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The sudden collapse of Silicon Valley Bank on Mar.ch10 caused the most serious crisis of confidence in banks since the Great Financial Crisis of 2008, which devastated the global economy and threatened to bring the financial system to its knees.
The Californian bank had bet on interest rates, by investing in high quality bonds. The problem was that SVB (SIVB) – Get Free Report bought these bonds and mortgage-backed securities when interest rates were low and did not protect itself in the event that rates rose. The bank simply did not hedge its risk.
When the Federal Reserve began raising interest rates from the second half of 2021, the bank’s bonds began to lose value. This problem coincided with the fact that SVB’s clients — mostly startups and venture capital firms — could no longer easily find cash to finance their operations and projects, as was the case during the pandemic, a period during which the federal government had printed money in large quantities.
These startups consequently started to dip into their deposits. SVB had no choice but to sell part of its bond portfolio and other securities to satisfy these withdrawal requests. As a result, the bank had to suffer a net loss of $1.8 billion during these sales and therefore needed to raise $2.25 billion to shore up its liquidity.
There have been multiple conversations between Biden’s team and Buffett in the past week, according to people familiar with the matter, who asked not to be identified because the information is private. The calls have centered around Buffett possibly investing in the US regional banking sector in some way, but the billionaire has also given advice and guidance more broadly about the current turmoil.
Rose Rambles... 