December 6, 2023

Milken Institute President Michael Milken speaks at the Milken Institute Global Conference on May 2, 2022 in Beverly Hills, California. (Photo: Patrick T. FALLON / AFP) (Photo: PATRICK T. FALLON/AFP via Getty Images )

Patrick T. Fallon | AFP | Getty Images

Prominent investor Michael Milken said on Tuesday that the current banking crisis stems from a typical asset-liability mismatch that has historically failed miserably.

“You shouldn’t be borrowing short and lending long … Finance 101,” Milken said on CNBC’s “Last Call.” “How many times and how many years do we have to learn the lesson of overnight lending vs. long-term lending? Whether it’s the 1970s , the 80s or the 90s.”

“Here, the banks have enough credit, they have enough equity, they have enough capacity to absorb the credit losses that are coming. Yet what they’re doing is borrowing overnight at artificially low rates, doubling the size, Triple, quadruple, and buy intermediate securities,” Milken said in a rare commentary on financial markets by the junk bond innovator.

Earlier this week, First Republic became the third U.S. bank failure since March and the largest bank failure since the 2008 financial crisis. The bank suffered deposit flight as the market value of its long-dated assets fell following a series of rate hikes, raising concerns about unrealized losses on its balance sheet.

The founder of the Milken Institute believes that after the crisis, the proportion of loans owned by the banking system will decline.

“We’re going to be stronger as they get into … pension funds that have long-term liabilities,” Milken said. “There’s so much focus on credit risk and so on, but one of the biggest risks is interest rate risk.”

After those banks collapsed, investors punished other lenders with similar characteristics. Companies with the highest proportion of uninsured deposits and potentially severe bond losses on their balance sheets received the most scrutiny.

To be sure, the 76-year-old investor acknowledged that the largest U.S. bank is actually displaying conservative risk management amid rapidly rising interest rates.

“It’s not like the country doesn’t have a lot of liquidity … we should also take into account that our major banks … are extremely prudent in their liabilities and asset management,” Milken said.

Milken was the king of junk bonds in 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.