William Ackman, a multibillionaire hedge fund manager, is pleading with President Biden to step in and stop a possible “economic meltdown” as a result of the impending bankruptcy of Silicon Valley Bank (SVB). Ackman has cautioned that failing to take action might have serious spillover effects across smaller financial institutions as banks get ready for their Monday am reopening.
SVB, the 16th-largest bank in the US, saw a stunning decline this week under market circumstances that broke all previous records. Its entire assets fell dramatically by over $200 billion since the end of 2020, causing one of the worst financial disasters since the Great Recession. This was the result of an astounding 60% decline in client deposits from 2022 to the present and massive share sales of $1.75 billion.
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“The gov’t has about 48 hours to fix a-soon-to-be-irreversible mistake. By allowing SVB 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 JP Morgan, CitiBank or Bank Of America 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),” Posted on Twitter by Ackman.
“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 Federal Reserve’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,” he added.
After CEO Greg Becker’s video address to SVB Financial Group’s workers admitting their “incredibly difficult” 48 hours before its unexpected shutdown, billionaire investor Bill Ackman recently delivered a dire warning about the status of the economy. Even while talks are still going on to find a suitable partner and a feasible solution for this sensitive issue, there is still no final result that can be guaranteed at this time.
Bank runs will occur, according to Ackman, unless the Biden government saves the bank:
“From a source I trust, SVB 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 FDIC, deposit guarantee, more bank runs begin Monday am,” he tweeted.
The following step, according to Ackman, should be as follows:
Over the weekend, SVB’s CEO sent the following video message to his staff:
‘It’s with an incredibly heavy heart that I’m here to deliver this message today,’ he said in the video. ‘I want to acknowledge how hard the last 48 hours have been on all of you. I care so much about all of you. It really is so incredibly difficult. I am trying to look past to focus on two things. 1.) I am focusing on you and thinking about the ultimate outcome of what this could be despite this incredibly difficult time. And 2.) I’m focusing on clients”
It was recently discovered that the bank’s CFO Daniel Beck and CEO Brian Becker carried out a premeditated selloff of their business shares on February 27th, two weeks before the bank’s failure. While the average price of the shares held by both executives at the time of sale was roughly $287 apiece, a decline from an earlier quotation close to the same day, the aggregate proceeds from both transactions exceeded $4 million. Following this information, reports on Friday morning indicated that the FDIC had taken custody of all assets associated to the now-bankrupt institution, evidently disregarding any concerns about improper conduct on the part of any officer during such transactions.
CNN reports that Janet Yellen has indicated the government won’t be saving the bank:
Treasury Secretary Janet Yellen said on Sunday that there won’t be a government rescue plan for Silicon Valley Bank after last week’s disastrous fall.
“Let me be clear that during the financial crisis, there were investors and owners of systemic large banks that were bailed out, and we’re certainly not looking,” When asked whether a bailout would be necessary, Yellen responded to CBS News. “And the reforms that have been put in place means that we’re not going to do that again.”
Watch this space for updates on this developing story.
