News/Commentary

Billionaire hedge fund manager Bill Ackman predicts economic meltdown Monday over SVB collapse

March 12, 2023 | | Print Article

Billionaire investor and hedge fund manager Bill Ackman has warned of impending economic collapse by Monday unless the government bails out Silicon Valley Bank, a behemoth that collapsed last week.

“The gov’t has about 48 hours to fix a-soon-to-be-irreversible mistake,” he tweeted early Saturday morning.

Why? It starts with the fact that, like other banks, Silicon Valley Bank has clients, and these clients have their money stored in the bank. The problem is their deposits are mostly uninsured, and so their clients are at the risk of losing all their money.

Why were SVB’s clients’ deposits uninsured? Because the Federal Deposit Insurance Corporation only insures deposits up to $250,000, but most of SVB’s client were Silicon Valley startups with millions of dollars in their accounts.

Regardless, Ackman wrote on that Twitter that unless someone, anyone, bails out the bank, other people will start withdrawing their own money from smaller, less secure banks too, lest they lose theirs as well:

“By allowing @SVB_Financial 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 wrote.

“Absent @jpmorgan @citi or @BankofAmerica acquiring SVB before the open on Monday, a prospect I believe to be unlikely, or the gov’t guaranteeing 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),” he added.

The assumption is that their money would be much safer in SIBs.

According to Investopedia, an SIB is a bank “that U.S. federal regulators determine would pose a serious risk to the economy if it were to collapse. A [SIB] is viewed as ‘too big to fail’ and imposed with extra regulatory burdens to prevent it from going under.”

It’s basically a better protected bank.

Continuing his tweet, Ackman warned that the transfer of all this money from smaller banks to SIBs “will drain liquidity from community, regional and other banks and begin the destruction of these important institutions.”

“These funds will be transferred to the SIBs, US Treasury (UST) money market funds and short-term UST. 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,” he wrote.

“These withdrawals will drain liquidity from community, regional and other banks and begin the destruction of these important institutions. The increased demand for short-term UST will drive short rates lower complicating the @federalreserve’s efforts to raise rates to slow the economy,” he added.

Despite this warning, many people still oppose a bailout on the basis that it’s unfair to everyday Americans who don’t get a bailout when they screw up.

Look:

But others say it’s equally unfair to screw over all the Silicon Valley startups who’d entrusted their money with SVB.

“Already thousands of the fastest growing, most innovative venture-backed companies in the U.S. will begin to fail to make payroll next week,” Ackman noted in his tweet.

He further argued that this could have been avoided had the federal government simply guaranteed SVB’s deposits.

“Had the gov’t stepped in on Friday to guarantee SVB’s deposits (in exchange for penny warrants which would have wiped out the substantial majority of its equity value) this could have been avoided and SVB’s 40-year franchise value could have been preserved and transferred to a new owner in exchange for an equity injection,” he wrote.

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Vivek Saxena
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