After the latest instability in the financial sector, headlined by the collapse of Silicon Valley Bank and Signature Bank as well as Credit Suisses forced sale to UBS, some investors were concerned that contagion could spread through the financial system like it did after the subprime mortgage crisis some 15 years ago. But now that the dust has settled, with regulators stepping in to backstop depositors and industry CEOs pointing the finger at a few black sheep lenders, most experts believe that banks recent issues were nothing like 2008, and the impact on the economy wont be nearly as severe.
Now, the billionaire investor Howard Marks is chiming in too, arguing Monday that while comparisons to the Global Financial Crisis (GFC) have been common in recent weeks, they just dont make sense.
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, the co-founder of the distressed debt asset manager Oaktree Capital Management explained in a Monday memo before highlighting four main differences between banks issues in 2008 and today.
Special case lenders
First, Marks noted that during the GFC, the problems that took down legendary financial institutions like Bear Stearns and Lehman Brothers were widespread, while the latest banking instability was largely caused by special case problem banks.
Silicon Valley Bank, for example, was particularly at risk of a bank run because its depositors were highly concentrated in the start-up space and largely uninsured. This meant that when the bank began to show signs of distress last month, the well-connected depositors were able to alert each other and pull billions from their accounts in record time.
SVBs management also took a risk that didnt pay off when it invested in bonds with long maturities after receiving an influx of deposits during the pandemic. When the Fed jacked up interest rates to counter inflation starting last year, the value of these bonds declined dramatically, leaving the lender with billions in unrealized loan losses.
The sum of the above rendered SVB particularly vulnerable to a bank run if adverse circumstances developed and they did. However, many of the above factors were peculiar to SVB, Marks said. Thus, I dont think SVBs failure suggests problems are widespread in the U.S. banking system.
This wasnt 2008s mortgage market insanity
Marks also explained that the main cause of the Global Financial Crisis was a glut of bad debt in the form of mortgage-backed securitiesbundles of home loans packaged together for investors to buy.
Investors and financial institutions experienced temporary insanity with respect to residential mortgages in the lead up to the GFC, according to the billionaire. They loaned money to unqualified borrowers who couldnt or wouldnt document income or assets, packaged those bad loans (called subprime mortgages) together with good loans to create investable mortgage-backed securities, and then used leverage to boost returns on the risky assets they created.
Looking at the current situation, I cant think of anything thats highly analogous to the subprime mortgages at the heart of the GFC, Marks wrote Monday, emphasizing that SVBs issues werent caused by bad mortgages like during the GFC, but instead by an uninsured and concentrated depositor base as well as not accounting for the impact of rising rates on their loan portfolio.
There are things here or there that have been over-hyped or are short on substance some people will point to SPACs or cryptocurrencies but theyre not as massive in scale, perhaps not as lacking in substance, and certainly not held on the balance sheets of Americas key financial institutions in amounts sufficient to endanger our financial system, he added.
A size issue
While the collapse of SVB and Signature Bank last month amounted to the second- and third-largest bank failures in U.S. history, Marks argued that the failures werent on the same scale as what was seen during the GFC.
SVB was just two-thirds the size of Washington Mutual (WaMu), which collapsed in 2008 and remains the largest bank to fail in U.S. history. Further, since the financial sector has expanded meaningfully in the last 15 years, WaMus $307 billion of assets in 2008 were much more significant than SVBs $209 billion today, he noted.
The billionaire also explained that some of the financial institutions that went bust during the GFC were systemically important, but he doesnt think that can be said of SVB due to its regional and industry specific depositor base.
The GFC affected some truly large banks household names and most people believed it was on the way to jeopardizing even bigger ones before the government stepped in. Theres no reason to think the failure of SVB poses the same risk.
New regulations for a new era
Finally, Marks highlighted regulators effective and efficient response to banks recent bout of instability, noting that they were able to step in and backstop depositors and inject liquidity into the financial system to prevent contagion.
Thus, I find it hard to believe that SVB or the like can set off a chain reaction sufficient to trigger an irreversible financial crisis, he said.
The billionaire added that regulations enacted after the GFC, including the Dodd-Frank Act which created the Financial Stability Oversight Council and the Consumer Financial Protection Bureau and established higher reserve requirements for banks, have made banks today much stronger than they were 15 years ago.
Thanks to the post-GFC rules, the major U.S. banks today are well capitalized and have significant liquidity and healthy balance sheets, he argued.
While the GFC took down 465 banks in the U.S., and hundreds more around the world, leaving millions out of work and on the streets worldwide, banks recent issues are unlikely to have such a dramatic impact on the financial system or the economy. But that doesnt mean they wont cause problems.
My sense is that the significance of the failure of SVB (and Signature Bank) is less that it portends additional bank failures and more that it may amplify preexisting wariness among investors and lenders, leading to further credit tightening and additional pain across a range of industries and sectors, Marks wrote.
