OPINION: This article may contain commentary which reflects the author’s opinion.
Billionaire hedge fund manager Bill Ackman has predicted an “economic meltdown” within hours of the banks opening on Monday morning after the collapse of Silicon Valley Bank. Ackman is urging President Joe Biden and his administration to intervene and safeguard all of the bank’s depositors, warning that failure to act could result in a ripple effect across other smaller banks in the industry.
His concern is that customers may hastily withdraw cash from their accounts due to apprehension about instability in the banking system, which could potentially trigger a domino effect, the Daily Mail reported.
Ackman is calling on the government to take action and rectify “a-soon-to-be-irreversible mistake” by Monday morning to avert potential catastrophe, the report said. His somber forecast came after SVB Financial Group’s CEO, Greg Becker, released a video message to the bank’s staff acknowledging the “incredibly difficult” 48 hours that led to its collapse on Friday.
Ackman released a lengthy statement on Twitter outlining his concerns that, until Biden acts, there will be a financial upheaval the likes of which haven’t been seen since the “Great Depression,” circa 2008, and the loss of tens of thousands of jobs:
The gov’t has about 48 hours to fix a-soon-to-be-irreversible mistake. By allowing @SVB_Financial to fail without protecting all depositors, the world has woken up to what an uninsured deposit is — an unsecured illiquid claim on a failed bank. Absent @jpmorgan @citi or @BankofAmerica acquiring SVB before the open on Monday, a prospect I believe to be unlikely, or the gov’t guaranteeing all of SVB’s deposits, the giant sucking sound you will hear will be the withdrawal of substantially all uninsured deposits from all but the ‘systemically important banks’ (SIBs).
These funds will be transferred to the SIBs, US Treasury (UST) money market funds and short-term UST. There is already pressure to transfer cash to short-term UST and UST money market accounts due to the substantially higher yields available on risk-free UST vs. bank deposits. These withdrawals will drain liquidity from community, regional and other banks and begin the destruction of these important institutions. The increased demand for short-term UST will drive short rates lower complicating the @federalreserve’s efforts to raise rates to slow the economy.
Already thousands of the fastest growing, most innovative venture-backed companies in the U.S. will begin to fail to make payroll next week. Had the gov’t stepped in on Friday to guarantee SVB’s deposits (in exchange for penny warrants which would have wiped out the substantial majority of its equity value) this could have been avoided and SVB’s 40-year franchise value could have been preserved and transferred to a new owner in exchange for an equity injection. We would have been open to participating.
This approach would have minimized the risk of any gov’t losses, and created the potential for substantial profits from the rescue. Instead, I think it is now unlikely any buyer will emerge to acquire the failed bank. The gov’t’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. For those who make the case that depositors be damned as it would create moral hazard to save them, consider the feasibility of a world where each depositor must do their own credit assessment of the bank they choose to bank with. I am a pretty sophisticated financial analyst and I find most banks to be a black box despite the 1,000s of pages of @SECGov filings available on each bank.
The gov’t has about 48 hours to fix a-soon-to-be-irreversible mistake. By allowing @SVB_Financial to fail without protecting all depositors, the world has woken up to what an uninsured deposit is — an unsecured illiquid claim on a failed bank. Absent @jpmorgan @citi or… https://t.co/SqdkFK7Fld
— Bill Ackman (@BillAckman) March 11, 2023
Ackman went on to note that allowing SVB to collapse without safeguarding all depositors sends a message that uninsured deposits are unsecured and illiquid claims on a failed bank. Currently, for FDIC-insured banks, only accounts with $250,000 or less are guaranteed by the government.
That said, SVB’s most recent annual report revealed that 96 percent of its $173 billion in total deposits were uninsured, which raises significant concerns about the fate of the bank’s corporate clients with large accounts, the Daily Mail noted.
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Ackman added: “From a source I trust: @SVB_Financial depositors will get ~50% on Mon/Tues and the balance based on realized value over the next 3-6 months. If this proves true, I expect there will be bank runs beginning Monday am at a large number of non-SIB banks. No company will take even a tiny chance of losing a dollar of deposits as there is no reward for this risk. Absent a systemwide @FDICgov deposit guarantee, more bank runs begin Monday am.”
From a source I trust: @SVB_Financial depositors will get ~50% on Mon/Tues and the balance based on realized value over the next 3-6 months. If this proves true, I expect there will be bank runs beginning Monday am at a large number of non-SIB banks. No company will take even a… https://t.co/2BoqtCDKJt
— Bill Ackman (@BillAckman) March 11, 2023