Buffett on the regional bank crisis: 'Messed up' incentives and 'poor' communication
Warren Buffett vented his frustrations about the banking industry during Berkshire Hathaway’s annual meeting Saturday, blasting “messed up” incentives that allow executives to escape accountability for mistakes and “poor” communication to the American public about the safety of customer deposits.
The FDIC and the US government “have no interest in having a bank fail and have deposits actually lost by people,” Buffett said, adding that “poor” communication from politicians, agencies, and the press led to the public not appreciating this fact.
“The American public is probably as confused about banking as ever,” he said.
Buffett was ready for questions about banks posed by shareholders: When he received an inquiry on the subject during an afternoon session, he turned around two nameplates positioned in front of Buffett and his right-hand man Charlie Munger that referenced some of the recent challenges in a lighthearted way.
One nameplate was called “available for sale" and the other read “held to maturity.” These are accounting classifications that many banks, including Silicon Valley Bank, have been using to house underwater securities without counting them against earnings or regulatory capital.
Buffett also was ready with some strong views about bad behavior in the industry, citing “incentives in bank regulation” that are “so messed up.” (Buffett has a personal connection to these problems. His father, he said, lost his job in 1931 because of a bank run.)
“You have to have a punishment for people who do the wrong thing,” he said.
Buffett then discussed First Republic, the lender that was seized last Monday. JPMorgan Chase (JPM) purchased the bulk of its operations.
First Republic, Buffett said, offered jumbo mortgages at low fixed rates, sometimes for terms of 10 years. Those loans became a lot less valuable when interest rates rose.
“That is what First Republic was doing,” he said. “It was in plain sight. The world ignored it until it blew up.”
If a CEO gets a bank in trouble, he said, “the CEO and directors should suffer.” When that doesn't happen it “teaches the lesson that if you run a bank and screw it up, you are still a rich guy… that is not a good lesson to teach the people who are holding the economy of the world in their hands.”
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'You can have a run in a few seconds'
The Oracle of Omaha made it clear that he is still “cautious” about holding many bank stocks and that he has been reducing his exposure recently. One exception he cited was Bank of America (BAC), which remains one of Berkshire’s largest holdings.
The new industry danger, he said, is that there are no longer any guarantees customers won’t pull their money from banks and the ease of online banking means they can pull large amounts quickly. Silicon Valley Bank lost more than $40 billion in one day before it failed on March 10.
“You can have a run in a few seconds,” he said. That, he added later, “changes everything.”
The fall of Silicon Valley Bank on March 10 triggered panic across the financial system. In a bid to restore calm, US officials made the controversial decision to protect all depositors at the failed institution even if their accounts were above the $250,000 limit insured by the Federal Deposit Insurance Corporation.
If that had not happened, Buffet said, the result would have been "catastrophic."
Buffett also made it clear that he is ready for a worst-case scenario in this banking crisis, citing a cash hoard that is approaching $130 billion.
“We want to be there if the banking system temporarily even gets stalled,” he said. “It shouldn’t. I don’t think it will. But it could."
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