This comes up all the time in economics, whether you're buying a used car, buying life insurance, or even using a dating app. I touched on this a bit, but something very important to keep in mind in trading is the concept of adverse selection. Either way, it's not a great scenario to be caught long. Either big traders know something that small traders don't, or the big traders are bluffing to make money. Of course, it could be much ado about nothing, but there's big money changing hands right now in PacWest and other regional bank stocks.Social media makes bank runs faster and much more dangerous, so the very fact that this type of stuff can happen is a good reason not to own shares in a struggling bank. The problem, if you're long, is that these things can tend to be self-reinforcing. There's some possibility that false rumors are circulating this week about regional banks, either from short sellers or just random people on social media.This is a huge adverse selection problem! If you're buying PacWest here, there's a decent chance that the people on the other side of the trade know something you don't. However, it's something that someone like me at home in Texas is not going to know about until it's too late. This is compounded by the fact that there's a major conference going on in Beverly Hills right now at the Milken Institute - if big money traders are finding out about deposit withdrawals or other issues at the bank then it wouldn't be illegal insider trading to act on it, per se (as far as I know). This would explain why the stock began to fall on Monday - as this information gets more widely circulated the share price drop would accelerate. I don't know if this is true but it would make some sense. It's a possibility that a lot of customers of PacWest decided to pull their money out after seeing the news on First Republic's seizure.There are a few possibilities for what's going on that are worth acknowledging.
First Republic preferreds which were trading for 10-15 cents in the days before its closure. I'm showing the preferreds trading for 40-50 cents on the dollar here, vs. However, if you look at the preferred shares ( PACWP), there isn't nearly as much stress indicated as there was in First Republic. PacWest is widely acknowledged to be among the weaker regional banks due to deposit flight. It's not immediately clear why Pacific Western is falling so much and so quickly. Data by YCharts Why Is PacWest Suddenly Tanking? Also coming under significant pressure are regional banks such as Western Alliance ( WAL ), Metropolitan Bank Holding Corp ( MCB ), and HomeStreet Inc. The shares started to come under pressure yesterday, and the pressure has ramped up significantly today. It appeared the situation had stabilized, although the bank had lost significant deposits during the initial phase of the crisis in March. Pacific Western is about one-fourth of the size that First Republic was and reported earnings last week. As of my writing this, PacWest is down about 40%-50% over the last five days and is down about 70% year-to-date. JHVEPhoto/iStock Editorial via Getty ImagesĪfter the FDIC seizure and sale of San Francisco-based First Republic (FRC) over the weekend, the focus has now shifted to Beverly Hills-based PacWest ( NASDAQ: PACW), which is leading an unusual regional bank rout early this week.
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