Buffett reaches out to help in US banks crisis

Just weeks ago, they were bit players in the giant US banking system. Now, a handful of regional lenders are at the heart of a crisis that’s shaken the country and engaged the likes of Warren Buffett and Jamie Dimon.

At the last tally in the rapidly evolving turmoil, one of the two collapsed lenders remained for sale while the fate of a third bank looked increasingly bleak. Billionaire investor Buffett was in touch with the Biden administration about potentially providing aid, while smaller banks and lawmakers demanded that the government offer more protection for customer deposits.

Berkshire Hathaway’s Warren Buffett has been in discussions with the Biden administration over the stability of US regional banks.Credit:Bloomberg

The continued upheaval — despite regulators’ efforts to contain it — came amid another wrenching moment in banking: UBS Group agreed buy Credit Suisse Group after a crisis of confidence at the stricken lender. While that deal ends a week of intense speculation over the Swiss bank’s fate, the prospects for America’s regional banks remain uncertain.

“This is going to be pretty bumpy going forward,” Mohamed El-Erian, chief economic adviser at Allianz and a Bloomberg opinion columnist, said. “People are doing something that probably is not rational but is totally understandable — they’re moving deposits. That dynamic isn’t going to stop overnight, neither are the losses that are being incurred.”

Depositors have been fleeing regional lenders following the collapse of SVB Financial Group’s Silicon Valley Bank, after it failed to raise capital amid huge losses on its debt investments. In one day alone, depositors attempted to pull $US42 billion ($63 billion). The bank collapsed into receivership the next day and the Federal Deposit Insurance Corp sought a sale.

On Sunday, Bloomberg reported the FDIC was moving toward a break-up solution for the lender after a second auction failed to line up a buyer. Bids are now due on Friday for the bridge bank — a sign the fast resolution regulators were pushing for isn’t imminent.

‘It’s more a crisis of confidence triggered by one or two banks, and that confidence just needs to be restored.’

The pain quickly had spread to other regional banks, prompting their shares to tumble. Moody’s Investors Service placed six regional banks on review for downgrade and cut the outlook for the entire US banking system to negative from stable, citing the runs on deposits.

Among them was First Republic Bank, which was downgraded by S&P Global Ratings for a second time on Sunday after being cut to junk just days ago, even after the bank received $US30 billion from eleven US banks to stave off a potential collapse.

The deal — the brainchild of US Treasury Secretary Janet Yellen and backed by JPMorgan Chase & Co chief executive officer Jamie Dimon — failed to quell investor concerns about its financial health.

“The biggest open question is First Republic, which suffered a run after being somewhat unfairly linked to Silicon Valley Bank and Signature Bank,” said Todd Baker, a senior fellow at Columbia University’s Richard Paul Richman Centre for Business, Law and Public Policy.

“I am expecting a private capital infusion or an M&A deal soon there so that the bank can hold onto primary banking relationships with its core base of wealth individuals and their businesses.”

The future of one troubled regional bank was resolved late Sunday: the FDIC announced that a subsidiary of New York Community Bancorp agreed to acquire key elements of New York-based Signature Bank, which was closed by state financial regulators a week ago and placed in FDIC receivership.

New York Community Bancorp’s Flagstar Bank will acquire “substantially all deposits and certain loan portfolios” from Signature, the FDIC said. Signature’s 40 branches will operate as Flagstar locations as of Monday.

Taking a page from the last financial crisis, the FDIC negotiated to get equity appreciation rights in New York Community Bancorp common stock that the agency said could ultimately be worth as much as $US300 million.

To assuage customers, US regulators unveiled extraordinary measures earlier this month, vowing to fully pay out uninsured deposits in the failed banks.

US Treasury Secretary Janet Yellen was the brainchild behind the First Republic Bank bailout.Credit:Bloomberg

A coalition of mid-size US banks asked federal regulators to extend FDIC insurance to all deposits for the next two years, arguing the guarantee was needed to avoid a wider run on the banks and stabilise the sector. On Sunday, Senator Elizabeth Warren, a longtime Wall Street critic, also said more US deposits should be covered by federal insurance.

The path to any across-the-board increase runs through a bitterly divided Congress. In contrast to Warren’s enthusiasm, key lawmakers like House Financial Services Committee chairman Patrick McHenry, have sounded a far more cautious tone.

There’s also mounting political pressure from small, community-focused lenders whose clients’ deposits are often under $US250,000.

Others argue that increasing the deposit insurance limit could help shore up confidence. “It’s more a crisis of confidence triggered by one or two banks, and that confidence just needs to be restored,” said Lawrence Baxter, a professor at Duke University School of Law.

The FDIC invoked what’s called a systemic-risk exception to insure the uninsured depositors at Silicon Valley Bank, which accounted for more than 90 per cent of its deposits — as well as Signature.

Also Sunday, the Federal Reserve and five other central banks announced co-ordinated action to boost liquidity in US dollar swap arrangements, the latest effort by policymakers to ease growing strains in the global financial system.

“Nobody wants to be systemic when it comes time for regulation, and everybody wants to be systemic when it comes time for bailouts,” said Aaron Klein, senior fellow at the Brookings Institution and formerly a deputy assistant secretary at the Treasury Department. “It’s difficult to know what the limits of the law are when in times of crises the boundaries are tested.”

Federal Reserve chair Jerome Powell and his colleagues will discuss the strength of US banks and the potential for a recession at a meeting on Tuesday.Credit:Bloomberg

The crisis has drawn Berkshire Hathaway’s Buffett into the fray. The investor — who has a long history of helping ailing lenders — has been in touch with senior officials in President Joe Biden’s administration in recent days as the regional banking crisis unfolded. The conversations have centred 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.

Complicating the issue is a two-day Fed meeting starting on Tuesday during which chair Jerome Powell and his colleagues will discuss the strength of US banks and the potential for a recession looming over head.

The Fed’s next move will be closely watched as recent bank failures are stirring memories of the 2008 financial crisis. Expectations have largely been shifting between the Fed delivering another quarter-point interest-rate rise or taking a pause in its year-long effort to raise rates and reduce inflation. As developments are changing rapidly, rate-rise expectations could shift yet again before Wednesday.

“This is a more difficult meeting,” said Derek Tang, an economist at LH Meyer/Monetary Policy Analytics, a Washington policy-analysis firm. “He doesn’t have two weeks to form a consensus. The consensus is a moving target.”

Bloomberg

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