According to reports, the eminent investor has been in touch with the White House on the banking industry’s confidence issue following the abrupt failure of Silicon Valley Bank.
Since the Great Financial Crisis of 2008, which decimated the world economy and put the financial system in danger of collapse, Silicon Valley Bank’s abrupt failure on March 10 has produced the worst crisis of faith in banks.
Silicon Valley Bank Problems
In order to hedge against rising interest rates, the Californian bank bought high-quality bonds. The issue was that SVB (SIVB) – Get Free Report did not protect itself in the event that interest rates climbed after purchasing these bonds and mortgage-backed securities at a time when they were low. Simply put, the bank didn’t manage its risk.
The bank’s bonds started to depreciate when the Federal Reserve started hiking interest rates in the second half of 2021. This issue occurred at the same time as SVB’s clients, particularly start-ups and venture capital firms, found it difficult to fund their operations and projects, unlike during the pandemic, when the federal government had created a lot of money.
As a result, many startups began to withdraw from their deposits. To fulfill these withdrawal demands, SVB was forced to liquidate a portion of its bond portfolio in addition to other instruments. In order to shore up its liquidity, the bank had to raise $2.25 billion by suffering a net loss of $1.8 billion during these sales.
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Warren Buffett And Joe Biden Talk
As per persons with knowledge of the situation who declined to be named because the information is confidential, there have been numerous conversations between Biden’s staff and Buffett over the course of the previous week.
The discussions have mainly focused on whether Buffett may participate in the US regional banking industry in some capacity, but the multimillionaire has also offered advice and direction on the current unrest in a broader sense.
Buffett has a long history of intervening to help banks in need, using his cult reputation as an investor and financial clout to boost the confidence of failing companies.
When Bank of America Corp.’s stock fell due to losses associated with subprime mortgages in 2011, Warren Buffett gave it a capital infusion. In 2008, in response to the failure of Lehman Brothers Holdings Inc., Buffett also threw a $5 billion lifeline to Goldman Sachs Group Inc.
Requests for a response from the White House and Berkshire Hathaway representatives were not immediately fulfilled. US Treasury Department representatives declined to comment.
US authorities promised to completely pay out uninsured savings in the collapsed banks as part of extraordinary measures to reassure consumers last weekend. This week, shares in regional banks fell even further on worries that the situation will get worse.
Biden’s staff has taken steps to coordinate backstops that don’t involve direct government spending from taxpayers, such as the acts of the Federal Reserve, in order to avoid political fallout.
This week, large US banks made a voluntary $30 billion deposit to support First Republic Bank, which regulators hailed as “very welcome.” Any investment or involvement from Buffett or other notables would follow the same strategy, trying to stop the crisis without offering outright bailouts.
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