Critics rally against US intervention in devastating Silicon Valley Bank collapse

A billionaire hedge fund manager has sounded alarm over the US government‘s knee-jerk reaction to a banking crisis not seen since 2008.

The collapse of three major US banks has sent a shockwave through the US, with critics of the financial system worried the government’s bailout will cascade into something far worse.

The failure of both Silicon Valley Bank and the New York-based Signature Bank marked the biggest banking collapse since the 2008 global financial crisis.

Images of hundreds of SVB customers lining up attempting to reclaim their money were a grim echo of the previous cataclysmic collapse, prompting an immediate response from authorities.

America’s top finance officials stepped in and revealed a number of measures aimed at restoring confidence in the banking sector and settling turbulent markets. The Treasury, Federal Reserve, and Federal Deposit Insurance Corporation have all announced plans to ensure SVB’s customers will be able to access all their deposits in the bank.

However, the government’s knee-jerk reaction to prop up failing banks has caused a stir among a number of finance commentators.

The failure of both Silicon Valley Bank and the New York-based Signature Bank marked the biggest banking failures since the 2008 global financial crisis.

In a wild interview following the collapse of two major US banks, Ken Griffin, the maverick founder of hedge fund Citadel, slammed the recent bailout of as a sign of American capitalism’s downfall.

Mr Griffin railed against the US government’s intervention to protect all SVB depositors, claiming it was a blatant disregard for the principles of capitalism and a sign of incoming turmoil for the world’s richest nation.

“The US is supposed to be a capitalist economy, and that‘s breaking down before our eyes,” Mr Griffin said in Financial Times interview, which took place just one day after US regulators pledged to protect all depositors in SVB, including those with balances exceeding the $250,000 federal insurance limit.

US President Joe Biden said “no losses will be borne by the taxpayers”, insisting the money will come from the fees that banks pay into the deposit insurance.

Images of hundreds of SVB customers lining up attempting to reclaim their money echoed back to the previous cataclysmic collapse, prompting an immediate response from authorities.

However, Mr Griffin was incensed at the “loss of financial discipline” he saw in the government‘s decision to bail out SVB depositors in full. He argued that the move created a dangerous moral hazard and that losses to depositors would have been insignificant.

“The regulator was the definition of being asleep at the wheel,” Mr Griffin said, accusing regulators of ignoring warning signs.

Others have also sounded alarm about the potential repercussions of injecting millions in liquidity when inflation rates continue to soar.

Finance reporter at Jacobin, Branko Marcetic, described the crisis as “a perfect storm of everything wrong with our era, from corruption and financial recklessness, to bad political decision-making and corporate entitlement”.

The bailout of SVB depositors, along with guarantees to other banks, is effectively a large dose of liquidity & financial easing - when inflation is still high!

What happens if US inflation continues to stay elevated, and more disruptive events like SVB happen? Very dangerous.

— Jay Kotak (@jay_kotakone) March 14, 2023

However, despite the uproar, the US economy is still strong, according to Mr Griffin.

With low credit losses, full employment, and bank balance sheets at their strongest ever, Mr Griffin believes that the US government could have addressed the issue of moral hazard from a position of strength.

“It would have been a great lesson in moral hazard,” Mr Griffin insisted. “Losses to depositors would have been immaterial, and it would have driven home the point that risk management is essential.”

Mr Griffin’s fiery comments sharply contrast with those of fellow hedge fund manager Bill Ackman, who recently called for the Federal Deposit Insurance Corporation to guarantee all deposits immediately, warning that “hours matter” and that the community and regional banking system is essential for the economy to function effectively.

Meanwhile, investors have continued to shun banking stocks following the news, and analysts remain concerned about the wider impact from SVB’s collapse.

“The rapid tightening in financial conditions alongside the uncertainty of the situation makes us lean toward the FOMC taking a pause from its hiking campaign at its upcoming meeting on March 22,” Wells Fargo economists wrote in a recent note to investors.

JP Morgan’s Michael Feroli said the Fed should be able to tackle both the uncertainty in the financial markets and above-target inflation.

“If they indeed have used the right tool to address financial contagion risks (time will tell), then they can also use the right tool to continue to address inflation risks -- higher interest rates,” he wrote to clients over the weekend.

But the fallout has already begun to impact the banking sector in multiple countries overseas.

US President Joe Biden called for calm on Monday, reassuring Americans that their banking system is secure in the wake of the crisis.

At least 20 regional US banks have been gripped by the uncertainty, with stock prices plunging up to Tuesday. Shares of First Republic Bank dropped by more than 65 per cent as trading started, leading the decline among banks as regional lenders face pressure.

Shares of other regional banks, including Western Alliance Bancorp and Zions Bancorporation, also plummeted.

Banks were also savaged in Europe. The benchmark Stoxx Europe 600 Banks index showed the top 42 EU and UK banks fell 5.6 per cent.

US President Joe Biden called for calm on Monday, reassuring Americans that their banking system is secure in the wake of the conundrum while also backing tougher regulations to prevent future crises.

“Americans can have confidence that the banking system is safe. Your deposits will be there when you need them,” Mr Biden said SVB’s failure.

“The money will come from the fees that banks pay into the deposit insurance.”

However, several in the sphere are sceptical of the President’s claims, warning authorities “extremely concerned” more banks will go insolvent.

“They are extremely concerned, and this is why we’ve seen them move so quickly on this,” Sky News Washington DC Bureau Chief Annelise Nielsen said this week.

“The fact Joe Biden put in this extra statement that he made this morning … there was a real concern the markets were going to open, and it was going to be catastrophic.”