.”
Other banking experts blamed the Economic Growth, Regulation Relief, and Consumer Protection Act that was supported by SVB CEO Greg Beck to bypass the stress test.
On the morning of March 10, the examiners of the Federal Reserve and the Federal Deposit Insurance (FDIC) Corporation examined all the company finances and assets. Several hours later, the California Department of Financial Protection and Innovation issued an order to take possession of the failed bank. The department cited liquidity and insolvency as the FDIC was appointed as the receiver.
Produced in association with Benzinga
