Just as one shouldn’t shout "fire" in a crowded theater, one shouldn’t
shout "run on the bank" in an analyst’s report. If you do that, as
Citigroup’s Prashant
Bhatia notoriously did in his report on E*Trade, you risk your report turning
into a self-fulfilling
prophecy. After all, no bank is immune to a bank run.
At the same time, however, I think it’s rash to simply blame Bhatia and call
him "irresponsible" for publishing what was actually a pretty sober
piece of analysis. The key datapoint: half of E*Trade’s deposits, or $15
billion, are in accounts that contain more than $100,000, and are therefore
not insured by the FDIC. If I was an E*Trade depositor, and I had more than
$100,000 in the bank, and I saw that E*Trade was announcing subprime write-downs
of unknown size, then I wouldn’t need Prashant Bhatia to tell me to
move my money somewhere a little bit safer.
If I were E*Trade, then, I wouldn’t be running around shooting the messenger,
I would be running around spending as much money as it took to buy private insurance
on all of my deposits over and above the FDIC cap. Either that, or I would be
simply trying to sell myself to someone rather better-capitalized.
As for Bhatia, he called it right. There are a million different things which
can cause a bank run, and analysts’ reports are hardly top of the list. What’s
more, for the time being there’s still no evidence of any bank run at all. Although
that might change tomorrow, when depositors start seeing the headlines. Even
then, however, the proximate cause of the bank run would be the drop in the
share price, not Bhatia’s report per se. As we’ve seen with shares
from Crocs to Sotheby’s, there’s no shortage of stocks which turn out to be
just waiting for an excuse to crater. E*Trade turned out to be one of them,
and that’s not Bhatia’s fault.