Friday, March 17, 2023

There is no banking crisis; First Republic stock; I disagree with Bill Ackman; Krugman: Three and a Half Myths About the Bank Bailouts; America Needs Its Small Banks; What's REALLY happening in Ukraine

By Whitney Tilson

1) The banking "crisis" continues to dominate the headlines...

I use quotes around the word crisis because the contagion that's happening here is one of the most irrational things I've ever seen in the markets.


In total contrast to 2008, our banking system is strong, healthy, and well capitalized.

A tiny number of institutions – you can count them on one hand – had flaky deposits and mismanaged the duration and interest rate risk of their investments... and thus paid a steep price.


2) I don't think First Republic Bank (FRC) is one of those institutions, so I think its stock – which is cratering today – is one of the most interesting speculations I've seen in quite a while.

I use the word speculation rather than investment because a panic (no matter how irrational) could bankrupt it, so the outcome for the stock is likely to be bimodal – either a zero or a double in short order.

I think the odds of the latter rose sharply yesterday when 11 larger banks deposited $30 billion there. Here's the story behind this bold move: Inside the $30 billion rescue of First Republic Bank.

3) My college buddy Bill Ackman of Pershing Square has the opposite point of view, tweeting this last night:

I agree with his comments on First Republic... but I respectfully disagree that "[First Republic Bank] default risk is now being spread to our largest banks," that the $30 billion deposit injection "raised more questions than it answers," or that "we need a temporary systemwide deposit guarantee immediately."

4) Here's the New York Times' Paul Krugman with some insightful commentary: Three and a Half Myths About the Bank Bailouts. Excerpt:

A third criticism is the claim that the feds have now established the principle that all deposits are effectively insured without imposing correspondingly tighter regulation on what banks do with those deposits – creating an incentive for irresponsible risk taking. But policymakers explicitly didn't guarantee all deposits everywhere, and at least so far, we're seeing an outflow of funds from smaller banks to more tightly regulated large banks. You may not like this – whatever else you may say about big financial institutions, they aren't lovable. But on balance we seem to be seeing the financial system move toward reduced, not increased, risk taking.

Which brings me to the criticism I take seriously, although I think it's probably wrong: claims that the bank failures will undermine efforts to control inflation...

The fallout from banking problems has made a murky economic situation even murkier, and it will be a while – maybe forever – before we know whether policymakers made the right call. But I'm hearing a lot of apocalyptic rhetoric right now, none of which seems justified by the available facts.

5) This Wall Street Journal op-ed by my friends Kevin Greene and John Michaelson is spot on: America Needs Its Small Banks. Excerpt:

The recent events surrounding Silicon Valley Bank and Signature Bank have created unprecedented challenges for the health of community, midsize and regional banks. We are headed at an accelerating pace toward a European-style banking system dominated by a handful of very large, effectively government-guaranteed banks. This would amount to a fundamental shift in the American banking system that would undermine its support for small and midsize businesses and local communities.

This shift is in part due to a larger trend of bank consolidation over the past several decades, which has allowed the biggest banks to continue to grow even larger. But now there is a new threat: the potential of a rapid flight to safety of depositors who may seek refuge with the "too big to fail" banks, starving smaller ones of capital.

Large banks play an essential role in our financial system. They provide crucial services for major projects, international commerce, large companies, major investment institutions and large traders. But small businesses are the growth engine for the American economy – the drivers of job creation and innovation. Community and regional banks focus on the needs of these enterprises and keep them afloat in a tough economy. Community banks alone provided 30% of Paycheck Protection Program loans during the pandemic. According to the Independent Community Bankers of America, community banks make 60% of all small-business loans and more than 80% of farm loans. And great innovative companies start as small enterprises. The support of local banks is critical to supporting their growth.

The core of the U.S. banking system lies in community and regional banks that have strong relationships with their clients, serve a diverse array of customers and businesses, and are deeply invested in their communities. This is a stark contrast to the centralized banking system of Western Europe, which has contributed to economic stagnation and a lack of innovative small companies.

6) Following up on Wednesday's e-mail entitled "Why I think the Ukrainian tiger is about to devour the Russian bear – and the implications for stocks," the media continues to get the story about what's really happening in Ukraine almost completely wrong – in part because Ukraine wants it that way!

The latest stories that leave a highly misleading impression are this one in today's NYT, Ukraine Burns Through Ammunition in Bakhmut, Putting Future Fights at Risk, and this one from a couple of days ago in the Washington Post, Ukraine short of skilled troops and munitions as losses, pessimism grow.

