Bill Ackman, the hedge fund billionaire, says the US economy is at risk heading for the “train wreck,” after Wednesday’s interest rate hike and comments from US Treasury Secretary Janet Yellen pushing for universal guarantees for banks.
“We have gone from implicit support to depositors to [Secretary Yellen’s] Explicit statement today that does not guarantee to be considered,” the founder of Pershing Square Capital Management tweeted on Wednesday. Ackman along he “will be surprised if the outflow of deposits is not faster.”
Ackman supported “temporary system deposit guarantee,” he said would “stop the bleeding.” (Ackman admit on Twitter that he has “no long or short positions in any bank”).
Secretary Yellen said in a Senate hearing on Wednesday that the administration is not “considering or discussing anything related to blanket insurance or deposit insurance,” although she suggested that Congress should consider changes to federal deposit insurance.
Yellen’s testimony is in contrast to her comments the day before to the American Bankers Association, where she said that other interventions, such as the Federal Reserve’s to protect depositors at Silicon Valley Bank, “can be guaranteed if small institutions experience deposits that cause contagion risk. “
Other government actions
Ackman loudly called for stronger and more government action because of concerns about the banks starting earlier this month. The hedge fund founder called for a government bailout of Silicon Valley Bank when it hit its deposits in early March.
On March 12, US regulators announced they would protect depositors at Silicon Valley Bank and Signature Bank of New York, which failed a few days after SVB, in full, citing “systemic risk exemptions.”
(Ackman praised the decision on Twitter shortly after, saying it “sends a message that depositors can trust the banking system.”)
Both banks and lawmakers are calling for expanded deposit protection to restore confidence in the banking sector. Typically, deposits are only protected up to the first $250,000.
Over the weekend, the Mid-Size Bank Coalition of America, an association of small banks, asked regulators to guarantee all deposits for the next two years, Bloomberg reported.
The first republic
Eyes are now on First Republic Bank, whose shares fell 15.5% on Wednesday, following Yellen’s comments. They have dropped 89.2% in the last month.
Eleven major banks deposited $30 billion into First Republic Bank last week, in order to provide enough liquidity to lenders struggling to find a solution.
But the move failed to reassure shareholders and customers, and now negotiations—reportedly led by JPMorgan CEO Jamie Dimon—continue to look for other solutions, like investing directly into the bank.
Any deal would likely require government support to encourage other banks to save First Republic Bank, Bloomberg reports.
Ackman is not a fan of the $30 billion deposit at First Republic Bank, calling it a “bad policy” that risks spreading financial contagion to give “false confidence.”