Buffett Says More Bank Runs Would Have Occurred Without Government Guarantee

Warren Buffett, the Oracle of Omaha, said Saturday that the decision to protect customer deposits during the March banking crisis averted further bank runs.

“It would have been a disaster,” he said, had federal regulators not intervened.

do not miss: Charlie Munger warns of “bad” commercial mortgages at banks

Buffett, CEO of Berkshire Hathaway, said the support of the Silicon Valley bank and signature bank by the federal government in March was necessary to avoid more customers withdrawing their money. (BRK.A) – Get a free reportduring the annual meeting of conglomerate shareholders in Omaha, Neb.

The FDIC stepped in when SVB Bank and Signature Bank collapsed and made depositors whole by insuring 100% of their deposits, which is more than the current limit. The FDIC insures $250,000 per account.

I can’t imagine anyone in the administration, Congress, or the Federal Reserve. . . “I’d love to be the one on TV tomorrow and explain to the American public why we only have $250,000 insured,” Buffett said. “It will start running on every bank.”

He said the decision to protect depositors was “inevitable”.

Buffett, 92, said he sold bank shares in 2020 and over the past six months, but gave no details.

Berkshire Hathaway chairman Buffett said he expected questions about the banking system and placed a sign saying “available for sale” in front of him and “held to maturity” next to Charlie Munger, 99, the conglomerate’s vice chairman.

While Buffett did not discuss whether to acquire more bank stock or step in to provide liquidity as he did during the Great Recession, he did say that Berkshire has $128 billion in cash and Treasury bills.

“We want to be there if the banking system temporarily malfunctions in some way. It shouldn’t, I don’t think it will, but I think it could,” he said.

He said in April that he sold his stakes in some banks because their CEOs made “stupid” risky decisions and relied on accounting that would improve their profits, in a statement.CNBC interview.

Management of First Republic Bank in California, which was acquired on May 1 at the last moment by JPMorgan Chase (JPM) – Get a free reportThey, along with its managers, should get “punishment” for causing its collapse, Buffett said.

The FRB has also been seized by federal regulators and is the biggest bank failure since 2008.

He said customers with deposits in US banks should feel reassured that their money will be protected.

“The message was very bad,” Buffett said. “You shouldn’t have so many people misunderstanding the fact … that the FDIC and the US government have no interest in a bank failing and deposits actually being lost by people.”

Berkshire Hathaway’s long investment in banks

Buffett has been a big fan of owning bank stocks for decades, even bailing them out during the financial crisis in 2008.

The billionaire avoided investing in regional banks and stuck to the big banks with assets worth trillions of dollars.

Buffett and his group have backed them through past financial troubles, including a $5 billion investment in Goldman Sachs (p) – Get a free reportduring the financial crisis. In 2011, Berkshire made a $5 billion bet in Bank of America BAC.

Buffett loves banks because “their core banking business is a very simple business model,” Robert Johnson, a professor at Creighton University’s Heider School of Business, previously told TheStreet.

“You pay x% for deposits and lend at y%,” he said. “Banks are a core business, and if you stick to the core business of lending money, it’s a profitable business in the long run.”

Known as a value investor, Johnson said he was drawn to banks based on valuation.

“They have historically been valued at lower price-to-earnings ratios than the market as a whole, yet they are able to offer attractive rates of return on capital,” he said.

Will Buffett keep his bank shares?

Johnson said Buffett was unlikely to give up any of his existing banking holdings.

“I would be surprised to see Berkshire Hathaway’s holdings lower in light of recent events,” he said. Buffett famously said: Be greedy when others are fearful and fearful when others are greedy.

Berkshire currently owns 1 billion shares of Bank of America and has diversified its existing portfolio.

Whether Buffett thinks Bank of America is a good bet remains unknown. He can buy more shares since the industry valuation has been affected recently. The bank’s shares have fallen 19.13% over the past six months, making it a victim of the contagion caused by recent banking meltdowns.

tech giant Apple (AAPL) – Get a free reportIt’s become a big player in its holdings and now accounts for 44% of Berkshire Hathaway’s marketable stock portfolio.

“The percentage of financial stocks in Berkshire’s negotiable portfolio has declined over time,” Johnson said. “It’s attributable to Apple’s position. Apple is such an extraordinary business that Buffett and his associates have such a high conviction to invest.”

But Buffett wasn’t afraid to give away some of his banking holdings. In the past, he sold shares in JPMorgan Chase, Goldman Sachs Group, and Wells Fargo and also reduced his stake in Bank of New York Mellon. (BK) – Get a free reportand US Bancorp (USB) – Get a free reportin 2022.

Buffett has stuck to his investment strategy for many decades and won’t “empty out his bank stocks,” Anthony Chan, a former JPMorgan Chase & Co economist, previously told TheStreet.

“If the price was right,” he said, “I would never write off Warren Buffett, who is famous for bailing out troubled financial institutions.” “In 2008, he boldly invested $5 billion and achieved an astonishing $3.1 billion return!”

In 1962, Buffett invested in American Express (AXP) – Get a free report. He is currently the company’s largest shareholder and owns 20% of its shares, according to FactSet data. His stake was valued at $22 billion at the end of 2022. Berkshire paid $1.3 billion for its stake in the financial services company and received $302 million in annual profits from American Express, Buffett discussed in his annual letter in February.

Munger says commercial real estate loans are ‘bad’

Munger said commercial real estate loans held by US banks are problematic because many of them would be considered “bad loans” due to the declining real estate value.

He told the newspaper that banks in the United States are “full” of mortgages, which he considers “bad loans”. financial times.

“Berkshire has done some investment banking that has worked very well for us,” Munger said. We’ve had some disappointment in the banks as well. It’s not very easy to run a bank smartly, there are too many temptations to do the wrong thing.”

While Berkshire has been a longtime investor in insurance companies, neither Munger nor Buffett like the volatility that stems from loans in commercial real estate. The decline in real estate values ​​may not see a turnaround soon, especially in office buildings as well as shopping centers as parts of the workforce continue to work remotely.

“A lot of real estate isn’t good anymore,” he said. “We have a lot of distressed office buildings, a lot of distressed malls, and a lot of other distressed real estate. There is a lot of doom out there.”

Some banks have already begun to reduce the risk by approving lower commercial real estate loans that developers have requested.

“Every bank in the country is much more aggressive about mortgages today than they were six months ago,” Munger said. “They all seem like a lot of trouble.”