Below is what I sent to my personal Ukraine e-mail list last night and this morning (to join it, simply send a blank e-mail to: [email protected])...

More gloom and doom, this time from the NYT today: Ukraine Burns Through Ammunition in Bakhmut, Putting Future Fights at Risk. Excerpt:

The Ukrainian military is firing thousands of artillery shells a day as it tries to hold the eastern city of Bakhmut, a pace that American and European officials say is unsustainable and could jeopardize a planned springtime campaign that they hope will prove decisive.

The bombardment has been so intense that the Pentagon raised concerns with Kyiv recently after several days of nonstop artillery firing, two U.S. officials said, highlighting the tension between Ukraine's decision to defend Bakhmut at all costs and its hopes for retaking territory in the spring. One of those officials said the Americans warned Ukraine against wasting ammunition at a key time.

With so much riding on a Ukrainian counteroffensive, the United States and Britain are preparing to ship thousands of NATO and Soviet-type artillery rounds and rockets to help shore up supplies for a coming Ukrainian offensive.

The Ukrainians must be thrilled that their disinformation campaign is working so well! It is very much in their interest to propagate the storyline that they are weak and Bakhmut is about to fall because it lures the Russians into: a) continuing to throw men and material into the charnel house that Bakhmut has become for them... and b) being unprepared for the coming offensive...

To be clear, the article is no doubt correct that Ukrainian forces are firing a lot of shells in Bakhmut and that they are short on ammunition.

But the reason they're firing so much is because there are so many Russian targets! It's not because, as the article implies, they're wasting ammunition in a desperate, foolish attempt to hold onto a strategically insignificant city.

My understanding is that the Ukrainians don't fire a single shell unless they have perfect intelligence via sight, drones, or U.S. satellites about a high-value target (they don't waste a shot, for example, on just one soldier). So the fact that they're firing a lot is good news – because it means that the Russians are continuing their rash assault, which is allowing the Ukrainians to decimate them.

So our response shouldn't be to criticize them for firing too many shells – it's to do everything in our power to get them more of them!

Also, keep in mind that, however short of ammo the Ukrainians are (with the full backing of NATO, which accounts for nearly half of the world's GDP), imagine what it must be like for Russia, which accounts for a mere 3%...

Turning to the recent Washington Post article, Ukraine short of skilled troops and munitions as losses, pessimism grow, which also contradicts my viewpoint that Ukraine is getting stronger every day, is inflicting disproportionate losses on the Russians, will be successful in pushing the Russians out of Ukraine once the counter-offensives starts, etc...

I sent it to a bunch of folks on the front lines – some literally in Bakhmut – and my overall view is that the article leaves a highly misleading impression (though a few paragraphs are exactly right).

Here are my friends' comments (note that Kupol was just relieved of his command):

  • "In general, the article seems too pessimistic. Kupol, Commander of the 46 Brigade, is trying to shift his own guilt about the Soledar situation to simple soldiers. It looks bad for him. He might be fired because it's his own failure that Soledar was taken without fighting. I know this situation, my battalion was standing nearby. Soledar was taken during a rotation of new soldiers – his mistake was not putting experienced officers to help the new soldiers. It is a lie that he has nobody with experience. Because of him we [are] having [a] bad situation in Bakhmut now.

"New soldiers are coming to the frontline constantly. In my battalion, we always have a lot of new ones. They join already formed teams and in a while they became experienced too. But only in Soledar did the Russians have success. Why? Because of a stupid commander. Sometimes it happens...

"I would say the Ukrainian army has taken huge losses during the year of war, but became stronger. Yes, we are losing some of our best people every day, but in their place come new leaders, who have strong motivation. From 10 commanders in my battalion (myself included), we lost six during the year of war. Yes, it's very painful and sad. But new commanders made my battalion better and stronger.

"We have the good fortune to have artillery, tanks, and heavy equipment. This war may take years, not months, but I know we [are] going to win for sure."

