Billionaire Bill Ackman has warned of “vast and profound” consequences of the U.S. government letting Silicon Valley Bank (SVB) fail without protecting all depositors. “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 cautioned.
Government Has Until Monday Morning to Fix Its ‘Soon-to-Be-Irreversible Mistake’
Billionaire Bill Ackman, CEO and portfolio manager of Pershing Square Capital Management, has warned of “vast and profound” consequences of the U.S. government allowing Silicon Valley Bank to fail without protecting all depositors.
He tweeted Saturday that the government has until Monday morning to fix its “soon-to-be-irreversible mistake,” elaborating:
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.
He stressed that unless JPMorgan, Citibank, or Bank of America acquires Silicon Valley Bank before Monday’s market open, or the government provides a guarantee for 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).”
Expecting these funds to be “transferred to the SIBs, U.S. Treasury (UST) money market funds, and short-term UST,” Ackman pointed out that “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.” The billionaire continued:
These withdrawals will drain liquidity from community, regional and other banks and begin the destruction of these important institutions.
“Already thousands of the fastest growing, most innovative venture-backed companies in the U.S. will begin to fail to make payroll next week,” he added. Moreover, he noted that 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.”
Government’s Failure to Guarantee SVB Deposits Has ‘Vast and Profound’ Consequences
Ackman explained that Silicon Valley Bank’s senior management “made a basic mistake” of investing short-term deposits in longer-term, fixed-rate assets, therefore “a bank run ensued” when short-term interest rates increased.
Not only senior SVB management “screwed up,” the billionaire asserted that the Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC) “also screwed up” in their risk monitoring of the banking system. “SVB should have been high on their watch list with more than $200B of assets and $170B of deposits from business borrowers in effectively the same industry,” Ackman said, emphasizing:
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 … while also permanently impairing our community and regional banks’ access to low-cost deposits.
The Pershing Square executive shared that his “back-of-the-envelope review of SVB’s balance sheet suggests that even in a liquidation, depositors should eventually get back about 98% of their deposits.”
He argued that the cost of the government guaranteeing SVB deposits “would be minimal” even without assigning any franchise value to the bank. Meanwhile, “The unintended consequences of the government’s failure to guarantee SVB deposits are vast and profound and need to be considered and addressed before Monday,” he cautioned.
Possible Bank Runs Starting on Monday
In a follow-up tweet Saturday, Ackman wrote that according to a source he trusts, “SVB depositors will get ~50% on Mon/Tues and the balance based on realized value over the next 3-6 months.” The billionaire stressed:
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.
Ackman further revealed on Twitter that neither he nor his company, Pershing Square, has any direct exposure to Silicon Valley Bank. However, he is “personally an investor in some of the less well known, mostly seed stage venture and biotech funds and some early stage startups which may have some exposure to SVB,” the billionaire detailed, adding that collectively, his “venture exposure” to the troubled bank is less than 10% of his assets.