SVB Collapse: 'Big Short' Michael Burry Sees No Reason to Panic

The legendary investor who anticipated the 2008 financial crisis believes that the current panic is not necessary.

It is rare to see Michael Burry in the camp with those who believe that everything will be fine.

The 2008 financial crisis made Burry a legend and an example to follow in defiance of standard practices in finance.

The 2015 film "The Big Short" describes how the hedge fund manager, who had no particular expertise in finance and real estate, came to understand that the sector had become a sandcastle. Financiers and bankers had created exotic mortgage products issued to financially fragile households and borrowers with poor credit. 

Burry decided to bet that the subprime-mortgage market would collapse -- hence the name "Big Short." History proved him right, and the move made Burry something of a Wall Street oracle.  He embraced this role, judging by his Twitter handle, which is Cassandra B.C. For traders and risk takers, he is a kind of party spoiler. 

At the start of the year, when markets had rallied strongly in anticipation of a change in monetary policy or a cut in rates after cycles of increases, Burry had been a dissenting voice. He foresaw a difficult future for the markets and had warned that things were going to rock.

A few weeks later, he was again right as economic data prompted the Federal Reserve to warn that there was no monetary change on the horizon as inflation remained stubborn. In addition to this bad macroeconomic news, investors were caught up in fears of bank runs following the sudden collapse of Silicon Valley Bank and two other banks -- Silvergate and Signature Bank in New York. 

The Crisis Could Be Over 'Very Quickly'

SVB played a central role in the economy and startups. The bank had to close due to a bank run caused by its announcement that it would raise $2.25 billion to cover a net loss of $1.8 billion related to the impairment of its portfolio of bonds and other securities.

Since then, fears have spread throughout the banking sector, with investors fearing contagion. Some, like billionaire entrepreneur Elon Musk, even see similarities between the current banking crisis and the Great Depression.

After warning a few days ago that another major bank was going to collapse, Burry has completely changed his mind. The founder of Scion Asset Management believes that the current crisis does not present any real danger and that it can be resolved very quickly.

"This crisis could resolve very quickly," the famous investor posted on Twitter on March 14. "I am not seeing true danger here."

Twenty-four hours after this message, he has just posted another one.

"In October 1907, Knickerbocker Trust failed due to risky bets, sparking a panic, " Burry wrote on March 15, as bank stocks were falling in the US and in Europe. "Two others soon failed, and it spread. When a run began on a healthy Trust, J.P. Morgan made a stand. 3 weeks later the Panic resolved & markets bottomed."

The legendary investor then concluded that the regulators are the J.P. Morgan of today.

"A stand was made this past weekend," he said, referring to the emergency plan unveiled on March 12 by the Treasury Department, the Federal Reserve and the FDIC.

The Crisis of 1907

Burry sees no reason to panic and believes the current crisis is not as deep as some investors fear. It seems to indirectly call for a calm return.

The Federal Reserve and the Treasury Department unveiled, in a joint news release, a plan to avert disaster. In this plan, they indicated that all SVB depositors would receive their money back the next day and they guaranteed deposits in all banks for one year.  

The Fed also created a facility to lend money under very advantageous terms to commercial banks in order to avoid any liquidity crisis. 

The next day, President Joe Biden declared, "Americans can have confidence that the banking system is safe."

The banking crisis of 1907 that Burry evoked ended with the creation of the Fed, as a lender of last resort. The triggering event of that crisis was the decision of the Knickerbocker Trust Company -- a company specializing in the long-term management of the assets of individuals and companies -- not to honor its obligations. 

Numerous withdrawals of funds from banks lead to a drop in stock market.

Then, the domino effect was unstoppable as the smaller banks in New York had placed their reserves in other banks. The panic spread. A rescue plan, implemented using the equity of J.P. Morgan, made it possible to restore confidence in the financial system.

But, the crisis showed the U.S. banking system had a major vulnerability, and the need to centralize the issuance of money and the regulation of banks by a lender of last resort. 

As a result, the “Owen-Glass Federal Reserve Act” created the Fed.