April 9 (Reuters) – As First Republic Bank’s share price fell by double digits following the collapse of Silicon Valley Bank last month, some people close to the San Francisco-based lender feared short sellers would exacerbate its difficulties, according to a source that is familiar with the situation.
Investors betting that shares of a company will fall increased their bets on First Republic (FRC.N) stock when it was already taking a hit, making it difficult for the bank to regain value, according to the source.
Indeed, short interest in First Republic increased as the turmoil in the banking sector deepened, although responses vary. The percentage of shares borrowed — the basic mechanism of a short bet — was minimal at the beginning of the month, but rose to between 7% and 37% by March 31, according to calculations from various data providers, versus average readings of between 3% and 5%. over all shares.
Two of the banks that closed last month, Silicon Valley Bank (SVB) (SIVBQ.PK) and Signature Bank (SBNY.PK), showed a similar pattern: Short rates rose as their stocks began falling, in different intensities.
Trouble at US regional banks increased last year as rapidly rising interest rates slashed the value of some banks’ holdings of long-term assets such as home loans and government bonds. Some lenders have also been challenged by exposure to cryptocurrency and technology companies. The underlying problems exploded last month as the depositor flight spiraled out of control and regional lenders across the board took a hit on their stocks.
The extent to which short sellers have contributed to the downward spiral reignites the debate over whether so-called short sellers are market watchdogs or opportunistic investors who profit from the plight of others. In the case of the banking crisis, a review of the data and interviews with short sellers and their critics suggests the answer could be both.
“The shorts in the months leading up to the collapse warned markets exactly…that the bank (SVB) is dangerously mismanaged,” Dennis Kelleher, president and CEO of Better Markets, a nonprofit Washington, DC-based industry group, said in an email. “The problem is that after the collapse, shorts with various motives started targeting other banks.”
Some short sellers have made their negative views of banks public, but dismiss suggestions that they are to blame for the problems.
Short seller Jim Chanos wrote in a March 13 Reuters letter to clients that investors had known about the underlying accounting problems that brought SVB down since last summer. But it wasn’t until the bank, where his capital was tight, “abruptly tried and failed to raise capital…did anyone care.”
First Republic and Chanos declined to comment. Signature and SVB did not respond to requests for comment.
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CONTROVERSIAL PRACTICE
Short selling is a controversial practice blamed for adding to the pain during the 2008 financial crisis; it was temporarily banned, albeit with little effect. A few high-profile short sellers were later hailed as prophetic words about the US housing market.
The crisis of confidence in US regional banks began when SVB shares slumped and savers fled after they announced plans on March 8 to raise capital to fill a nearly $2 billion hole from asset sales.
The Santa Clara, Calif.-based lender was taken over by regulators on March 10, which in turn dragged shares of other regional lenders lower. New York’s Signature failed on March 12, and First Republic lost more than 80% of its market value by mid-March.
As the crisis accelerated, equity analysts at JPMorgan Chase & Co wrote on March 17 that short sellers were “collaborating to fuel bank runs,” and venture capitalist David Sacks tweeted if “quirky short sellers” were using social media would have to tighten insert flight from SVB.
JPMorgan and Sacks did not respond to requests for comment.
Nonetheless, interviews and public postings show that at least some short sellers had been betting against regional banks well before the crisis erupted.
These included: William C. Martin, who shorted SVB in January 2023; Orso Partners’ Nate Koppikar, who shorted SVB in early 2021; Argonaut Capital Partners’ Barry Norris, who shorted SVB in late 2022; Bronte Capital Management’s John Hempton, who sold Signature short in late 2021; and Marc Cohodes, who shorted Silvergate Bank (SI.N) in November 2022, according to interviews with Reuters.
Porter Collins, co-founder of hedge fund manager Seawolf Capital, said he saw how rising interest rates were likely to hit banks and sold SVB, Signature, First Republic, Silvergate and Charles Schwab Corp in early 2022. (BLACKN).
“There were warning signs,” he said, “that were pretty easy to spot for those who were looking.”
Schwab and Silvergate did not respond to requests for comment.
SHORT POSITIONS
However, such early short sellers were in the small minority. According to data tracker S3 Partners, shorts accounted for only about 5% of SVB’s stock as of March 1, with First Republic accounting for about 3% and Signature 6%. This compares to an average of around 4.65% of all shares per S3.
Data from S&P Global Market Intelligence and ORTEX, using different methodologies, have similar numbers showing SVB, First Republic and Signature with relatively low overall pre-crisis shorts.
Short positions increased in March, although measures vary across the three data providers. At First Republic, the percentage of shares on loan ranged from 7% to 39% last month, while SVB ranged from 11% to 19% and Signature ranged from 6% to 11%.
Regardless, short positions in most regional banks were nowhere near some heavily shorted stocks like electric car maker Tesla Inc, which was up around 25% as recently as 2019, and GameStop Corp, which is up over 100% in 2020, according to Refinitiv data. of shares rose.
An exception was Silvergate, a cryptocurrency-focused lender, which faced unusually high levels of short interest rates — over 75% — for months compared to other banks when it said it would cease operations on March 8.
S3’s Ihor Dusanivsky said the broad increase in US regional bank short positions in March was an “exceptionally small” portion of overall sector trading; The declines were caused by common shareholders selling their shares.
“The shorts aren’t driving the stock price,” Dusaniwsky said. “People say the tail wags the dog. That’s certainly not the case with most of these names.”
Short sellers still scored well: Overall, short bets in US regional banks gained $4.76 billion in March, up 35% at an average short rate of $13.4 billion, according to S3.
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Reporting by Lawrence Delevingne in Boston; additional reporting from Megan Davies in New York and Noel Randewich in San Francisco. Edited by Megan Davies, Paritosh Bansal and Anna Driver
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