Famed financier Michael Milken has slammed lenders for repeating the financial mistakes of past crises and triggering the banking turmoil that has seen three banks fail within the space of two months.
In an interview with CNBC’s “Last Call” program on Tuesday, Milken, a famed investor and the founder of economic think tank the Milken Institute, argued that America’s recent banking failures had been brought about by basic strategy errors.
“You shouldn’t have borrowed short and lent long—Finance 101,” he said. “How many times, how many decades are we going to learn this lesson of borrowing overnight and lending long?”
This was a mistake that was seen in 1970s, the 1980s and the 1990s, Milken added.
The collapse of regional lender First Republic this week marked the third American bank failure since March and the second biggest in U.S. history. Regulators seized First Republic on Monday and sold the majority of its assets to JPMorgan after customers worried about the struggling bank’s financial health withdrew more than $100 billion.
Its demise came after the failures of Silicon Valley Bank and Signature Bank, with the banks’ collapses hastened by the Federal Reserve raising interest rates, which dented the value of investments the lenders had made in assets like long-term bonds and left them with billions of dollars in unrealized losses.
Unlike past banking failures, however, this year’s crisis was exacerbated by social media, which helped to fuel bank runs.
Milken—who became known as the Junk Bond King in the 1980s before serving two years in prison after pleading guilty to fraud charges, of which he was later pardoned by former President Donald Trump—suggested in Tuesday’s interview that the failed banks should have been able to protect themselves but made poor financial decisions that ultimately made this impossible.
“The banks have enough credit, they had enough equity, they had enough ability to absorb credit losses that are coming,” he told CNBC. “However, what they did is they doubled, tripled, quadrupled their size by borrowing overnight at artificially low rates, and buying intermediate securities.”
Despite the turbulence in the banking sector, Milken argued that America’s biggest lenders had taken a more appropriate approach to managing the Fed’s year-long rate hiking cycle.
“We should take into consideration that our major banks...have exercised extreme caution on liability and asset management,” he said.
Some optimism
In a separate interview with Yahoo Finance on Tuesday, Milken expressed optimism over the state of the U.S. banking sector.
“This is not the 1980s, it's not the 1970s, it's not the Great Financial Crisis,” he told the outlet at the 2023 Milken Institute Global Conference.
However, he said again that banks needed to rethink their investment strategies.
“It's a lesson again that we need to match those that buy long-term assets with those that have long-term liabilities like pension funds, insurance companies,” he told Yahoo. “And that our financial institutions cannot run a mismatched book of short-term liabilities and long-term assets.”
