Billionaire hedge fund manager Bill Ackman is warning that the financial system is on the verge of collapse, with regional banks facing a “grave risk” as the banking crisis drags on.
On May 3, Federal Reserve chairman Jay Powell said the U.S. banking system is “sound and resilient,” a line trotted out by federal regulators in March after customers withdrew nearly $100 billion in deposits.
Yet, hours after Powell’s statement, shares in Beverly Hills-based regional bank PacWest plunged and were down 71 percent for the year at market close.
The morning of May 4, company officials announced they were exploring mitigation strategies, including the possible sale of the company, which would make the company the latest in a series of recent bank collapses impacting consumer confidence.
First Republic Bank recently joined Credit Suisse, Silicon Valley Bank, Signature Bank, and Silvergate as institutions that have imploded as weaknesses in the U.S financial system are exposed by the Fed hiking interest rates to dampen inflation.
This string of bank failures is the largest since the financial crisis of 2007-08.
Short sellers made more than $378 million in profits on May 3 alone by betting against certain regional banks.
“The regional banking system is at risk,” Ackman cautioned in a lengthy Twitter post. “The rapid rise in rates impaired assets and drained deposits.”
A Gallup poll published on May 4 shows that 48 percent of U.S. adults say they are concerned about the safety of money they have in accounts at banks or other financial institutions. The survey was conducted after Silicon Valley Bank and Signature Bank collapsed.
“Banking is a confidence game. At this rate, no regional bank can survive bad news or bad data as a stock price plunge inevitably follows, insured and uninsured deposits are withdrawn and ‘pursuing strategic alternatives’ means an FDIC shutdown over the coming weekend,” Ackman wrote.
Confidence in a financial institution is built over decades and destroyed in days. As each domino falls, the next weakest bank begins to wobble. Until investors are rewarded for betting on a wobbling bank, there will be no bid, and the best sale is the last price.
We are running out of time to fix this problem. How many more unnecessary bank failures do we need to watch before the FDIC, [U.S. Treasury] and our government wake up? We need a systemwide deposit guarantee regime now.
The same week, JP Morgan Chase announced that it had acquired the majority of the assets for First Republic, folding the company’s portfolio into its own. “Our government invited us and others to step up, and we did,” said JPMorgan Chase CEO Jamie Dimon.
First Republic’s crash is now the second-largest bank failure in U.S. history.