The risk of a short-selling ban by the US government is giving veteran bear Marc Cohodes pause for thought before betting against the country’s regional banks, even though he says the outlook for the industry remains gloomy.
(Bloomberg) — The risk of a short-selling ban by the US government is giving veteran bear Marc Cohodes pause for thought before betting against the country’s regional banks, even though he says the outlook for the industry remains gloomy.
The former hedge fund boss, who now manages his own money while raising chickens on a farm in California, said deposits will continue to be pulled from US regional banks because of where Treasuries are trading in relation to regional banks’ deposit and CD rates.
Cohodes recently wagered against Silvergate Capital Corp.
and Signature Bank. He’s now turning his attention to Bank of Hawaii and Metropolitan Bank Holding Corp., identifying them as being vulnerable to the profitability issues that are hitting the broader industry.
“While I’m not short the regional banks yet, it’s something I’m always considering, at the right time,” Cohodes said in a telephone interview.
“I’ll see how it all plays out.”
The commission said last week it wasn’t currently considering a short-selling ban.
Smaller US banks, which typically have fewer resources to defend themselves, are facing pressure after rate hikes battered the value of their bond holdings.
Silicon Valley Bank unraveled in less than 48 hours in March after outlining a proposal to shore up capital. When that plan failed, a run on deposits forced the lender to take huge losses on sales of securities that had lost value as interest rates climbed.
Shares of regional lenders across the US have plummeted amid concern they too could fall victim to the same threats that sunk SVB.
Silvergate Capital, Signature Bank and, most recently, First Republic Bank, are among lenders that have collapsed this year.
The KBW Regional Banking Index is down more than 30% this year. Bank of Hawaii and Metropolitan Bank are both down at least 50%.
A representative for Bank of Hawaii declined to comment. A representative for Metropolitan Bank didn’t have an immediate comment.
Cohodes classified some of the country’s regional banks as zombies that are mismanaged, but said the risks of a short squeeze that would be brought on from a government-imposed short-selling ban poses major risks for both speculators and the banking system.
“The government needs to fix the problem instead of putting a band-aid over the gangrene that they created,” Cohodes said.
“Trying or talking about putting a short-selling ban in place is sheer insanity and will make the problem worse.”
Read more: Bove Says Shorting Bank Stocks Does ‘A Meaningful Service’ (1)
Those in favor of a ban say speculative bets have fueled deposit withdrawals.
Lawyers at Wachtell, Lipton, Rosen & Katz urged the Securities and Exchange Commission last week to impose a 15-day prohibition on short sales.
“Absent prompt action, strong banks, employees, communities and the American consumer may continue to bear the high costs of unnecessary and unjustified distress,” Edward Herlihy and Matthew Guest, partners at the law firm, wrote in a letter.
Federal prosecutors are examining short selling that emerged as three regional banks failed in recent weeks, Reuters reported Tuesday, citing a source familiar with the matter it didn’t identify.
Turmoil in the regional-banking industry is an “area of interest” for the Justice Department, Reuters reported the source as saying.
Cohodes, who spent much of his career exposing companies suspected of fraud, has spoken out about wagering against stocks to make a quick buck, calling out the so-called smash-and-grab tactics employed by some short sellers.
He said that any positions he takes against regional banks would be part of a longer-term strategy.
Property Pain
Trouble in commercial real estate also threatens to exacerbate the pressure on US regional banks.
After years of financing deals secured against the souring office assets, losses are coming, he said.
“The real problem is we haven’t even got to the credit crunch yet,” Cohodes said. “The banks exposure to commercial real estate is the iceberg that’s still 50 miles away, and it’s part of the game that hasn’t even been played yet.”
(Updates with Bank of Hawaii response in eighth paragraph.)
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