Dominoes

“As each domino falls, the next weakest begins to wobble,” Bill Ackman warned.

He was referring, of course, to America’s regional banks, which remain under siege despite exhortations and assurances from no less than Jamie Dimon and Jerome Powell this week.

Banking, Ackman reminded US officials, “is a confidence game.” His assessment was dire. “At this rate, no regional bank can survive bad news or bad data as a stock price plunge inevitably follows, insured and uninsured deposits are withdrawn and ‘pursuing strategic alternatives’ means an FDIC shutdown over the coming weekend.”

His remarks came as Beverly Hills-based PacWest plunged on reports it was exploring strategic alternatives, including a possible sale. In a statement confirming those reports, PacWest insisted it hasn’t experienced “out-of-the-ordinary deposit flows” on the heels of First Republic’s sale to JPMorgan and “other news.” Discussions with “several potential partners and investors” are ongoing, PacWest said.

Discussions which, as of Thursday, aren’t ongoing, are those around the TD and First Horizon merger. The banks’ 2022 agreement has been terminated, according to the both lenders. TD cited regulatory uncertainty “unrelated” to First Horizon, whose CEO Bryan Jordan called the news “unfortunate and unexpected.”

First Horizon gets a $200 million consolation prize in the form of a cash payment from TD on top of $25 million in fee reimbursements. The bank, Jordan said, boasts a “strong capital position,” and has “disciplined credit quality… and [a] well-diversified and stable funding mix.” Those solid fundamentals “have enabled [the] business to navigate challenging industry dynamics,” according to the same statement.

As Ackman made clear in no uncertain terms, those “challenging industry dynamics” are likely to persist absent government intervention. Shares of PacWest and First Horizon were markedly lower Thursday. It seemed unlikely that PacWest’s remarks about stable core deposits would be sufficient to deter speculators or stanch the proverbial bleeding.

Western Alliance, whose shares also suffered heavy losses earlier this week, released a statement of its own, reiterating deposit guidance and noting, like PacWest, that it hasn’t experienced “unusual” outflows.

To reiterate my contention+ from Tuesday, this situation isn’t tenable. These are banks. Rampant speculation is conspiring with an unforgiving, around-the-clock news cycle to erode confidence, and social media is amplifying it. As Ackman put it (on social media, ironically), “confidence in a financial institution is built over decades and destroyed in days.”

The knives are out for these small lenders, and the large banks are fully aware of the self-fulfilling dynamics. They may step in and buy, but only after the banks fail, something Ackman was also keen to emphasize.

12 hours before the PacWest news, I wrote that assurances around the purported “end” of the regional banking crisis were beginning to sound like a new version of “subprime is contained.” I stand by that assessment, and I’d have to agree with Ackman: Either the US guarantees all deposits, or these dominoes will keep falling.