Howard Marks, the fabled distressed asset investor, has said the comparison between the recent collapse of Silicon Valley Bank (SVB) and a few others in the US to the banking sector's woes during the 2008 financial crisis is unwarranted.
In his latest memo to his clients, the co-founder of Oaktree Capital Management wrote that most problems that plagued SVB were peculiar to it and may not be applicable to the entire banking industry.
“I think the similarities between 2008 and 2023 are limited to the mere fact that, in both instances, problems existed at a few financial institutions,” said Marks. “I find the common elements mostly superficial.”
SVB, which catered mostly to startups and venture capitalists in the US, collapsed in March 2023 following a bank run within days that led to a liquidity crisis at the lender. This was followed by two more bank failures in the US and the forced sale of Credit Suisse to rival UBS in Switzerland.
Faulty bond purchases
“When looking at SVB’s demise, the decision-making behind its bond purchases stands out as particularly flawed and probably the primary cause of the bank’s failure,” Marks said.
Silicon Valley Bank collapse: Here's all you need to know
The 76-year-old was referring to the SVB management putting about half of its deposits in hold-till-maturity bonds having “pitifully” low yields. The management assumed that interest rates would hold steady or fall. The bond purchases took place in 2020 and 2021. In that two-year period, the yield on the 30-year treasury ranged between 0.99 percent and 2.45 percent.
“How could anyone have thought rates that low were more likely to hold steady or fall than rise?” said Marks. “When the Fed and Treasury flooded the economy with cash in 2020 and inflation began to rise in 2021, the one thing that should have been obvious was that there was no good reason to hold long-dated bonds at pitifully low yields, which presented profound risk and miniscule potential for return.”
Among other reasons that Marks said hurt SVB were highly concentrated business, more deposits and low demand for credit and a rapid pace of interest rate hikes that caught the management off guard.
Drawing a contrast to the 2008 crisis, Marks also blamed social media for the run on SVB. He said it took several days or weeks in 2008 for problems in some of the banks to reach the masses and thus the management and regulators had time to prepare. However, given the fact that most customers of SVB were tech-savvy and belonged to a tight-knit community, they could exchange information almost instantaneously through social media.
Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
