A sign hangs at Silicon Valley Banks headquarters in Santa Clara, California on March 10, 2023.
Noah Berger | AFP | Getty Images
Billionaire investor Bill Ackman said the U.S. government’s action to protect depositors after the implosion of Silicon Valley Bank is “not a bailout” and helps restore confidence in the banking system.
In his latest tweet on SVB’s collapse, the hedge fund investor said the U.S. government did the “right thing.”
“This was not a bailout in any form. The people who screwed up will bear the consequences,” wrote the CEO of Pershing Square. “Importantly, our gov’t has sent a message that depositors can trust the banking system.”
“Without this confidence, we are left with three or possibly four too-big-to-fail banks where the taxpayer is explicitly on the hook, and our national system of community and regional banks is toast,” Ackman added.
Ackman further explained that in this incident, shareholders and bondholders of the banks will be mainly the ones affected, and the losses will be absorbed by the Federal Deposit Insurance Corporation’s (FDIC) insurance fund.
This is in contrast to the great financial crisis in 2007-2008, where the U.S. government injected taxpayers’ money in the form of preferred stock into banks, and bondholders were protected.
The decisive government action was seen by some as a critical step in stemming contagion fears brought on by the collapse of SVB, a key bank for start-ups and other venture-backed companies.
Not everyone agrees.
Peter Schiff, chief economist and global strategist at Euro Pacific Capital, said the move is “yet another mistake” by the U.S. government and the Fed.
He explained in another tweet: “The bailout means depositors will put their money in the riskiest banks and get paid higher interest, as there’s no downside risk.”
“… all banks will take on greater risks to pay higher rates. So in the long-run many more banks will fall, with far greater long-term costs,” Schiff said.
In a statement late Sunday — issued jointly by the Federal Reserve, Treasury Department and the FDIC — regulators said there would be no bailouts and no taxpayer costs associated with any of the new plans.
“Today we are taking decisive actions to protect the U.S. economy by strengthening public confidence in our banking system,” said a joint statement from Federal Reserve Chair Jerome Powell, Treasury Secretary Janet Yellen and FDIC Chair Martin Gruenberg.
Along with that move, the Fed also said it is creating a new Bank Term Funding Program aimed at safeguarding institutions affected by the market instability of the SVB failure.
The statement — also said New York-based Signature Bank will be closed due to systemic risk. Signature had been a popular funding source for cryptocurrency companies.
Ackman said in the tweet that had the government “not intervened today, we would have had a 1930s bank run continuing first thing Monday causing enormous economic damage and hardship to millions.”
“More banks will likely fail despite the intervention, but we now have a clear roadmap for how the gov’t will manage them.”
Still, some analysts are not convinced the regulators’ action will shore up confidence in the U.S. banking system and limit the fallout.
“I don’t think that you can understate the danger that the American banking system is in,” veteran bank analyst Dick Bove, told CNBC’s “Squawk Box Asia” on Monday.
“Right at this moment, I don’t think you would expect to see the Treasury Secretary, the head of the Fed and the head of the FDIC, making a public joint statement — unless they understood clearly the risk that the banking system and the American in America is facing right now,” he said.
Bove pointed out the U.S. banking system is at risk for two reasons.
“Number one, the depositors have lost faith in American banks: Forget the people who may or may not have been taking money out of SVB. Deposits in American banks have dropped 6% in the last 12 months,” he noted.
“The second group that has lost faith in the American banking system are investors,” he added. “The investors have lost faith because the American banks have a whole bunch of accounting tricks that they can play, to show earnings when earnings don’t exist, to show capital when capital doesn’t exist.”
He went on to say that accounting practices for the banking industry are “totally unacceptable,” and that banks are using “accounting gimmickry to avoid indicating what the true equity is in these banks.”
“The government is now on its back feet. And the government is trying to do whatever it can to stop what could be a major, major negative thrust,” Bove said.
The White House said President Joe Biden will address the nation on Monday morning on how to strengthen the banking system.
“I am firmly committed to holding those responsible for this mess fully accountable and to continuing our efforts to strengthen oversight and regulation of larger banks so that we are not in this position again,” Biden said in a statement.
Jeremy Siegel, Wharton School of business professor, noted the government’s intervention will “fortunately” stem the losses from SVB’s fallout.
He said SVB is more like a regional bank unlike other big Wall Street players. As a result, the government is unlikely to take a political hit from its latest action.
“They’re more in the category we call regional banks. And actually, politicians love regional banks, in contrast to the big names, which are easy to target, to … hit politically,” Siegel told CNBC’s “Street Signs Asia.”
“They have a lot of political support. All the Congress men and women, are going to be hearing from their people and their district,” Siegel said. “The smaller banks are not the JP Morgans, Goldman Sachs and all those. These are the banks that we use … getting down to the regional level.”
— CNBC’s Jeff Cox contributed to this report.