Bill Ackman, a well-known hedge fund manager, recently took to Twitter to express his concerns over the potential failure of Silicon Valley Bank (SVB) and the potential consequences it could have on the banking industry and the broader economy. According to Ackman, SVB's failure could result in the withdrawal of uninsured deposits from all but the "systemically important banks" (SIBs) and drain liquidity from community, regional, and other banks, leading to the destruction of these important institutions.
SVB is a bank that focuses on providing banking services to venture capital (VC) firms and their portfolio companies. As Ackman notes, many of the fastest-growing and most innovative VC-backed companies in the US rely on SVB for loans and holding their operating cash. SVB's failure could, therefore, have significant implications for the broader VC industry, as it would create a funding gap that private capital may not be able to fill.
Ackman argues that the government has about 48 hours to fix a soon-to-be-irreversible mistake by allowing SVB to fail without protecting all depositors. He suggests that absent JPMorgan, Citigroup, or Bank of America acquiring SVB or the government guaranteeing all of SVB's deposits, there could be a significant withdrawal of substantially all uninsured deposits from all but the SIBs. These funds would be transferred to the US Treasury money market funds and short-term US Treasury (UST) accounts, draining liquidity from community, regional, and other banks and beginning the destruction of these important institutions.
Ackman suggests that the government could have stepped in on Friday to guarantee SVB's deposits in exchange for penny warrants that would have wiped out the substantial majority of its equity value. This approach would have minimized the risk of any government losses and created the potential for substantial profits from the rescue. However, Ackman believes that it is now unlikely any buyer will emerge to acquire the failed bank, and the government's approach has guaranteed that more risk will be concentrated in the SIBs at the expense of other banks, creating more systemic risk.
In Ackerman's opinion, the government's failure to guarantee SVB's deposits could destroy an important long-term driver of the economy as VC-backed companies rely on SVB for loans and holding their operating cash. He suggests that if private capital can't provide a solution, a highly dilutive government preferred bailout should be considered.
Ackman also points out that SVB's senior management made a basic mistake by investing short-term deposits in longer-term, fixed-rate assets, and they should lose their jobs. Additionally, the FDIC and OCC failed to monitor SVB's risk properly, given that it had over $200 billion of assets and $170 billion of deposits from business borrowers in effectively the same industry. The FDIC and OCC's failure to do their jobs should not be allowed to cause the destruction of thousands of our nation's highest potential and highest growth businesses while also permanently impairing our community and regional banks' access to low-cost deposits.
In conclusion, Ackman believes that the government needs to consider and address the unintended consequences of its failure to guarantee SVB's deposits before Monday. The potential consequences are vast and profound and could lead to systemic risk and the destruction of thousands of important institutions. The government should step in and provide a solution that protects all depositors while minimizing the risk of any government losses. Otherwise, the banking industry and the broader economy could be in for a rough ride.