This is the year that bank stocks became meme stocks.
Shares of banks such as PacWest have seesawed wildly since March. Bad news, including lost deposits, has sent them spiraling. Good news, like hints of greater government support, has sent them soaring.
The sharp turns have been exaggerated by the same forces that turbocharged GameStop and AMC a couple of years ago: the lightning-fast spread on social media of both fact and rumor, strong interest from individual investors and the use of options and other tools that can amplify the impact of trades.
A near-record number of shares in regional banks has changed hands this month, and the number of options bets against the sector has exploded. Big Wall Street institutions and at-home individual investors alike are taking part, feeding on each other’s selling and buying.
Rookie traders are flooding social media with doomsday theories on the next bank that might fail. Others are loading up on bank stocks, speculating that there will soon be an epic jump in shares.
The result? A market that moves from calm to chaotic faster than ever. Social-media mentions, dailySource: Hootsuite
“The dominoes will continue to fall as the gravitational pull rips more banks into pieces,” one user wrote on a day PacWest stock dropped 11%.
Stock gyrations can be punishing for any company, but they can be fatal for banks, where confidence is currency. Although a plunging share price shouldn’t have any immediate effect on a bank’s ability to satisfy its financial obligations, it can drive depositors to withdraw their money, which does.
“You can create real panic,” said Cem Karsan, founder of Chicago-based investment firm Kai Volatility Advisors.
The economic effect, in turn, is potentially more serious. GameStop sells videogames. Banks make mortgages and business loans. For that reason, some in the banking industry have called for regulators to ban short sales of financial-company shares.
Karsan is a volatility trader, which means he doesn’t take bullish or bearish positions on stocks based on their fundamentals. Instead, he looks to profit from the stock market’s swings. This month, he started buying options that would profit if the explosive ups and downs in regional-bank shares continued.
Bank executives are fretting, worried that declines in their stocks will frighten off real-life customers.
At Western Alliance, another midsize bank that has been under a microscope, shares fell 47% in a single day right after Silicon Valley Bank collapsed in March—the largest one-day drop since shares began trading in 2005. Elevated options activity and thin trading before the opening bell were to blame, Chief Financial Officer Dale Gibbons said on a recent earnings call. That, in turn, made some customers pull their deposits, he said.
Gibbons said in an interview that when deposits began declining, the bank curtailed lending and began meeting with clients to reassure them about the bank’s finances. “They can’t rely on the stock to be a reliable indicator of a financial institution’s health,” he said, referring to the recent volatility.
In the case of Silicon Valley Bank, rising interest rates left the bank sitting on billions of dollars in potential losses at the end of last year. Customers tried to withdraw $42 billion in a single day, prompting regulators to close the bank.
In testimony before Congress last week, former CEO Greg Becker blamed social media for the deposit run.
The 2008 banking crisis wasn’t like this. At-home traders were around then, of course, as was social media. But market influencers and the general public didn’t have the same sort of online megaphone. Twitter was in its infancy. WallStreetBets, the popular Reddit forum, didn’t exist.
People back then rarely traded on their phones, and unlike today, they had to pay a few dollars each time they bought or sold something. Esoteric corners of the market, including options, were mostly out of reach for amateurs.
For PacWest, a midsize California lender with about 70 branches, the new market forces would collide in the first week of May.
The rumblings, though, had begun in the fall. The implosion of crypto exchange FTX had put some traders on alert about banks tied to cryptocurrencies, including Signature Bank. Rising bond yields threatened banks’ finances, and some analysts and investors started taking a closer look at their balance sheets.
Some traders felt sure something else in financial markets would go awry as the Federal Reserve kept raising interest rates.
PacWest shares dropped sharply when the market opened that Monday, March 13. After a frenetic trading session, they settled at $9.75, down 21% for the day. One week before, they had closed at $27.40. A PacWest spokesman declined to comment on the volatility.
Over the next several weeks, its shares swung up and down, jumping or falling by double-digit percentages on several days. On April 28, PacWest shares closed at $10.15. Then things got crazier.
Monday, May 1
Regulators seized First Republic Bank, a San Francisco-based regional bank known for its affluent clientele, which had been bleeding deposits for weeks. It was the second-biggest bank failure in U.S. history.
The Fed hoped traders would think the bank turmoil was over. They didn’t.
Daniel Betancourt, a 30-year-old pub owner in Pomona, Calif., used to bet on stocks rising, but now he was doing the opposite. Weeks before, he said, he had won big with wagers against Signature Bank.
Shares of many regional banks were slipping. Betancourt says he spotted some options activity tied to PacWest that he found odd, and suspected that a big institutional player might know something he didn’t. He scooped up put options tied to PacWest that would profit if the shares dropped to as low as $5. That day, PacWest shares fell 11% to $9.07.PacWest share price, daily movesSource: FactSetAs of May 23, 4:15 p.m. ET
Tuesday, May 2
Regional-bank stocks continued to fall. Mentions on social media tied to PacWest jumped more than 10-fold from the day before, according to social-media marketing platform Hootsuite. Some bloggers and trading enthusiasts on Twitter predicted that the bank would fail.
