Ken Griffin: SVB could have been lesson in moral hazard

Ken Griffin, the founder and CEO of Citadel, isn’t a fan of the extraordinary measures taken by the U.S. Federal Reserve to protect depositors at Silicon Valley Bank and Signature Bank on Sunday.

“There’s been a loss of financial discipline with the government bailing out depositors in full,” Griffin said, in an interview with the Financial Times on Monday. Griffin continued that the measure was a betrayal of the U.S.’s capitalist economy, which he said was “breaking down before our eyes.”

On Sunday, the U.S. Federal Reserve said it would ensure that depositors at Silicon Valley Bank and Signature Bank, which also failed over the weekend, were protected in full, even beyond the $250,000 normally covered under federal deposit insurance. The Fed also said it would launch a new lending program where banks could pledge certain securities, valued at par instead of market value, as collateral.

Instead, Griffin suggested that, given the strength of the economy, the U.S. government could have let SVB’s depositors lose their money. “It would have been a great lesson in moral hazard,” said Griffin, predicting that losses “would have been immaterial.”

“It would have driven home the point that risk management is essential,” he said.

What is moral hazard?

Investors, economists and politicians have cited the idea of ‘moral hazard’ when debating the merits of a rescue package for Silicon Valley Bank, which collapsed on Friday after a bank run. 

Moral hazard is the argument that an individual or business will engage in riskier behavior if someone, like an insurance company or the government, protects it from the consequences of its actions. This concept is often used to criticize bailouts, rescue packages or debt forgiveness plans. In the context of a bank bailout, the idea of ‘moral hazard’ suggests that if those involved in a bank—whether leadership, shareholders, or depositors—would not judge risk properly if they believed a rescue would come if something went wrong.

Nouriel Roubini, an economist at New York University commonly known as “Dr. Doom,” tweeted on Monday that the Fed’s protection for depositors at Signature Bank, which was connected to the cryptocurrency sector, was the “mother of [all] moral hazards,” and that it rewarded “criminals & con men.”

Even those who supported a rescue package, like former U.S. Treasury Secretary Lawrence Summers, had to dismiss the argument that rescuing the bank—or at least its depositorswould mean protecting people from allegedly poor decisions. “This is not the time for moral hazard lectures,” Summers tweeted on Sunday, before the U.S. announced its plan to protect SVB depositors. 

Griffin’s rejection of the SVB rescue stands in sharp relief to other investors who supported forceful action, like fellow billionaire and hedge fund founder Bill Ackman, an early supporter of a bailout for the bank.

On Monday, Ackman suggested on Twitter that the U.S. government should extend deposit insurance to cover the full value of deposits rather than just $250,000. He suggested that, given the speed of social media and digital banking, “no bank is safe from a run” without full deposit protection. 

“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.  Until this problem is solved, our banking system is at risk,” he continued.  

Other investors took issue with Griffin’s comments specifically. Linking to Griffin’s interview on Twitter, tech investor Bill Gurley claimed that previous rescue packages, like those for big banks in 2008 or airlines in 2020, protected equity shareholders and bondholders, were more generous than what was offered to Silicon Valley Bank. 

“I’m all for being tough, & I fully understand why ‘failure” is a necessary part of capitalism. But in this case SVB has already been treated much more harshly,” Gurley tweeted. “Protecting stockholders in these situations is a far worse direct harm to capitalism.”

Shares of regional banks crashed on Monday as investors feared that they would face similar problems as Silicon Valley Bank. Stock exchanges halted trading in companies like First Republic Bank and Western Alliance Bancorp due to volatility, as share prices plunged by as much as 85% for some companies as markets opened. 

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