Why Bill Ackman fears Wall Street's $30 billion rescue of First Republic could have catastrophic fallout
- Bill Ackman is sounding the alarm on Wall Street's $30 billion show of faith in First Republic.
- The billionaire investor fears the move has put other banks at risk and could endanger the economy.
Bill Ackman has warned that Wall Street's rescue of First Republic threatens other banks, the financial system, and the US economy. Here's a closer look at why he's worried, and what he wants.
What's going on?
JPMorgan, Bank of America, and nine other banks said on Thursday that they would make uninsured deposits totaling $30 billion in First Republic Bank (FRB) for at least 120 days.
Ackman cautioned that if FRB suffers a tidal wave of withdrawals and defaults on its debts, the Wall Street banks would be exposed and suffer losses as well.
The billionaire investor and Pershing Square chief argued the big banks' show of faith hasn't addressed the root problem — a lack of trust in the banking system.
Simply put, banks make money by taking their customers' deposits and using them in two ways. They can lend the money out and collecting interest on the loans, or invest it in relatively safe assets such as US Treasuries and mortgage-backed securities.
As a result, they don't keep the cash on hand — which makes it tricky if they have to satisfy a sudden surge of withdrawals.
Silicon Valley Bank collapsed last week because its money was tied up in long-dated bonds that had slumped in value due to rising interest rates, and a large number of its customers tried to pull out their money at the same time.
The Federal Deposit Insurance Corporation (FDIC) took control of ailing SVB on Friday. Under a systemic risk exception, it agreed to insure deposits at both that lender and another, Signature Bank, on Sunday.
What could happen next?
FRB stock has tanked 70% since last Wednesday, as investors fear it could collapse as well. The San Francisco-based lender's customer base has a similar profile and concentration to SVB's, a high percentage of uninsured deposits, and substantial unrealized losses on its bond portfolio.
The bank has tried to assuage fears by securing access to $70 billion of liquidity from the Federal Reserve and JPMorgan, and agreeing to receive another $30 billion in deposits from its peers.
However, S&P Global and Fitch have both cut the lender's credit rating to junk status, citing the risk of a wave of withdrawals.
Ackman described the Wall Street rescue as a "fictional vote of confidence," and investors seem to agree as FRB shares were trading lower in premarket trading on Friday. He praised FRB as a healthy, well-run lender that shouldn't be blamed for its current challenges.
"It is caught up in a bank run due to no fault of its own," he said. "It does not deserve to fail."
Ackman's fear appears to be that bank runs will take down one lender after another, threatening the stability of the entire US banking system.
That could discourage banks from lending money, causing a credit crunch that could hurt consumers and businesses and hammer the entire economy.
"I am simply extremely concerned about financial contagion risk spiraling out of control and causing severe economic damage and hardship," Ackman said.
"We need to stop this now," he continued. "Tick-tock."
"Three dominoes have fallen and another is on its way," Ackman said in an earlier tweet, referring to Silicon Valley Bank, Signature Bank, and Silvergate. "Time is running short before the fire becomes a conflagration."
What does Ackman want?
Ackman is urgently calling for a temporary, systemwide guarantee on all US deposits, as he believes that would shore up faith in lenders and discourage bank runs.
His longer-term solution is to raise the cap on deposit insurance from its current level of $250,000, and charge higher fees to less creditworthy banks to encourage them to act responsibly.
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