Investors Made $7B Betting Against Biden Administration Fixing Bank Crisis

Investors profited more than $7 billion by betting against mid-sized banks following the Silicon Valley Bank (SVB) failure, signaling a lack of confidence in the Biden administration's ability to prevent future bank failures.

SVB, a mid-sized bank based in San Francisco, collapsed on March 10 as rising federal interest rates saw the value of the bank's assets drop, prompting wealthy depositors to withdraw their money. Its failure added new pressures to mid-sized regional banks, and others, including First Republic Bank, have failed in the weeks that followed.

Stock traders have made $7.4 billion from shorting stocks in mid-sized banks since SVB's collapse, according to a recent report from Semafor that cited data provider S3. That means they are essentially betting that the banking situation will worsen in the short term—an indication that the Biden administration has struggled to instill confidence in investors that they can prevent future financial turmoil.

Short selling is an investment strategy speculating on the decline of a stock price, according to Investopedia. Short sellers bet on and profit off of a "drop in a security's price."

Cristian Tiu, the chair of the Department of Finance and an associate professor of finance at the University at Buffalo, told Newsweek on Monday that short selling typically indicates that traders believe the stock of a company will drop in the short term.

Short selling does not necessarily mean the entire banking system is in a crisis, but it does signal that investors see a possibility for more bank failures in the near future, he said.

"It indicates that it's possible that in the short term, more banks might be in the position to fail in the sense that they see a run on them," he said. "When that happens, traders' sentiments become more negative and prices in the short-term decline."

While shorting is an "important indicator," Tiu said people who have deposits in these banks "don't need to panic" because shorting does not necessarily indicate a wider banking crisis—it indicates that some banks may see a drop in their equity prices, he said.

Newsweek reached out to the White House for comment.

Biden Reassures Banking System 'Safe'

Despite a lack of confidence from some investors, the Biden administration has sought to reassure the public that the banking system remains overall safe, saying during a press conference last week that regulators ensuring First Republic depositors are protected will "ensure that the banking system is safe and sound, and that includes protecting small businesses across the country who need to make payroll for their workers and their small businesses."

The Treasury Department has also said the banking system remains "sound and resilient" following First Republic's collapse.

Tiu said the Biden administration should focus on economic growth to instill more confidence in investors but agrees that the banking system at large is not in crisis despite issues affecting some medium-sized banks.

"What I'd like to see [the] administration do is just focusing on economic growth," he said. "I think more economic growth will solve quite a bit of the problems we have. I don't think cosmetic solutions do very much."