Ken Griffin, founder and CEO of Citadel, was not happy with the extraordinary measures taken by the US Federal Reserve to protect depositors at Silicon Valley Bank and Signature Bank on Sunday.
“There is a loss of financial discipline with the government bailing out depositors completely,” said Griffin, in an interview with Financial Times on Monday. Griffin continued that the move was a betrayal of the U.S. capitalist economy, which he said was “broken before us.”
On Sunday, the US Federal Reserve said it will ensure that depositors at Silicon Valley Bank and Signature Bank, which also failed over the weekend, are fully protected, even beyond the $250,000 normally covered by federal deposit insurance. The Fed also said it will start a new credit program where banks can pledge certain securities, valued at par instead of market value, as collateral.
However, Griffin suggested that, given the strength of the economy, the US government could allow SVB depositors to lose their money. “It’s going to be a good lesson in moral hazard,” Griffin said, predicting that the losses are “insignificant.”
“It drives home that risk management is important,” he said.
What is moral hazard?
Investors, economists and politicians are citing the idea of ’moral hazard’ as they debate the merits of a rescue package for Silicon Valley Bank, which collapsed on Friday after the bank opened.
Moral hazard is the argument that individuals or businesses will engage in safer behavior if someone, such as an insurance company or government, protects them from the consequences of their actions. This concept is often used to criticize bailouts, rescue packages or debt forgiveness plans. In the context of bank bailouts, the idea of ’moral hazard’ suggests that those involved in the bank—whether managers, shareholders, or depositors—will not judge risk correctly if they believe something is wrong.
Nouriel Roubini, an economist at New York University commonly known as “Dr. Doom,” tweeted there that the Fed’s protection for depositors in Signature Bank, which is connected to the cryptocurrency sector, is the “mother of [all] moral hazard,” and rewarding “criminals & frauds.”
Even those who supported the bailout package, like former US Treasury Secretary Lawrence Summers, had to reject the argument that it saved the banks—or at least the depositors.—it means protecting people from decisions they consider bad. “This is not the time for moral hazard lectures,” Summers said tweeted there, before the US announced plans to protect SVB depositors.
Griffin’s refusal to bail out SVB came as a relief to other investors who supported strong action, such as billionaire and hedge fund founder Bill Ackman, an early supporter of the bailout for the bank.
On Monday, Ackman recommended on Twitter that the US government should extend deposit insurance to cover the full value of deposits instead of just $250,000. He suggested that, given the speed of social media and digital banking, “no bank is safe from the run” without full deposit protection.
“The reward for being a depositor is minimal compared to the risk of losing access to the funds needed to run a business or household. Until this problem is resolved, our banking system is at risk,” he said. along.
Other investors take issue with special Griffin comments. Linking to Griffin’s interview on Twitter, technology investor Bill Gurley said that previous rescue packages, such as for big banks in 2008 or airlines in 2020, protected shareholders and bondholders, were cheaper than the one offered to Silicon Valley Bank .
“I think everything is difficult, and I understand why ‘failure’ is an important part of capitalism. But in this case SVB has been treated more harshly, “Gurley tweeted. “Protecting shareholders in these circumstances is a direct detriment to capitalism.”
Shares of regional banks fell on Monday as investors feared they would face the same problems as Silicon Valley Bank. The stock exchange halted trading in companies like First Republic Bank and Western Alliance Bancorp due to volatility, as share prices fell as much as 85% for some companies when the market opened.
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