Elon Musk Reacts As Bill Ackman Flags First Republic's Risk Spreading To Largest Banks: '...Astounding'

The banking crisis continues to play out, with skeletons continuing to tumble out of the closet. First Republic Bank FRC announced after the close that it would receive $30 billion in uninsured deposits from a slew of bigger banks and suspend its dividend.

Hedge fund manager Bill Ackman weighed in on the development in a long tweet.

What Happened: Treasury Secretary Janet Yellen likely pushed systemic important banks, or SIBs, to recycle some of the deposits they received from First Republic back to the bank for 120 days, Ackman said.

“The result is that FRB default risk is now being spread to our largest banks,” he said, adding that the spreading of risk of financial contagion to achieve a “false sense of confidence” in FRB is “bad policy.”

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The hedge fund manager said the SIBs on their own may not have made these “low return” deposits unless they were pressured to do so and without assurances that FRB deposits would be backstopped if the smaller bank failed.

The 35% decline in First Republic shares at one point in after-hours trading suggests that the market isn’t convinced with this “fictional vote of confidence,” he added.

FRB No SVB: Ackman noted that First Republic is a well-managed, well-capitalized, high-service bank with good assets and it is loved by its clients. First Republic is no SVB, he said, referring to the just-collapsed Silicon Valley Bank.

“It is caught up in a bank run due to no fault of its own. It does not deserve to fail,” he added.

Instead of the stop-gap arrangements, Ackman called for the government's handholding. “We need a temporary systemwide deposit guarantee immediately until expanded and modernized @FDICgov insurance system is made widely available, he said.

Late Thursday’s press release from the First Republic raised more questions than it answers, Ackman said. “We have allowed days to go by. Half measures don’t work when there is a crisis of confidence,” he said.

He also reiterated that he has no long or short positions in the banking sector. He suggested that his interest in the issue stemmed from his extreme concern about the financial contagion risk spiraling out of control and causing severe economic damage and hardship.

“We need to stop this now. We are beyond the point where the private sector can solve the problem and are in the hands of our government and regulators,” he concluded.

Elon Musk Responds: Tesla CEO Elon Musk joined in the conversation as well. "The inefficiency of the set of heterogeneous resource allocation databases we call money is astounding," he said. 

First Republic stock closed Thursday's session down 16.98% at $28.45, according to Benzinga Pro data.

Photo: Courtesy of Wikimedia Commons

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