Billionaire hedge fund manager Bill Ackman on Friday demanded that lawmakers use taxpayer money to bail out Silicon Valley Bank (SVB) depositors, a move some Republicans have already said they would oppose.
The bank was placed into receivership by the FDIC after the California Department of Financial Protection and Innovation found the bank insolvent.
The crash was the result of a bank run as customers began withdrawing $42 billion.
The primary factor that caused the bank to flow was higher interest rates at the Federal Reserve due to President Joe Biden’s high inflation rate.
As interest rates have risen to curb inflation, it has become more expensive for companies to borrow money, causing commercial depositors to access their savings in the enterprise. John Carney of Breitbart News explained the script to Fox Business host Larry Kudlow:
One of the problems [for SVB] When money was freely available to all these startups, they didn’t borrow much. So, they had a lot of deposits coming in and they didn’t have a lot of opportunity to give people loans… So, they invested that in bonds. I think Bank of America has 25 percent of its assets in bonds, but this bank had over 50 percent of its assets in bonds.
Recently, these bonds have incurred a negative yield and lost the bank’s money.
“And at the same time, all these startups that deposit a lot of money there are withdrawing it now because they don’t have access to free money anymore. So they’re withdrawing it just to pay their bills. They actually produce real losses, not just market losses.
Ackman believes it is the taxpayer’s responsibility to bail out the bank so that it can meet its obligations to avoid additional crises in the tech industry. And others aren’t quite so sure taxpayers should shoulder the burden, like Rep. Matt Gates (R-Fla.), who believes that if the government asked Congress Monday to bail out the bank, it would be “disguised as national security and economic security and indulged in.” … bartering campaign donations for interests.
Ackman argued differently.
“The government has about 48 hours to fix a near irreversible mistake. By allowing @tweet Failing without protecting all depositors, the world has woken up to what an unsecured deposit is – an illiquid, unsecured claim on a failing bank,” he tweeted. @tweet @tweet or @bank of america Getting an SVB before opening on Monday, a possibility I think unlikely, or the government not insuring all SVB deposits, the giant sucking sound you’ll hear would be a withdrawal of all uninsured deposits from all but the ‘systemically important’ banks (SIBs )”.
“Thousands of America’s fastest-growing, most innovative venture-backed companies are already starting to fail to make the payroll next week,” Ackman argued. “Had the government not stepped in on Friday to guarantee SVB’s deposits (in exchange for cash guarantees that would have wiped out the vast majority of its share value) this could have been avoided and the value of the SVB concession could have been preserved for 40 years to a new owner in return for an injection of capital.”
“A back-of-envelope review of SVB’s balance sheet suggests that even in liquidation, depositors should eventually get about 98% of their deposit back, but in the end it’s too long when you have payroll to meet next week. So even without allocating any value concession to SVB, the cost of the state guarantee of SVB deposits will be minimal. “On the other hand, the unintended consequences of the government’s failure to guarantee SVB deposits are wide and run deep and need to be considered and addressed before Monday. Otherwise, watch out below.”
Ackman conceded that the bank managers had made a mistake in how they invested the company’s deposits and should lose their jobs over it. They invest short-term deposits in long-term fixed-rate assets.
Then short-term interest rates rose and a wave of banks followed. Top management screwed up and they should lose their jobs.
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