Fed's actions in bailing out banks will have catastrophic consequences, warns Bill Ackman
It seems to be succeeding in extinguishing the fire in the banking sector (although we can argue about the form). However, a well-known financier thinks that it is not about extinguishing, but rather about adding fuel to the fire. Why does he think these moves will set off an even bigger disaster?
Bill Ackman warned that Wall Street's bailout of First Republic threatens other banks, the financial system and the U.S. economy. JPMorgan $JPM+2.5%, Bank of America $BAC+3.4% and nine other banks announced Thursday that they will inject a total of $30 billion in uninsured deposits into First Republic Bank $FRBA+5.0% for at least 120 days.
Ackman warned that if FRBA is hit by a tidal wave of withdrawals and fails to repay its debts, Wall Street banks will be at risk and will also suffer losses. The billionaire investor and head of Pershing Square argued that the big banks' show of confidence does not address the underlying problem - a lack of confidence in the banking system.
https://www.youtube.com/watch?v=ep8ZlOV_Kk8
Simply put, banks make money by taking deposits from their customers and using them in two ways. They can lend the money and collect interest on it, or they can invest it in relatively safe assets such as US Treasury bonds and mortgage-backed securities. As a result, they don't have cash on hand - which is difficult if they have to meet a sudden influx of withdrawals.
Last week, Silicon Valley bank $SIVB collapsed because its money was tied up in long-term bonds that had fallen in value as interest rates rose, and a large number of its clients were trying to withdraw their money at the same time.
Will the collapse of SVB spark the biggest economic disaster of this decade?
The Federal Deposit Insurance Corporation (FDIC) took control of the burning SVB on Friday. Under a systemic risk exemption, it agreed to insure deposits at that lender and another bank, Signature Bank, on Sunday.
FRB shares have plunged 70% since last Wednesday as investors fear they too could collapse. The San Francisco-based lender's customer base has a similar profile and concentration to SVB, with a high proportion of uninsured deposits and significant unrealized losses on its bond portfolio.
The bank sought to allay concerns by securing access to USD 70 billion in liquidity from the Federal Reserve and JPMorgan and agreeing to accept an additional USD 30 billion in deposits from its peers.
Ackman described the Wall Street bailout as a "sham vote of confidence" and investors seemed to agree with him as FRB shares fell again. But he praised FRB as a sound, well-managed lender that should not be blamed for its current problems.
"It found itself in a banking run through no fault of its own," he said. "It doesn't deserve to fail."
Ackman is apparently worried that the run on the banks will lead to the collapse of one lender after another, threatening the stability of the entire U.S. banking system. That could discourage banks from lending money and cause a credit crunch that could hurt consumers and businesses and hit the entire economy.
"I'm just extremely concerned about the risk of financial contagion getting out of control and causing serious economic damage and hardship," Ackman said.
What do you think? Will these moves cause more runs and more problems for other banks?
Disclaimer: This is in no way an investment recommendation. This is purely my summary and analysis based on data from the internet and other sources. Investing in the financial markets is risky and everyone should invest based on their own decisions. I am just an amateur sharing my opinions.
