Global Courant 2023-05-03 06:19:53
Michael Milken, President of the Milken Institute, speaks at the Milken Institute Global Conference in Beverly Hills, California, on May 2, 2022. (Photo by Patrick T. FALLON/AFP) (Photo by PATRICK T. FALLON/AFP via Getty Images)
Patrick T Fallon | Afp | Getty Images
Famed investor Michael Milken said on Tuesday that the current banking crisis is the result of a classic mismatch between assets and liabilities that has played out miserably in history.
“You shouldn’t have borrowed short and lent long… Finance 101,” Milken said on CNBC’s “Last Call.” “How many times, how many decades are we going to learn this lesson of overnight borrowing and long-term lending? Whether it was in the 1970s, 1980s and 1990s.”
“Again here, the banks have enough credit, they had enough equity, they had enough equity to absorb the credit losses coming up. .
Earlier this week, First Republic became the third U.S. bank failure since March and the biggest bank collapse since the 2008 financial crisis. The bank experienced a deposit flight as its long-term assets fell in market value after a series of rate hikes, leading to concerns about unrealized losses on the balance sheet.
The founder of the Milken Institute believes there will be a decline in the percentage of loans owned by the banking system in the aftermath of the crisis.
“We will be stronger if they get into the hands of … pension funds that have long-term liabilities,” Milken said. “People are so focused on credit risk, etc., but one of the biggest risks is interest rate risk.”
In the wake of these bank failures, investors have penalized other lenders with similar characteristics. Companies with the highest percentage of uninsured deposits and potentially serious bond losses on their balance sheets were the most scrutinized.
To be sure, the 76-year-old investor acknowledged that the largest banks in the US have indeed conducted conservative risk management amid rapidly rising interest rates.
“It’s not that there isn’t a lot of liquidity in this country…We also have to take into account that our big banks…have been extremely careful with the management of liability and assets,” Milken said.
Milken was the king of junk bonds in the 1980s and pioneered leveraged buyouts. In 1990, he pleaded guilty to securities fraud and tax violations, and was later pardoned by President Donald Trump in 2020.
