Investors are warning that the Silicon Valley Bank (SVB) bank bailout was a mistake and will incentivize riskier financial behavior.
Key Details
- A small group of investors is now saying Sunday’s bailouts were a mistake and that it will incentivize riskier activity and reward mass failure.
- Citadel founder Ken Griffin told the FT that the U.S. shouldn’t have protected depositors for SVB and that the bailout reflects a loss of financial discipline.
- AQR Capital Management founder Clifford Asness tweeted that the bailouts create a moral hazard, as a reduced incentive for making financial mistakes increases risks.
- Muddy Waters Capital founder Carson Block says depositors should be responsible for risks, and bailouts send the wrong message to banks.
Why It’s News
On Friday, the U.S. experienced its second-largest bank failure in history with the sudden collapse of SVB, causing repercussions in the entire financial industry. On Sunday, Treasury Secretary Janet Yellen ruled out the possibility of a bailout for SVB in a Sunday interview with CBS. This was backtracked immediately after President Joe Biden announced a bailout for SVB on Monday, ensuring depositors could pull their funds from SVB.
The Biden administration’s bailouts have generally received approval from big-name investors like Larry Summers and Bill Ackman, a move many feel was necessary to keep a contagion of bank runs and liquidity crises from spreading to other banks, Bloomberg reports.
While others are blunt but somewhat supportive. Tweets New York Times DealBook editor Andrew Ross Sorkin: “It is a bailout. Not like 2008. But it is a bailout of the venture-capital community + their portfolio companies … It is the right thing to do in the moment, but there will be ramifications.”
President Joe Biden spoke on Monday morning, reassuring users that “your deposits will be there when you need them.” He also affirmed that the administration is “firmly committed to holding those responsible for this mess fully accountable.”
Notable Quotes
“The U.S. is supposed to be a capitalist economy, and that’s breaking down before our eyes. There’s been a loss of financial discipline with the government bailing out depositors in full,” Griffin told FT.
“It’s not as bad as if we also let [FTX founder] Sam Bankman-Fried off the hook. But it ain’t ok,” tweeted Asness.
“Corporate depositors, in particular, should be expected to manage their counterparty risks. Bailing out uninsured depositors at SVB, which are mostly corporates, further infantilizes markets by sending the message that such risk management is anachronistic,” tweeted Muddy Waters Capital founder Carson Block.
