Bill Ackman Says Government Has 48 Hours To Fix The SVB Mess: 'A Soon-To-Be-Irreversible Mistake'

Following the collapse of Silicon Valley Bank, owned by its holding company SVB Financial Group SIVB, hedge fund manager Bill Ackman called for immediate action from the government.

What Happened: “The gov’t has about 48 hours to fix a soon-to-be-irreversible mistake,” Ackman said. By allowing SVB to fail without protecting all depositors, people are left to face the ugly prospect of realizing what an “unsecured illiquid claim” on a failed bank is, he suggested on Twitter.

Ackman also raised the possibility of bank runs on all, but the "systemically important banks," under either of the following scenarios:

• If SVB is not acquired by JPMorgan Chase & Co. JPM, Citigroup, Inc. C or Bank Of America Corp. BAC before the market opens on Monday
• The government isn’t guaranteeing all of SVB’s deposits.

Ackman sees the first possibility as remote. These withdrawn funds will likely be transferred to SIBs (social impact bonds), U.S. Treasury money market funds and short-term U.S. Treasury money market accounts due to substantially higher yields available on risk-free treasuries versus bank deposits.

The withdrawals will likely drain liquidity from community, regional and other banks and begin the destruction of these important institutions, he added.

The increased demand for short-term U.S. treasuries will drive short rates lower, complicating the Fed’s efforts to raise rates to slow the economy, Ackman said. Also, thousands of innovative venture-backed companies may find it tough to meet payroll expenses, he said.

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Missed Opportunity: The government could have stepped in on Friday to avert the crisis by guaranteeing SVB’s deposits for penny warrants, Ackman said. This, according to the fund manager, would have helped preserve the franchise value of the bank and allow the transfer of the institution to a new owner in exchange for an equity injection.

He also flagged the possibility of his fund participating in the process.

“This approach would have minimized the risk of any gov’t losses, and created the potential for substantial profits from the rescue,” he said. It’s now unlikely that a potential buyer would emerge to acquire a failed bank, he added.

“The gov’t’s approach has guaranteed that more risk will be concentrated in the SIBs at the expense of other banks, which itself creates more systemic risk,” Ackman said.

He blamed SVB's senior management as well as the FDIC and OCC for the fiasco,

“The FDIC’s and OCC’s failure to do their jobs should not be allowed to cause the destruction of 1,000s of our nation’s highest potential and highest growth businesses (and the resulting losses of 10s of 1,000s of jobs for some of our most talented younger generation) while also permanently impairing our community and regional banks’ access to low-cost deposits,” Ackman tweeted.

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Photo: Illustration from BZ and Shutterstock