Billionaire Citadel founder Ken Griffin says Biden should not bail out SVB depositors

Billionaire Citadel hedge fund founder Ken Griffin has argued that the Biden administration should not have guaranteed the deposits of customers at failed Silicon Valley Bank and Signature bank. 

'There's been a loss of financial discipline with the government bailing out depositors in full,' Griffin told the Financial Times in an interview on Monday, before Citadel on Tuesday said it bought a 5.3% stake in Western Alliance Bancorporation. 

Over the weekend, the Federal Reserve, Treasury Department, and FDIC announced a plan to guarantee deposits at failed SVB and Signature, insisting that the move was not a bailout for the banks' bondholders and shareholders.

The backstop was designed to prevent panic and bank runs spreading to other institutions, but Griffin argued that letting bank customers eat the losses would have been 'a great lesson in moral hazard'.

'Moral hazard' refers to the removal of people's incentive to guard against financial risks, through the provision of backstops such as bailouts or insurance. 

Billionaire Citadel hedge fund founder Ken Griffin has argued that the Biden administration should not have guaranteed the deposits of customers at failed banks

Meanwhile, Griffin's hedge fund Citadel on Tuesday said it bought a 5.3% stake in Western Alliance Bancorporation

'The US is supposed to be a capitalist economy, and that's breaking down before our eyes,' said Griffin.

'Losses to depositors would have been immaterial, and it would have driven home the point that risk management is essential,' he argued.

'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.' 

A senior Treasury official said the FDIC will use funds from the Depositor Insurance Fund to ensure that depositors at the failed banks are made whole, and that the DIF is bearing the risk, not the taxpayer.

'The situation is not 2008,' the official said, referring to the bank bailouts of the Great Recession. 'There are lot of reforms that have been put in place and we are trying to help depositors of institutions. The bank's equity and bondholders are being wiped out. They took a risk, as owners of these securities; they will take the losses.'

Billionaire hedge fund manager Bill Ackman took the opposition position from Griffin, arguing that a rescue plan for depositors saved the US economy from ruin.

Ackman wrote on Twitter that if authorities had not intervened, 'we would have had a 1930s bank run continuing first thing Monday causing enormous economic damage and hardship to millions.'

'More banks will likely fail despite the intervention, but we now have a clear roadmap for how the gov't will manage them.'

Billionaire hedge fund manager Bill Ackman took the opposition position from Griffin, arguing that a rescue plan for depositors saved the US economy from ruin 

A sign for Western Alliance bank on the floor of the New York Stock Exchange on Tuesday

Western Alliance's share price, which had tumbled on Monday, shot higher on Tuesday, rising as much as 43 percent shortly after the opening of trading

Because only the first $250,000 of each deposit at a U.S. bank is insured by the FDIC, last week's collapse of SVB sparked concerns that its small-business clients would be unable to pay employees. 

Some 89% of around $200 billion in deposits held by SVB at the end of 2022 was uninsured, according to the FDIC. Regulators have now removed that risk by guaranteeing even the uninsured deposits.

Meanwhile, Griffin's hedge fund Citadel on Tuesday said it bought a 5.3% stake in Western Alliance Bancorporation, sending a strong signal of confidence as the company was swept up in growing fears of a broader financial crisis after two other banks were seized.

Western Alliance's share price, which had tumbled on Monday, shot higher on Tuesday, rising as much as 43 percent shortly after the opening of trading.

Citadel earned $16 billion in profits for investors last year and its trades are closely watched by markets for signs of trends. Last year's returns made Citadel the most successful hedge fund ever.

A Citadel spokesman declined to comment beyond the regulatory filing in which the investment was detailed.

Western Alliance was one of a number of banks caught in a crippling sell-off since last week when regulators shut down startup-focused bank SVB Financial Group that triggered worries of a contagion and rippled across financial markets. 

Signature Bank was also shut down by regulators.

Earlier on Tuesday, CNBC reported that Ron Baron said he 'modestly increased' his position in broker Charles Schwab to take advantage of a double-digit sell-off.