Guru watch

The failure of

Silicon Valley

Bank and Signature Bank isn’t likely to usher a run of major banking collapses, says Howard Marks,the co-founder of Oaktree, the world’s largest distressed debt investor. However, “it may amplify pre-existing wariness among investors and lenders, leading to further credit tightening and additional pain across a range of industries and sectors”.

While some analysts are drawing comparisons with the global financial crisis of 2007-2008, when a series of banks failed or required rescuing, “the similarities between 2008 and 2023 are limited to the mere fact that, in both instances, problems existed at a few financial institutions”. Back then, banks had “experienced temporary insanity with respect to residential mortgages”. They had assumed, based on history, that mortgages would never default in large numbers, and so they loaned vast amounts of money to subprime borrowers, built leveraged structured securities out of those subprime mortgages, and in many cases invested their own money into the riskiest part of the securities.

There is nothing similar to that in today’s situation. While cryptocurrencies and special purpose acquisition companies (Spacs) “have been over-hyped or are short on substance”, they are “not as massive in scale, perhaps not as lacking in substance, and certainly not held on the balance sheets of America’s key financial institutions in amounts sufficient to endanger our financial system”. Yet the problems still have the potential to shake things up, and the change in sentiment, alongside higher interest rates, should benefit opportunistic strategies. “When investors think things are flawless, optimism rides high and good buys can be hard to find.” But when the mood “swings in the direction of hopelessness”, then “bargain hunters and providers of capital will be holding the better cards”.