US capitalism is ‘breaking down before our eyes’, says Ken Griffin
Citadel founder argues that refusing to bail out SVB depositors in full would be ‘great lesson in moral hazard’
Ken Griffin, founder of hedge fund Citadel, said the rescue package for Silicon Valley Bank unveiled by US regulators shows American capitalism is “breaking down before our eyes”.
Griffin told the Financial Times that the US government should not have intervened to protect all SVB depositors following the collapse of the Santa Clara-based bank on Friday.
“The US is supposed to be a capitalist economy, and that’s breaking down before our eyes,” he said in an interview on Monday, a day after US regulators pledged to protect all depositors in SVB — even those with balances above the $250,000 federal insurance limit.
“There’s been a loss of financial discipline with the government bailing out depositors in full,” Griffin added.
SVB was shut down by US regulators on Friday after customers raced to withdraw $42bn — a quarter of its total deposits — in one day and a failed effort to raise new capital called into question the future of the tech-focused lender.
Critics of the rescue package have pointed to the risk of moral hazard that comes from making all depositors whole on the money they have with SVB, while regulators have faced questions over missed warning signs.
“The regulator was the definition of being asleep at the wheel,” Griffin said.
The billionaire Citadel founder, whose fund this year became the most successful hedge fund firm ever, said the strength of the US economy meant the US government did not have to take such forceful action.
“It would have been a great lesson in moral hazard,” he said. “Losses to depositors would have been immaterial, and it would have driven home the point that risk management is essential.”
“We’re at full employment, credit losses have been minimal, and bank balance sheets are at their strongest ever. We can address the issue of moral hazard from a position of strength.”
Griffin’s stance contrasts starkly with that of Bill Ackman, another high-profile hedge fund manager, who on Monday called for the Federal Deposit Insurance Corporation to “explicitly guarantee all deposits now”, warning that “hours matter”. Ackman said on Twitter that “our economy will not function effectively without our community and regional banking system”.
He said that neither he nor his hedge fund Pershing Square had any exposure to Silicon Valley Bank, adding that his personal exposure to the venture capital industry was “less than 10 per cent of my assets”.
Last year Griffin moved Citadel and his market-making firm Citadel Securities to Miami from Chicago after threatening to leave the city over rising crime. Griffin, who relocated to Miami with his family, has described the city as a “growing metropolis that embodies the American dream” and has said he wants Florida’s Republican governor Ron DeSantis to run for president in 2024.
Citadel, which Griffin set up in 1990, has grown to manage $54bn in assets.
After Hours Summary: AMLX +20% (also files mixed shelf), DCGO +10.6% both up on earnings, BG +7.8% to be added to S&P 500; GTLB -35.7%, HEAR -13.3% down significantly on earnings, UAL -7% down on lackluster Q1 EPS guidanceAfter Hours Gainers:
Companies trading higher in after hours in reaction to earnings/guidance: AMLX +20% (also files mixed shelf), DCGO +10.6% (also awarded $180 mln in contracts), CDMO +8.5%, GETY +0.2%
Companies trading higher in after hours in reaction to news: BG +7.8% (replacing SBNY in S&P 500), ASTS +4.4% (signs MoU with Saudi Telcom Company), NEP ($500 mln unit offering), PARA +1% (Sean Combs looking to buy BET, according to Variety), HYZN +1% (names new CEO), RBBN +0.8% (SIVB closing to not impact operations), ACHR +0.7% (confirms small amount of cash with SIVB), AMPS +0.2% (no exposure to SIVB, SBNY, or FRC)
After Hours Losers:
Companies trading lower in after hours in reaction to earnings/guidance: GTLB -35.7%, HEAR -13.3% (also extends repurchase program), UAL -7% (guidance)
Companies trading lower in after hours in reaction to news: AAL -1.5% (trading in sympathy with UAL), LHX -0.8% (to develop imager for NASA), DAL -0.8% (trading in sympathy with UAL), AMCX -0.6% (CEO resigned as a director), JBLU -0.6% (trading in sympathy with UAL), FIVE -0.4% (CFO promoted to COO), LUV -0.3% (trading in sympathy with UAL), HOOD -0.1% (reports February data), META (to wind down NFTs, according to Reuters)
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Justice Department Probes Collapse of Do Kwon’s TerraUSD Stablecoin
FBI and New York officials have questioned former Terraform Labs team members
The Justice Department is investigating last year’s collapse of the TerraUSD stablecoin, adding the risk of U.S. criminal charges to the pressure on its creator, South Korean crypto entrepreneur Do Kwon, people familiar with the matter said.