  • "I think this article could have been bought either by the Russian special services or Trump's election campaign. Not everything is as bad as they say. Much is exaggerated."
  • "I think the article is unfairly biased and not factual. In reality, Russian troops are being sent out with sticks and WW2-era rifles and getting annihilated. Clearly there have been many casualties in both sides, but I believe the current training, weapons, and support from the U.S., U.K., and western Europe are going to make a real dent and allow Ukraine to rip through Russian defenses."
  • "Lots of anonymous sources usually means bullsh*t, but the Ukrainian army is also hurting. Give them the F-16s!" 
  • "Yes I read it. It's odd. I believe it's driven by false intel. One day I read a report that the Russians are near victory on the Donetsk. The next day an article that Ukraine is standing strong and bleeding the Russians. Remember how our country went through the BS of Russian election interference but it never really proved out. Yet in a war I feel both sides want to get their story out there so both sides plant information and disinformation."
  • "Here's what I know for a fact. One year ago, Russia launched a full-scale invasion against Ukraine. Russia has failed to succeed. I believe Russia has thrown everything that they have at Ukraine and they continue to throw everything they can to [win] that war, yet Russia has not [been] able to prevail. Prigozin is now having open air, public disputes with Russian military leadership, and that tells me they have a serious problem with the weapons and the ammunition to maintain the war at the level that they have been. You have been around Ukraine and you've talked with dozens of people involved and you know what you heard there and what they told you. I would stick to believing the Ground Truth that I saw and learned and not the headlines. I questioned this article yesterday when I read it and I dismissed it as being influenced by misinformation." 
  • "Could you imagine if the United States got into a conflict with Texas and the federal government and the U.S. military invaded the state of Texas to take it over? And then imagine everyone was expecting that the U.S. military would sweep through to Houston and San Antonio and Dallas in a matter of weeks – yet a year later, the U.S. had failed to do anything except take 15% or 20% of the state? Such a circumstance would require all Americans to re-configure how we see ourselves, how we see our position in the world, how we see our ability to project power, and whether we could rank ourselves as a global power. I believe this is where Russia stands today. They will suffer a strategic loss. Russia has to face the reality they are only the 12th largest economy in the world. The only thing that makes them a superpower is an old arsenal of nuclear weapons. They simply are not a superpower that the Soviet Union was. And I question why they are even on the Security Council."
  • "I agree that this article is likely misinformation, or at least inspired by misinformation. My understanding is that [the] Ukrainian military do have some lack of skilled forces on the front right now... but not because they've been killed, but rather because they are in significant rotation through western training regimens. So it's decontextualized info that is then turned into a half-truth and printed. It ends up being a dance between competing narratives that each have intent behind them that may not fully line up with reality."

Finally, here's a fascinating in-depth interview with Stefan Korshak, Senior Defense Correspondent at Kyiv Post, who just returned from the front lines: March 14 – Day 384 – Your questions, and some road trip pix. His comments on the battlefield situation – whether Bakhmut will be overrun (no), the coming Ukrainian counterattack, the status of Russian forces, corruption (or lack thereof) in Ukraine, whether China will intervene to support Russia (unlikely), etc. – are very consistent with what I saw/heard. Excerpt:

Morale is overall good, I would say. As I gather, for most holding out is a given, the thing is, for a few who happen to be in the not-so-many holes or buildings the Russians have picked for the days attacks, you may run out of ammo, get Russian infantry inside your position, find out company or battalion can't give you fire support like you need it, or die. But most of the guys in a given day just hold their positions, or do their specialty job, whatever it is. Morale goes up when people hear Ukrainian guns outshooting the Russian ones....

My view is the Russians will have a whole lot of very bloody fighting ahead of them before they even manage to threaten Bakhmut's communications seriously, and if the weight of artillery I heard and observed over the weekend was any indicator of the general situation, the Ukrainians have artillery dominance around Bakhmut. Given sufficient shells and mortar rounds, there will be no danger, is how I see it...

I think two things have happened. First, somehow, the Russians are in a shell shortage and the Ukrainians have if not unlimited ammo then enough to go out and try and kill things on a regular basis. This plus Ukrainian drone advantage – the Russians admit this openly, they complain about it – means that the Ukrainian artillery over time has probably had more ability to hit priority targets the drones find, which without question include Russian artillery. I saw UAF artillery which by type and location almost certainly was doing counter-battery work. Whether or not the trend is significant, [I] don't know, but I do know when I was in the area the Ukrainian bangs seriously outnumbered the Russian bangs.

Key line: "In my opinion, there probably is not a well-trained Russian unit larger than a company in all Ukraine right now."

Again, to join my Ukraine e-mail list (roughly one e-mail per day), simply send a blank e-mail to: [email protected].

Best regards,


P.S. I welcome your feedback at [email protected].