- The Federal Reserve should have seen the regional banking turmoil coming, according to Carson Block.
- "The risks were right under the noses of the Fed," the famed short-seller told Bloomberg Thursday.
- Years of low interest-rates created "powder kegs of leverage", the Muddy Waters founder added.
The Federal Reserve fueled the turmoil at US regional banks by keeping borrowing costs low for years — and it should've seen the collapse of SVB Financial and other lenders coming, according to famed short-seller Carson Block.
"These risks were right under the noses of the Federal Reserve Board of Governors and the FOMC committee members," the Muddy Waters Research founder told Bloomberg TV on Thursday.
"I mean, this wasn't something that was far afield, where in hindsight you'd say that would have been hard for them to foresee."
"That's what happens when you create these bigger and bigger powder kegs of leverage," he added, referring to banks taking advantage of low interest rates to cheaply borrow money and then invest it.
Regional bank stocks like First Republic and Western Alliance have plummeted in recent weeks, as markets reeled after the collapse of SVB, Signature, and Silvergate Capital earlier in March.
The banks' struggles come after the Fed raised interest rates from near-zero to around 5% in the space of a year to fight inflation. That has driven stocks and bonds to plummet, which fueled the implosion of high-profile companies like FTX and SVB.
The central bank's aggressive hikes followed more than a decade of low borrowing costs in the aftermath of the financial crisis. That encouraged lenders to take unnecessary risks and enabled them to use leverage to hide problems on their balance sheets, according to Block.
"When you look back in hindsight, these problems were there in plain sight," he told Bloomberg.
"Obviously what's happened is you've had the Fed hiking interest rates quite quickly and you've had a lack of risk management by many of these banks."
"What I think this speaks to — and this has been the bane of short-sellers since the financial crisis — is all of the leverage that has been created and all the money that's been pumped into financial markets in order to just keep the system going," Block added.