The Federal Bureau of Investigation and the Southern District of New York have questioned former team members of Mr. Kwon’s company, Terraform Labs Pte. Ltd., in recent weeks and sought to interview others, the people said. The FBI and SDNY are both parts of the Justice Department, and SDNY often takes the lead in high-profile prosecutions of financial crimes.
Representatives of Terraform Labs and the Justice Department declined to comment.
The Securities and Exchange Commission filed a civil fraud lawsuit last month against Mr. Kwon and Singapore-based Terraform Labs in Manhattan federal court. The suit accused Mr. Kwon and the firm of misleading investors about the risks of TerraUSD, a so-called stablecoin designed to maintain a price of $1. The coin lost its peg in May 2022, causing a chain reaction that wiped out some $40 billion in market value and cost some investors their life savings.
The Justice Department’s probe covers similar territory as the SEC suit, the people said. Among the topics that investigators asked about were the relationship between Chai, a South Korean payment app, and the underlying blockchain that Terraform created to power TerraUSD, some of the people said.
The SEC accused Mr. Kwon of misleading the public by claiming that Chai transactions were processed on Terraform’s blockchain, when in fact Chai used more traditional technology, according to the lawsuit.
If Chai had used the Terraform blockchain for payments, it would have been an unusual example of blockchain technology being used for a real-world application. Chai Corp., the startup behind the app, has previously said that by 2021, it was no longer using Terraform’s blockchain technology or digital assets to process its payments. The SEC said Mr. Kwon’s claims of real-world usage duped investors into buying Terraform’s cryptocurrencies.
A lawyer for Mr. Kwon and Terraform has said in court that they would seek to dismiss the SEC’s lawsuit, which included other allegations that they misled investors and accused them of selling unregistered securities. Mr. Kwon has previously denied committing fraud. In an interview with The Wall Street Journal last year, he said that he believed in TerraUSD and personally lost money when it collapsed.
It couldn’t be learned what specific charges the Justice Department is pursuing. Prosecutors could potentially drop the investigation without filing charges.
The U.S. probe is the latest in a string of investigations around the world stemming from the TerraUSD collapse. Prosecutors in South Korea said in September that they had obtained an arrest warrant for Mr. Kwon and a so-called red notice for him from global law-enforcement agency Interpol, effectively putting police agencies worldwide on the lookout for him. Singapore police have said they are investigating Terraform Labs.
Mr. Kwon was based in Singapore until vanishing from public view last year. According to South Korean prosecutors, he left Singapore in September, traveling to Dubai and then to Serbia.
Officials from South Korean law enforcement visited Serbia earlier this year to seek the Balkan country’s cooperation, a spokeswoman for the Seoul Southern District Prosecutors’ Office said. She declined to comment further on the status of the South Korean investigation.
Still, Mr. Kwon has denied that he is “on the run.” In his last media interview, carried out with crypto journalist Laura Shin in October, he said that he hadn’t seen a copy of the South Korean arrest warrant and that he wasn’t disclosing his location because of threats to his security. “If the location where I live becomes known, it becomes almost impossible for me to live there,” he told Ms. Shin.
Veterans Affairs to Be First Major Insurer to Cover Alzheimer’s Drug Leqembi
Roughly 168,000 veterans receiving care have Alzheimer’s dementia
Eisai Co. ’s new Alzheimer’s disease drug Leqembi will be covered by the U.S. Department of Veterans Affairs, the first major insurer to agree to pay for the drug since its approval by U.S. regulators earlier this year.
Eisai said Monday veterans with the early stages of Alzheimer’s would get the drug covered under criteria set by the VA.
An estimated 167,954 veterans receiving care through the VA have Alzheimer’s dementia, according to government estimates. To qualify for Leqembi, patients must be over 65, have early-stage symptoms and elevated brain amyloid, sticky protein fragments, which the drug is designed to remove.
Leqembi is the first anti-amyloid drug shown to slow decline from Alzheimer’s. Its potential side effects include brain bleeding and swelling; people taking blood thinners may be at a higher risk of suffering large brain bleeds, according to the VA.
Leqembi, which was co-developed with Biogen Inc., is expected to have relatively small sales unless Medicare officials modify a decision that denies routine coverage of anti-amyloid drugs. Government officials have said they need to see additional data before they will reconsider the coverage decision.
Many analysts expect that Medicare won’t revise its decision until the FDA grants full traditional approval to Leqembi. The drug was approved in January using accelerated approval, which allows for drugs to be marketed before they are fully proven effective, based on its impact on biological markers of disease such as amyloid.
