First Republic shares plunge as Bill Ackman warns $30B rescue could spread ‘financial contagion’
First Republic Bank shares plunged in trading Friday as hedge fund billionaire Bill Ackman warned that a historic $30 billion plan to rescue the troubled lender could fuel “financial contagion” in the banking sector.
First Republic’s stock was down 33% to $22.96 in trading Friday despite Thursday’s news that a group of 11 banks led by JPMorgan Chase, Citigroup, Bank of America and Wells Fargo extended a lifeline to First Republic after the bank experienced a mass exodus of deposits this week.
The embattled First Republic said it would suspend dividend payments to shareholders while its board focused “on reducing its borrowings and evaluating the composition and size of its balance sheet going forward.”
The stock drop erased the firm’s gain of nearly 10% on Thursday after the nation’s largest banks announced their plan to flood its coffers with deposits.
Ackman, who has repeatedly warned of a potential banking sector meltdown since Silicon Valley Bank went bust last week, argued the plan “raises more questions than answers.”
“The result is that FRB default risk is now being spread to our largest banks,” Ackman tweeted on Thursday night. “Spreading the risk of financial contagion to achieve a false sense of confidence in FRB is bad policy.”
First Republic’s after-hours stock plunge showed that the “market has responded to this fictional vote of confidence,” Ackman added.
JPMorgan Chase, Citigroup, Bank of America and Wells Fargo led the rescue by each pledging $5 billion of deposits, while other firms, including Morgan Stanley and Goldman Sachs, contributed smaller amounts.
The money represented a portion of the flood of deposits larger banks received this week as spooked investors shifted their money. Bank of America alone received more than $15 billion in deposits after the recent bank failures.
Ackman said he has “no investments long or short in the banking sector.”
“I am simply extremely concerned about financial contagion risk spiraling out of control and causing severe economic damage and hardship,” he added. “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. Tick-tock.”
The $30 billion rescue plan reportedly came together during a Tuesday phone call with Treasury Secretary Janet Yellen and JPMorgan Chase boss Jamie Dimon.
Yellen floated the possibility of large banks depositing money to shore up First Republic’s balance sheets, Bloomberg reported. Dimon liked the idea and began pitching it to his contemporaries at Citigroup, Bank of America and Wells Fargo.
As part of the arrangement, the banks agreed to keep their money at First Republic for at least 120 days.
The deal emerged after federal regulators stepped in to guarantee all deposits at SVB and Signature Bank – a move that critics have called a bailout.
