Michael Milken says the latest crisis is the same mistake banks made decades ago

Michael Milken, President of the Milken Institute, speaks during the Milken Institute’s Global Conference in Beverly Hills, Calif., on May 2, 2022. (Photo by Patrick T Fallon/AFP) (Photo by Patrick T Fallon/AFP via Getty Images)

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Famed investor Michael Milken said Tuesday that the current banking crisis stemmed from a classic asset-liability mismatch that has happened miserably over and over in history.

“You didn’t have to borrow short and lend so long… Finance 101,” Milken said on CNBC’s “Last Call.” “How often and how many decades are we going to learn from this lesson of overnight borrowing and long lending? Whether it’s the 70’s, the 80’s, the 90’s.”

“Here again, the banks have enough credit, they have enough equity, they have enough capacity to absorb the credit losses coming in. However, what they did is they doubled, tripled, quadrupled by borrowing between Overnight at artificially low rates, and buying intermediary securities,” Milken said in the rare commentary on financial markets by the junk bond creator.

Earlier this week, First Republic became the third failure of a US bank since March and the largest bank collapse since the 2008 financial crisis. The bank suffered deposit flight as its long-term assets plunged in market value after a series of interest rate increases, raising concerns about losses. Unrealized in the balance sheet.

The founder of the Milken Institute believes that there will be a decrease in the proportion of loans held by the banking system in the aftermath of the crisis.

“We will be stronger when they pass into the hands of … pension funds that have long-term obligations,” Milken said. “People focus a lot on credit risk, et cetera, but one of the biggest risks is interest rate risk.”

In the wake of these bank failures, investors punished other lenders with similar characteristics. The companies with the highest percentage of uninsured deposits and potentially dangerous bond losses on their balance sheets were the most scrutinized.

Sure enough, the 76-year-old investor admitted that the largest banks in the US have in fact shown conservative risk management amid the rapid increase in interest rates.

“It’s not like there isn’t a lot of liquidity in this country… We also have to bear in mind that our big banks… have been very careful about liability and asset management,” Milken said.

Milken was the junk bond king of the 1980s and pioneered leveraged buyouts. In 1990, he pleaded guilty to securities fraud and tax violations, and was later pardoned by President Donald Trump in 2020.