The FDA has set a deadline of July 6 to make a decision on full approval.
An earlier anti-amyloid drug developed by Biogen and Eisai, Aduhelm, was denied coverage by the VA in 2021. The agency cited the drug’s risk of side effects and a lack of certainty about its effectiveness.
Debate has raged for two decades over the role that amyloid plays in Alzheimer’s and its utility as a target for drug development. Scientists agree that amyloid is a defining characteristic of Alzheimer’s, but not on whether it is the root biological cause of the gradual decline in memory and day-to-day functioning.
However, some former skeptics have become persuaded that removing amyloid plaques with monoclonal antibody drugs can produce a benefit to patients, albeit a relatively small one that carries safety risks including brain swelling and bleeding.
Eisai and Biogen’s drug Leqembi slowed cognitive decline by 27% in a large study after removing large amounts of plaques. Eli Lilly & Co.’s drug donanemab dramatically lowered plaques in a midstage study that was associated with a slowing of cognitive decline; results from a Phase 3 study are expected sometime this year.
Closing Stock Market SummaryIt was a volatile start to the new week for the stock market as investors digested a busy weekend of news surrounding the banking sector fallout.
Market participants learned through a joint statement from the Federal Reserve, Treasury, and FDIC that all depositors at Silicon Valley Bank and Signature Bank of New York would be fully protected even though both banks had been taken over by regulators. In turn, the Fed also introduced a Bank Term Funding Program (BTFP) that will help banks avert selling Treasury and other government securities at a loss by allowing them to offer those securities to the Fed, which will value them at par, as collateral.
Those efforts were designed to restore some normalcy to the banking system and some calm to the capital markets. Price action in banking stocks today suggested that regulators did not succeed in either regard, and that their efforts may have created a belief that this issue is bigger than previously thought.
The SPDR S&P Regional Banking ETF (KRE) fell another 12.3% and the SPDR S&P Bank ETF (KBE) fell another 10.0%. First Republic Bank (FRC 31.21, -50.55, -61.8%), Western Alliance Bancorp. (WAL 26.12, -23.22, -47.1%), Comerica (CMA 42.54, -16.27, -27.7%), and PacWest Bancorp. (PACW 9.75, -2.60, -21.1%) were among today's biggest losers in the banking space.
Still, the main indices spent a good portion of today's session in positive territory thanks to gains in some heavily-weighted components. Mega-cap companies with solid balance sheets, like Apple (AAPL 150.47, +1.97, +1.3%) and Microsoft (MSFT 253.92, +5.33, +2.1%), were favored as investors rotated capital into stocks that are seen as being removed from the fallout in the banking industry. The Vanguard Mega Cap Growth ETF (MGK) rose 0.8% versus a 1.2% loss in the Invesco S&P 500 Equal Weight ETF (RSP).
The 2-yr note yield fell 57 basis points to 4.02% and the 10-yr note yield fell 18 basis points to 3.52%, as investors recognized the potential for a less aggressive Fed in the wake of this bank fallout and the potential for it to have a disinflationary impact on the economy.
The former point was also reflected in the fed funds futures market. The CME FedWatch Tool shows a 55.4% probability of a 25 basis points rate hike at the March FOMC meeting and a 44.6% probability of no rate hike versus last week when there was a 78.6% probability of a 50 basis points rate hike.
Unsurprisingly, the S&P 500 financial sector (-3.8%) was the worst performer by a wide margin. The real estate (+1.6%) and utilities (+1.5%) sectors showed the largest gains. The health care sector, up 0.9%, was also a relative strength leader, digesting the news that Pfizer (PFE 39.86, +0.47, +1.2%) will acquire Seagen (SGEN 197.65, +25.04, +14.5%) for $43 billion or $229.00 per share in cash and Carl Icahn's proxy battle with Illumina (ILMN 226.94, +32.93, +17.0%).
- Nasdaq Composite: +6.9% YTD
- S&P Midcap 400: -1.0% YTD
- Russell 2000: -1.0% YTD
- S&P 500: +0.4% YTD
- Dow Jones Industrial Average: -4.0% YTD
Looking ahead to Tuesday, market participants will receive the following economic data:
- 6:00 ET: February NFIB Small Business Optimism Index (prior 90.3)
- 8:30 ET: February CPI (consensus 0.4%; prior 0.5%) and Core CPI (consensus 0.4%; prior 0.4%)
There was no U.S. economic data of note today.