According to recent reports, Warren Buffett — the Oracle of Omaha himself — has begun advising President Joe Biden on the brewing banking crisis. This has ignited rumors of an impending bank bailout akin to the 2008 financial crisis.
Per a Bloomberg report, the billionaire has already had multiple meetings with the Biden Administration on the regional banking failures. According to anonymous sources familiar with the matter, the calls have focused on the possibility of Buffett investing in the regional banking sector. Buffett has also provided general guidance on how to handle the situation.
If you recall, this isn’t Buffett’s first rodeo. In fact, the Berkshire Hathaway (NYSE:BRK-A, NYSE:BKR-B) founder has stepped in several times to assist the U.S. government with various banking concerns.
Buffett famously offered $5 billion to Goldman Sachs (NYSE:GS) in 2008 in order to stabilize the bank in the wake of the Lehman Brothers collapse. In 2011, he also floated Bank of America (NYSE:BAC) a $5 billion cash injection when the bank stumbled in the face of failing subprime mortgages. This proved to be a major money maker for Berkshire. As part of the deal, the company earned the right to purchase 700 million common shares of BofA, which — when they executed the deal in 2017 — netted the company a tidy $12 billion windfall.
Now, Biden is in the middle of a political quandary, tasked with navigating an increasingly uncertain banking situation while trying to avoid bailing out banks on the tax payer’s dime. With less than two years out from the next election, he’s also attempting to balance stubborn inflation and growing recession fears.
What do you need to know about the current banking situation?
Banking Crisis Shows Shades of 2008 Amidst Indirect Bailouts
Last week, U.S. regulators announced they would take surprisingly strong measures to protect businesses and individuals with financial exposure to the regional banking failures. Indeed, the Treasury is currently investigating the possibility of raising its insurance cap to cover deposits beyond the current $250,000 limit. That’s a move several bank coalitions have already voiced support for.
White House spokesman Michael Kikukawa said the following about the situation:
“We will use the tools we have to support community banks […] Since our administration and the regulators took decisive action last weekend, we have seen deposits stabilize at regional banks throughout the country and, in some cases, outflows have modestly reversed.”
Of course, raising the Federal Deposit Insurance (FDIC) insurance cap will likely face some dissent from Republicans. As such, the Treasury is exploring whether it has the emergency authority to raise the FDIC limit without Congressional approval. The House Freedom Caucus said on Monday:
“Any universal guarantee on all bank deposits, whether implicit or explicit, enshrines a dangerous precedent that simply encourages future irresponsible behavior to be paid for by those not involved who followed the rules.”
Last week, the Treasury Department, Federal Reserve and FDIC also announced they would insure all deposits at the now-defunct Silicon Valley Bank of SVB Financial (NASDAQ:SIVB) and Signature Bank (NASDAQ:SBNY). President Biden later pointed out that federal banking fees would likely pay for the move, taking the onus off tax payers.
Currently, several other regional banks are still under duress. These include First Republic (NYSE:FRC), PacWest (NASDAQ:PACW) and Western Alliance (NYSE:WAL). Tens of billions have been withdrawn from the mid-sized banks in recent weeks, with the likes of JPMorgan (NYSE:JPM) and other larger financial institutions stepping in to hoist up the banking system.
Is This the Same as 2008?
Despite the similarities, this isn’t 2008. Back then, banks were caught making risky bets in an unproven housing market. These bets ended up deteriorating their liquidity to the point of wider collapse.
Currently, the issue isn’t really that banks are failing, but rather that confidence in banks has slipped. Depositors have essentially manufactured a bank run. This has inadvertently led to a liquidity crisis, as is the nature of the fractional banking system.
Unlike 2008, most major banks are doing fine. Some are even enjoying a surge of deposits, attributable to depositors transferring their funds from regional banks to larger financial institutions.
“This is different from 2008,” said Treasury Secretary Janet Yellen on Tuesday, “2008 was a solvency crisis; rather what we’re seeing are contagious bank runs.”
That isn’t to say there’s no risk of greater financial ruin. Per a BofA monthly survey of fund managers, investor perception of market risk has reached levels last seen amid the Great Recession. Additionally, concerns over a “systemic credit event” skyrocketed last month.
Heading into the next rate hike decision Wednesday, the question remains whether the Fed will stay the course with its tightening agenda. Just weeks ago, analysts theorized that Fed Chair Jerome Powell may opt for a hefty 50 basis point hike. Now, in the face of the brewing banking crisis, most experts expect either a 25 basis point increase or no change at all. Tesla (NASDAQ:TSLA) CEO Elon Musk even believes the Fed should lower rates by 50 points.
“The Fed is facing a difficult task on Wednesday, but it is likely already past the point of no return – a soft landing now looks unlikely, with the airplane in a tailspin (lack of market confidence) and engines about to turn off (bank lending),” said JPMorgan analysts on Monday.
On the date of publication, Shrey Dua did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
