NEW YORK (Realist English). Famed investor Michael Milken criticized creditors for repeating the financial mistakes of past crises, which provoked banking shocks, as a result of which three banks went bankrupt within two months. He believes that the current banking crisis stemmed from a classic asset-liability mismatch that has played out miserably time and again in history of the banking system.
“You shouldn’t have borrowed short and lent long… Finance 101,” Milken said on CNBC’s “Last Call.” “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 90s.”
To be sure, the 76-year-old investor acknowledged that the largest banks in the U.S. have in fact displayed conservative risk management amid the rapid increase 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.”
He believes that there will be a decrease in the percentage of loans that are owned by the banking system in the aftermath of the crisis.
“We will be stronger as they move into 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.”
Earlier this week, First Republic became the third failure of an American bank since March and the biggest bank collapse since the 2008 financial crisis.
The bank suffered a deposit flight as its long-term assets fell in market value after a series of rate hikes, triggering worries about unrealized losses on the balance sheet. US regulators closed the bank, selling the bulk of its assets, as well as JPMorgan deposits.