Billionaire Ackman 'Extremely Concerned' $30 Billion Bank Rescue Plan Risks Financial Contagion Spiraling Out Of Control

Topline

Billionaire Bill Ackman railed against the federal government-backed infusion of $30 billion into the regional bank First Republic in a scathing tweet on Thursday, calling it an insufficient plan that lulls the market into a “false sense of confidence” and risks the spread of “financial contagion”—all while shares of the ailing bank tanked yet again despite the new support from big banks.

The latest First Republic infusion could be catastrophic, says Ackman.

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Key Facts

The rescue plan rolled out Thursday afternoon designed to instill market confidence in First Republic including $5 billion uninsured deposits apiece from the nation’s four largest banks causes First Republic’s “default risk” to be “spread to our largest banks,” according to Ackman, the head of the hedge fund Pershing Square who has been outspoken about the need for government intervention in the sector.

The market seemingly agreed with Ackman’s assessment that the scheme did little to solve First Republic and the banking industry’s issues, with shares of First Republic crashing 21% in premarket trading Friday and shares of the five largest U.S. banks each falling 2%.

Ackman said he’s “extremely concerned about financial contagion risk spiraling out of control and causing severe economic damage,” adding he has no investments in the banking industry.

The 11 large banks depositing $1 billion or more into First Republic were “pressured” by the federal government to comply and assured the deposits “would be backstopped if it failed,” Ackman claimed.

The banking system needs a “temporary systemwide deposit guarantee immediately,” Ackman suggested.

Crucial Quote

Elon Musk, the eccentric billionaire CEO of Tesla, Twitter and SpaceX, chimed in on Ackman’s assessment of the First Republic situation, writing: “The inefficiency of the set of heterogeneous resource allocation databases we call money is astounding.”

Chief Critic

Fellow hedge fund billionaire Ken Griffin has taken a diametrically opposite stance than Ackman on the need for government intervention in banks, telling the Financial Times on Monday: “The U.S. is supposed to be a capitalist economy, and that’s breaking down before our eyes.” The federal government stepping in to protect previously uninsured depositors at Silicon Valley Bank represented a “loss of financial discipline,” he added. Griffin said a hands-off response from the government “would have been a great lesson in moral hazard” to emphasize the importance of risk management.

Forbes Valuations

This group of billionaires questioning the federal government’s response to the banking crisis are some of the wealthiest people in the nation, and the world: Musk’s $187 billion fortune is the largest in the U.S. and second-biggest on the planet, Griffin’s $32.6 billion wealth pile makes him the 37th-richest person in the world, and Ackman is the 819th-wealthiest person on earth with a $3.4 billion net worth.

Key Background

Regulators shuttered Silicon Valley Bank on Friday as the bank was unable to meet consumer withdrawal requests during a massive run. Ackman called for government intervention days before the bank’s failure and subsequent quasi-bailout, suggesting inaction could cause “dominoes [to] continue to fall” in the banking sector. New York-based and digital-first Signature Bank failed two days after Silicon Valley Bank. Those failures, combined with Silvergate Capital’s closure last week, caused a host of regional bank stocks including First Republic to crash as investors panicked about spillover effects.

Surprising Fact

Several executives and board members at First Republic sold $12 million in their company’s stock in the two months preceding the bank’s crisis and stock crash, according to regulatory filings.

Billionaire Ackman ‘Extremely Concerned’ $30 Billion Bank Rescue Plan Risks Financial Contagion Spiraling Out Of Control