Short sellers continued betting against the shares. At the start of the year, about 4% of PacWest’s shares were being shorted, according to data-analytics company S3 Partners. In March and April, that shot as high as 21%, and it was now lingering in the high teens.
PacWest hadn’t disclosed anything noteworthy about changes in its business or finances over those 48 hours. The swoon in its share price threatened to dent its finances by triggering withdrawals. Its shares fell 28% to $6.55.
Wednesday, May 3
The Federal Reserve raised rates, and bank shares kept sliding.
Individual investors had been buying shares of PacWest all week, according to Vanda Research, hoping to get the stock on the cheap and ride it back up. But buying the dip wasn’t working—the shares kept falling.
Social-media mentions of PacWest kept rising, with nearly 42,000 posts referencing the bank on forums such as Twitter, Facebook and Reddit, according to Hootsuite. The Wednesday before, there had been fewer than 3,000.
“I came to kill the banks,” Betancourt said in an investing chat room that he hosts on Discord.
PacWest shares slipped another 2% to $6.42.
After the closing bell came a Bloomberg story that said PacWest was considering selling itself. Shares dropped more than 50% after hours.
PacWest tried to ease the tension, releasing a statement after midnight EST that said it hadn’t suffered any out-of-the-ordinary deposit flows, that it was proceeding with plans to boost its capital ratio and was talking with potential partners and investors.
“Tomorrow gonna be f— insane !!!!!!!!!!!!!!!!!!!!!” wrote one trader in Betancourt’s chat room.
Thursday, May 4
Betancourt could barely sleep that night, excited about cashing out his bearish trades. PacWest shares plummeted when markets opened, and he spotted his chance.
Put options trading in PacWest shares—the kinds of trades that would profit if the shares kept dropping—jumped to the highest level on record, according to Cboe Global Markets data since 2008. One options measure, which tracks the cost of insuring against the banks’ shares falling further, also hit a high, according to Cboe data going back to 2010.PacWest put volume, dailySource: Cboe Global Markets
The contracts Betancourt had bought were now worth around four times as much as he had paid for them, he said. His wife suspected something was up when he was at his computer at dawn.
In his Discord chat room, traders celebrated, exchanging screenshots of winning trades or memes of Leonardo DiCaprio from “The Wolf of Wall Street” and Steve Carell from “The Big Short.”
Betancourt and his wife, who had welcomed a baby girl in April, called his winnings “the college fund.”
Betancourt got to work again. “Just looking for another bank to go to zero,” he said.
PacWest depositors were unnerved. The bank later disclosed that customers yanked nearly 10% of deposits during the week, mostly on May 4 and 5.
PacWest shares fell 51% that Thursday to $3.17, their lowest close ever.
Truck driver Liam Brannigan, trying to rest before his early-morning shift, couldn’t sleep.
Friday, May 5
Brannigan, 40, had been keeping an eye on regional-bank stocks since mid-March, tracking YouTube videos and comments on Reddit between long shifts delivering vegetables to grocery stores in western Canada. He gradually accumulated shares of PacWest.Daily net buys of PacWest shares amongindividual investorsSource: Vanda Research
Thursday’s plunge didn’t make sense to him. He thought the stock was being unfairly targeted by short sellers, and he guessed that the shorts were big Wall Street firms. Brannigan also had noticed that PacWest executives had taken questions from analysts on their April earnings call, unlike First Republic’s leaders.
Brannigan was cruising along the highway in the dark near Victoria, British Columbia, early Friday when he decided to double down. He dumped all his other investments, he said, including pharmaceutical stocks and companies tied to artificial intelligence, and hit the buy button on his phone, which was mounted on the truck’s dashboard. He poured more than $1,000 into shares of PacWest around the time the market opened.
PacWest shares changed hands more than 135 million times that day, according to FactSet. On the average day in February, they traded about 1.4 million times.
Individual investors purchased a net of almost $5 million worth of PacWest shares that day, one of the highest levels on record, according to Vanda Research. PacWest shares jumped 82% to $5.76.
Brannigan is happy with his decision. “I got such a good deal on it,” he said. “They’re going to be around for years.”
The wild swings have continued. PacWest shares fell 21% the following week. They zoomed up 26% last week. Shares rose 20% on Monday, and another 8% Tuesday, closing at $7.38. The bank said Monday that it had entered an agreement to sell a portfolio of real-estate construction loans.
Traders are getting used to the big moves.
“When I first started doing this 20 years ago, a 3% to 5% move was like, ‘Holy cow,’ ” said R.J. Grant, head of equity trading at Keefe, Bruyette & Woods. “Now it’s like, ‘All right, what’s for lunch?’ ”