Billionaire activist investor Bill Ackman, the CEO & Portfolio Manager of Pershing Square Capital Management, came out strongly in support of the U.S. government’s response to the failure of Silicon Valley Bank (SVB), saying that actions should not be called a “bailout.” It was, he said, a necessary action to preserve confidence in the economy. And Ackman also proposed a new system for guaranteeing bank deposits for the masses should another bank fail.
“Recent events have made clear in the mind of the average American that there is a risk that they could lose money doing something they used to think of as safe — Being a depositor,” wrote Bill Ackman in an extended statement he released on Twitter. “We have had a two-tiered system since the GFC where a few large banks have the explicit backing of the taxpayer and the rest have $250k of deposit insurance. This two-tiered system worked until it didn’t work.”
Seeing modern technology as one of the causes behind such collapses, Bill Ackman explained that our world today allows for such speedy communications with smart-phone-enabled bank accounts where withdrawals can be made with the push of a button, “no bank is safe from a run unless the depositor has an explicit gov’t guarantee that ensures that they always have complete access to the total value of their deposits. Without this guarantee, the non-systemically important banks (non-SIB banks) will likely continue to experience large withdrawals.”
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Also, these days consumers know that when a bank stock collapses, explained Ackman, “it is only a matter of days before the bank fails due to liquidity demands by their depositors.”
“The rewards for being a depositor are minimal compared with the risk of loss from losing access to funds needed to run your business or household,” he added. “Until this problem is solved, our banking system is at risk. The more time the public is exposed to a period of uncertainty, the more imprinted deposit risk is on the mind of the public.”
“That is why it is critically important that our gov’t promptly puts its full faith and credit behind our deposit system,” said Bill Ackman, pointing out that bank depositors are actually “safer” when a bank fails and the federal government steps to ensure deposits because when a bank is operating no one knows where all the money actually is.
Bill Ackman went on to call for a temporary system wide deposit guarantee until a new system to replace what he called the “outmoded” $250k deposit guarantee program is modernized. “Since this new system can’t be created over a weekend, we need a stop-gap measure to get us through the next few days and weeks,” he said.
The alternative, he said, is continued bank failures.
Silicon Valley Bank (SVB) collapsed in what was described as the largest failure of a US bank since Washington Mutual in 2008. On Friday, the Federal government was forced to take over SVB and this is having repercussions in Israel where hundreds of firms are said to have deposits with the bank.
In the U.S., depositors are insured by the Federal FDIC program for up to $250,000. Federal authorities pledged that all such deposits will be secured and small depositors will get all of their money back, while it is working on how to disperse the bank’s funds to larger depositors. Some companies have hundreds of millions deposited in SVB. But investors who hold stock in the bank will lose a fortune.