Buffett and the Bank - Silicon Valley Bank, that is

Last Fri, Mar 10 two things happened:

1. Deadline day for our *free* summer Warren Buffett Reading Group*

I'm glad to say we got a lot of applications from great students. So many that we now have a waiting list (we are working to train more Harvard Business School alums /experienced executives so we can handle more students in the future).

2. And, oh yeah, Silicon Valley Bank failed

I spent most of the weekend dealing with both of these things – reviewing applications with my WBRG team, and talking to many CG members impacted by SVB.

There's a lot already written about why and how SVB failed. 

I'll just add this.

Two years ago in February of 2021, Warren Buffett warned that the bond market was "bleak" and that any investors in bonds were going to run into deep trouble.

[B]onds are not the place to be these days... Fixed-income investors worldwide...face a bleak future.

Shortly after that, Silicon Valley Bank made a *huge* wrong-way bet on, you guessed it, bonds. 

Now, to be fair, they had a real problem at SVB. During the pandemic, billions of dollars of new deposits from flush startups came pouring in.

For a bank, a deposit is a 'liability' and they need to find a way to turn it into an asset. 

Buffett also had billions of dollars he had to figure out what to do with (more than $100 billion actually – and much of that was also a 'liability' in the form of insurance float).

Buffett, however, decided that the risk of longer-term bonds was too high and so instead put the billions into short-term 3-month Treasury bills (with near zero interest rates). He did that so he would not run into trouble when interest rates went up.

This was a very difficult decision.

It meant he was giving up higher returns at that point – Treasury bonds were paying in the neighborhood of 1.64% while Treasury bills were paying something like .05% (Note: now T-bills are paying 4% -5% and Buffett is benefitting from the rise in interest rates).

As a result, Buffett got a lot of pressure in 2021 to "juice the returns", but he resisted it and implored others to resist it too.

Some ... may try to juice the pathetic returns now available by shifting their purchases [to bonds]....[but that is] not the answer to to inadequate interest rates.

Indeed, as SVB and the whole world has now discovered – that was definitely not the answer to low interest rates.

You can bet we'll be teaching "Buffett and the Bank" this summer.

Our main goal with the program is to help high school students discover they are capable of reading, understanding, and talking about challenging business ideas – and to create the space where they become motivated to keep learning more.

And maybe, just maybe, we hope our small efforts will help produce more future leaders who can have the courage to make the kind of hard decision that Buffett made two years ago. 

Best,

Phyl

P.S. If you have a high school student that would like to apply for summer 2024, then they can sign-up today to be notified when applications are ready.

P.P.S. Separately – on another topic – remember if you have a friend or colleague laid-off, then let them know that job searching is a four-letter word: Phyl.org. Our global volunteer community will get them into a *free* Job Search Council and provide lots of *free* training. Several thousand have signed up but we can handle a LOT more so send them our way!