Monday, March 20, 2023

Warren Buffett in Contact With Biden Team on Banking Crisis; Bankers flying to Omaha; Venture Catastrophists; What Gets Lost When You Rescue Markets; Forbes Fails

By Whitney Tilson

1) It's not surprising that the government is reaching out to Warren Buffett: Warren Buffett in Contact With Biden Team on Banking Crisis. Excerpt:

Berkshire Hathaway's Warren Buffett has been in touch with senior officials in President Joe Biden's administration in recent days as the regional banking crisis unfolds.

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 U.S. regional banking sector in some way, but the billionaire has also given advice and guidance more broadly about the current turmoil.

Buffett has a long history of stepping in to aid banks in crisis, leveraging his cult investing status and financial heft to restore confidence in ailing firms. Bank of America won a capital injection from Buffett in 2011 after its stock plunged amid losses tied to subprime mortgages. Buffett also tossed a $5 billion lifeline to Goldman Sachs in 2008 to shore up the bank following Lehman Brothers' collapse.

2) It's not just the government, of course...

As this tweet highlights, banks aren't just calling Buffett – they're flying to Omaha to grovel at his feet:

As a longtime fan of Buffett and Berkshire Hathaway (BRK-B) – an open recommendation in our flagship newsletters, Empire Stock Investor and Empire Investment Report – I hope Buffett is able to put some of his massive cash hoard to work here!

3) Here's NYU marketing professor Scott Galloway with his usual spot-on take on things: Venture Catastrophists. Excerpt:

While they were working over the weekend to ring-fence the contagion and make SVB's depositors whole, a new species of venture capitalist was born on Twitter: the Venture Catastrophist. The fear mongering's stated intention was to drum up support for a federal bailout of SVB depositors – many of whom were the Catastrophists themselves.

There are no libertarians in foxholes.

After SVB

In the immediate aftermath, observers are doing what they do after a complex catastrophe – cherry-picking the proximate cause that suits their politics and priors. It wasn't rising interest rates, poor risk management, the concentration of the depositor base, or Venture Catastrophists on social media. It was all of it.

A more interesting question: What could have prevented the collapse? What is obvious is there does not appear to be a J.P. Morgan figure in the Valley with the leadership, citizenship, and sense of sacrifice to cauterize a contagion. There was, however, a group of venture capitalists working behind the scenes, quietly with our leaders, to figure out a solution. No all caps, no posing for the algorithms – just responsible people working around the clock because they saw themselves as part of the solution. Several hundred VC firms signed a letter committing to keeping their business with SVB, intended to make the asset more attractive to an acquirer.

More interesting than who signed the letter was who didn't. In sum, venture capital firms that have a vested interest in destabilizing the banking system and the dollar, via crypto investments, have morphed from Americans to agents of chaos. I believe Marc Andreessen or Peter Thiel could have stopped the run with one tweet. They chose not to. This week, on the other side of the country, big banks, including the one J.P. founded, are following in his footsteps, depositing $30 billion in First Republic, after close coordination with Treasury Secretary Yellen...

It's no surprise a community of increasingly atomized individuals chose survivalism over citizenship. Now, many Americans are disgusted with the backstopping, despite it being standard operating procedure, as they are wary of bailouts. More specifically, they are exhausted by a tech community that captures the upsides of risk but expects other Americans to bear the inevitable downsides.

Thanks to its ubiquitous apps – which create billions for management and investors but addict and depress our teens and make our discourse more coarse – the brand "Silicon Valley" has fallen farther faster than any brand other than "Musk." If the failed bank had been "First Bank of Iowa Agriculture," there would have been no reticence by the feds or public to backstop its depositors. Fortunately, the wisdom of prior generations to establish the FDIC and the steady hand of the U.S. Government has endured.

It comes down to this. What type of leader, business person, and (quite frankly) man do you want to be? When sh*t gets real, do you want to be the steady hand who stays calm and works with others, with purpose and skill, to figure out a solution? Or are you in the foxhole screaming, only giving your position away and making things worse? The real man here, the real American, is in Washington, and his name is Janet Yellen. The Venture Catastrophists are the other guys.

4) And here's the Wall Street Journal's Jason Zweig with some interesting history, including a brief interview with Charlie Munger: What Gets Lost When You Rescue Markets. Excerpt:

Central authorities aren't omniscient and omnipotent, and their efforts to wring risk out of the system may make it more dangerous, not less.

Even as rules have proliferated and bailouts multiplied, the U.S. stock market has suffered four crashes of least 20% since the year 2000.

The expectation that government authorities will rescue bankers and investors from their own reckless behavior may have become a self-fulfilling prophecy.

"The attempt to control risk by lowering interest rates reduces the cost of taking risk, and so ends up increasing the aggregate amount of risk in the system," says financial historian and investment strategist Edward Chancellor, author of The Price of Time, a history of interest rates.

"Over the past 25 years or so," he says, "each crisis has become more complex than the one that preceded it, each one has cost more in losses, each one has spread wider across industries and countries"...

The role of government as the markets' guardian angel has gotten a lot more complicated. Social media accelerates and amplifies fear, and smartphones are instantaneous ATMs. In a matter of seconds, alarmed depositors can – and did – pull their cash out of a bank besieged by rumor and fear.

Once regulators hold themselves out as the guarantors of stability in such a hair-trigger atmosphere, they have little choice but to intervene.

"Capitalism without failure is like religion without hell," Berkshire Hathaway Vice Chairman Charlie Munger has said, paraphrasing the late economist Allan Meltzer.

This week, however, Mr. Munger struck a much more serious tone when he told me: "I'd prefer to live in a world where nobody did anything undisciplined or stupid and so forth, but we don't live in that kind of a world. And therefore the decisions have to be made for the way the world is, not the way we'd like it to be."

He added: "The way the world is, the government had no alternative but to back all deposits. Or we would have had the biggest goddamn bunch of bank runs you ever saw."

5) Comedian Bill Maher had this hilarious spoof of the Forbes cover curse: Forbes Fails.

Best regards,

Whitney

P.S. I welcome your feedback at [email protected].