Investors who wager shares in a company will fall were increasing bets on First Republic’s stock when it was already taking a beating, making it difficult for the bank to recover its value, according to the source.
Two of the banks that shut down last month, Silicon Valley Bank (SVB) and Signature Bank, showed a similar pattern: short interest increased as their stock started to fall, at varying degrees of intensity. Problems at US regional banks grew last year, as rapidly rising interest rates slashed the value of some banks’ holdings in long-term assets such as home loans and government bonds. Some lenders were also challenged by exposure to cryptocurrency and technology companies. The underlying issues exploded last month when depositor flight spiralled out of control and regional lenders across the board saw their shares hit.
But it was only when the bank, which his fund was short, “abruptly tried, and failed, to raise capital … that anyone cared.”
Short selling is a controversial practice, blamed in the financial crisis of 2008 for adding to the pain; it was temporarily banned, albeit with little impact. Some high profile short sellers were later celebrated as making prophetic calls about the US housing market.
The Santa Clara, California-based lender was taken over by regulators on March 10, in turn dragging down the shares of other regional lenders. New York’s Signature failed on March 12, and First Republic lost more than 80 per cent of its market value by mid-March.
As the crisis accelerated, JPMorgan Chase & Co equity analysts wrote on March 17 that short-sellers were “working collectively to drive runs on banks,” and venture capitalist David Sacks asked on Twitter whether “scurrilous short sellers” had used social media to exacerbate depositor flight from SVB.
Even so, interviews and public postings show at least some short sellers had placed bets against regional banks well before the crisis hit.
These included: William C Martin, who shorted SVB in January 2023; Nate Koppikar of Orso Partners, who shorted SVB in early 2021; Barry Norris of Argonaut Capital Partners, who shorted SVB in late 2022; John Hempton of Bronte Capital Management, who shorted Signature in late 2021; and Marc Cohodes, who shorted Silvergate Bank in November 2022, according to interviews with Reuters.