Bank Crisis: Bankers Call For Probe Into Short Sellers. Sen. Warren Digs Into First Republic.

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Bank Crisis: Bankers Call For Probe Into Short Sellers. Sen. Warren Digs Into First Republic.

May 05, 2023

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Bank stocks rebounded Friday, clawing back some of the losses that followed Monday's collapse of First Republic Bank, the second-largest bank failure in U.S. history. Meanwhile, the American Bankers' Association called for a probe into short sellers profiting off the bank crisis. And Sen. Elizabeth Warren (D.-Mass.) wants answers from First Republic executives.

Bankers Call For SEC Probe

The American Bankers Association sent a letter on Thursday to the Securities and Exchange Commission, requesting the regulator launch a probe into a significant number of short sales of publicly-traded bank stocks. The ABA called the trades "disconnected from the underlying financial realities."

The group also said it observed "extensive social media engagement" about the health of various banks that was out of step with general industry conditions.

Reuters reported short sellers raked in $378.9 million in profits on Thursday alone by betting against certain regional banks, according to data from analytics firm Ortex.

"The harm caused by short shelling that runs counter to economic fundamentals ultimately falls on small investors, who see value destroyed by others' predatory behavior," ABA President and CEO Rob Nichols wrote.

SEC Chair Gary Gensler issued a statement late Thursday on current market events. "As I've said, in times of increased volatility and uncertainty, the SEC is particularly focused on identifying and prosecuting any form of misconduct that might threaten investors, capital formation, or the markets more broadly," Gensler wrote.

He issued a similar statement on March 12 at the start of the bank crisis. "We will investigate and bring enforcement actions if we find violations of the federal securities law," Gensler wrote at the time.

Bank Crisis Widens. JPMorgan Rescues First Republic Bank.

Sen. Warren Wants Answers From First Republic

Warren sent a letter to former First Republic Bank CEO Michael Roffler Wednesday asking for more information about executive pay and its support for rolling back bank regulations and business practices before the collapse.

Specifically, Warren asked when executives were first made aware of potential problems. She also questioned how many concerns were raised and ignored. Warren noted previous reports that the bank slowed down hiring and replacing employees late last year.

Warren requested information about executive compensation, bonuses, stock sales from the past five years and plans for the bank to claw back awards to its top brass.

She also pressed Roffler for information about First Republic's lobbying efforts to weaken regulations. Finally, the Massachusetts senator asked if any of the executives plan to seek employment at JPMorgan or any other bank after the First Republic failure.

First Republic Lobbying Efforts

Warren noted First Republic Bank spent hundreds of thousands of dollars lobbying for the 2018 Economic Growth, Regulatory Relief and Consumer Protection Act that rolled back Dodd-Frank rules for First Republic and similar banks. Roffler's predecessor James Herbert gave over $2.1 million in campaign contributions to supporters of the law.

Roffler wrote to the Federal Reserve and FDIC in January 2023 opposing proposals to capital and resolution requirements. At the time, First Republic wrote its operations do not pose financial stability risk. "In the event of failure, it is expected that the bank could be resolved in an orderly fashion," Roffler wrote.

Three months later, First Republic Bank received a $30 billion emergency rescue deposit from JPMorgan and the nation's 11 largest banks after customers withdrew more than $100 billion in funds. First Republic was seized and sold to JPMorgan on May 1.

Warren also noted First Republic executives sold a total of $11.8 million in stock this year leading up to the collapse at prices averaging just under 130 per share, according to Wall Street Journal reports.

Charles Schwab Bank Crisis Update

SCHW stock surged 3.9% in trade Friday after Charles Schwab announced client outflows decelerated for the third straight month.

April outflows slowed to $1 billion, down from $1.19 billion in March, $1.36 billion in February and $1.52 billion in January.

Schwab also disclosed it extended and modified its Insured Deposit Account Agreement with Toronto-Dominion Bank. The amendment lets Schwab reduce the amount of balances subject to fixed-rate interest. The previous 2019 IDA required fixed-rate interest for at least 80% of all balances.

First Republic Bank Is The Second-Largest Bank Failure In U.S. History. What Comes Next?

Bank Stocks

Regional banks posted strong rebounds early Friday to claw back their losses from Thursday. PacWest Bancorp had sent shares spiraling again Thursday following rumors it was exploring strategic options and a potential sale.

PACW stock rocketed 81.7% Friday. Its share price halved Thursday on reports PacWest is exploring strategic options and potential sale.

Western Alliance leapt 49% Friday. WAL stock dove 38.5% Thursday after the Financial Times reported the bank may pursue its own sale. Western Alliance quickly denied the story, calling it "categorically false in all respects."

First Horizon (FHN) rose 8.5% Friday. FHN stock dove 33% Thursday after Toronto-Dominion Bank (TD) called off their $13.4 billion merger.

Zions Bancorp (ZION) rebounded 19.2% during trading Friday, erasing its 12% decline from Thursday.

Among larger banks, JPMorgan (JPM), Goldman Sachs (GS), Morgan Stanley (MS) and Bank of America (BAC) all climbed higher Friday. The banks saw their shares slide the past three days.

You can follow Harrison Miller for more stock news and updates on Twitter @IBD_Harrison

Bank Crisis: Bankers Call For Probe Into Short Sellers. Sen. Warren Digs Into First Republic.

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