Michael Milken said on CNBC’s “Last Call” that “You shouldn’t have borrowed short and lent long… Finance 101.”
“How many times, how many decades are we going to learn this lesson of borrowing overnight and lending long? Whether it was the 1970s, the 1980s, and the 1990s,” he added.
“Again here, the banks have enough credit, they have enough equity, and they have enough ability to absorb the credit losses that are coming. However, what they did is they doubled, tripled, and quadrupled their size by borrowing overnight at artificially low rates, and buying intermediate securities,” stated Milken, the pioneer of junk bonds, in his sporadic remarks on the financial markets.
Moreover, earlier this week, First Republic Bank became the third American bank to fail since March of this year and the biggest bank collapse since the 2008 financial crisis. The bank suffered a deposit flight as its long-term assets downshifted in market value after a series of rate hikes, triggering concerns about unexpected losses on the balance sheet.
Further, Michael Milken, founder of the Milken Institute, believes that there will be a decline in the percentage of loans that are obtained by banking systems in the fallout of the dilemma.
“We will be stronger as they move 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 great risks is interest rate risk,” he added.
Investors have penalised other lenders that have identical components after these bank failures. Whereas, companies with the highest percentage of unindemnified deposits and potential acute bond losses on their balance sheets were certainly inspected.
To be sure, the 76-year-old investor admitted that the top banks in the United States had practised prudent risk management despite the quick rise in interest rates.
“It’s not like there isn’t a great deal of liquidity in this country….We should also take into consideration that our major banks… have exercised extreme caution on liability and asset management,” Milken stated.
Milken, being the king of junk bonds in the 1980s, developed leveraged buyouts. In 1990, he pleaded guilty to securities fraud and tax violations and was later absolved in 2020 by President Donald Trump.
- Published By Team Genuine Reporter