Shares of First Republic Bank plunged in premarket trading on Friday as hedge fund billionaire Bill Ackman warned that a landmark $30 billion plan to rescue the troubled lender could fuel “financial contagion ” in the banking sector.
First Republic shares were down more than 18% in premarket trading despite news on Thursday that a group of 11 banks led by JPMorgan Chase, Citigroup, Bank of America and Wells Fargo extended a lifeline to First Republic. Republic after the bank experienced a massive outflow of deposits this week.
The decline in shares would wipe out the company’s nearly 10% gain on Thursday after the country’s biggest banks announced plans to flood its vaults with deposits.
Ackman, who has repeatedly warned of a potential meltdown in the banking sector since Silicon Valley Bank collapsed last week, said the plan “raises more questions than answers.”
“The result is that FRB default risk is now extended to our largest banks,” Ackman tweeted late Thursday. “Spreading the risk of financial contagion to create a false sense of confidence in FRB is bad policy.”
The after-hours drop in First Republic shares showed that “the market responded to this fictitious vote of confidence,” Ackman added.
JPMorgan Chase, Citigroup, Bank of America and Wells Fargo led the rescue, each pledging $5 billion in deposits, while other firms including Morgan Stanley and Goldman Sachs contributed smaller amounts.
The money was part of the flood of deposits big banks received this week as spooked investors shifted their money. Bank of America alone received more than $15 billion in deposits after recent bank failures.
Ackman said he had “no long or short investment in banking.”
“I’m just extremely concerned about the risk of financial contagion spiraling out of control and causing severe economic damage and hardship,” he added. “We have to stop this now. We are beyond the point where the private sector can solve the problem and we are in the hands of our government and regulators. TIC Tac.”
The $30 billion bailout was reportedly set in motion during a Tuesday phone call with Treasury Secretary Janet Yellen and JPMorgan Chase boss Jamie Dimon.
Yellen raised the possibility of big banks depositing money to shore up First Republic 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 hold their money with 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 critics called a bailout.