Investment News 09-05-2023 00:22 27 Views

Warren Buffett says bank runs would have been ‘catastrophic’ without government intervention

Warren Buffett, chairman and CEO of Berkshire Hathaway, praised the government’s intervention in recent bank failures, saying on Saturday it averted what could have become an even bigger crisis.

Yet he said the U.S. banking system had become overly complicated — and that he was not surprised that the banks had failed. He said he’d been selling bank stocks, first at the start of the pandemic and more recently over the past six months as banks increasingly face mismanagement and respond to bad incentives.

‘The American public doesn’t understand their banking system — and some people in Congress don’t understand it anymore than I understand it,’ Buffett said.

Speaking during the company’s annual shareholders meeting in Omaha, Nebraska, about the failure of Silicon Valley Bank, Buffett said he thought the government did the right thing in stepping in to guarantee bank deposits above the Federal Deposit Insurance Corporation guarantee of $250,000.

“It would have been catastrophic,” Buffett said of a situation in which the government didn’t act. He added that refusing to guarantee all SVB deposits risked a “run on every bank in the country” and, by extension, a threat to the global financial system.

Berkshire Hathaway, the Omaha-based conglomerate that owns and invests in companies ranging from Dairy Queen to Geico, has substantial investments in the largest banks in the country. As of the end of 2022, Buffett’s investments included a 13% stake in Bank of America, 3.2% stake in Bank of New York Mellon, 2.8% stake in Citigroup and 0.5% stake in U.S. Bancorp.

The banking industry has been rattled by higher interest rates, which squeezed banks unprepared for the sharp drop in the value of its interest rate-sensitive assets.

Buffett said he was worried about how easy bank runs had become.

‘If people think deposits aren’t sticky anymore, you’re living in a different era,’ he said, adding technology has made it so that ‘you could have a run in a few seconds.’

A new poll from Gallup found that nearly half of Americans say they are now worried about the safety of their deposits, the highest share since the global financial crisis of 2008.

Yet even as he worried about the ease with which additional bank runs could occur — and recounted how his father lost his job in 1931 as the result of a bank run — Buffett said the U.S. government actions should have demonstrated that concerns about deposit safety were unfounded.

“Here we are in 2023, and we actually see the FDIC pay off 100 cents on the dollar to everybody, or making it available to all demand deposits,” Buffett said.

The banking crisis episode has led to heightened scrutiny on the commercial real estate sector, where telework arrangements and soaring borrowing costs are raising concerns about banks that lend to the sector.

“The hollowing out of the downtowns in the United States and elsewhere in the world is going to be quite significant and quite unpleasant,” said Berkshire Vice Chairman Charlie Munger, who added that Berkshire itself is not actively exposed to commercial real estate.

Inflation and the dollar

Buffett praised Federal Reserve Chairman Jay Powell, saying no one understood the current economic environment better than him.

But he also warned that there was a limit to how much control the Fed had, and worried about having let ‘the genie out of the bottle’ when it came to price growth and money printing eroding faith in the U.S. dollar.

‘We are not as well off in relation to curbing inflation expectations — which become self fulfilling — we are not as well off as we were earlier,’ Buffett said.

Yet even as Buffett acknowledged uncertainty about the course of the erosion of purchasing power, he rejected the idea that the U.S. dollar was in danger of losing its global-reserve status.

‘I see no option for any other currency to be the reserve currency,’ Buffett said.

The debt ceiling

Buffett also spoke briefly on the debt limit, noting that he could not imagine the U.S. government allowing “the debt ceiling to cause the world to go into turmoil.”

Congress and the White House are barreling toward a June 1 deadline to raise the limit on how much the U.S. Treasury is allowed to borrow, with the “economic and financial catastrophe” of a government default on the line.

Nonetheless, Buffett expressed broad worry about the trajectory of U.S. politics.

“Partisanship, it seems to be, has moved toward tribalism, and tribalism just doesn’t work as well.”

Concerns about AI

The nonagenarians also fielded questions on the application of artificial intelligence on investing — and the world at large.

As Wall Street weighs the use of tech like ChatGPT in forecasting stock prices, Buffett said “the tech doesn’t make any difference” in finding investable opportunities.

Buffett, whose reputation for stock picking built Berkshire, added that “what gives you opportunities is other people doing dumb things.”

Broadly, Buffett expressed concern that society can’t “un-invent” technology that changes the future, but adamantly said humans remain in the driver’s seat.

“With AI, it can change everything in the world except how men think and behave,” Buffett said, loosely quoting Albert Einstein’s commentary on the invention of the atom bomb. Munger quipped that “old fashioned intelligence works pretty well.”

The Oracle of Omaha

Known as the Oracle of Omaha, Buffett currently ranks fifth on Forbes’ billionaires list, with a net worth of about $105 billion.

Throughout his decades in business, Buffett has earned a reputation as one of the smartest investors alive — all while maintaining a relatively frugal lifestyle (he still lives in the house he purchased in 1958, and regularly eats McDonald’s).

Buffett’s strategy is broadly defined as value investing; buying low and only selling when absolutely necessary. Buffett advises holding onto good investments for decades at a time, while ignoring most short-term market movements.

Instead of frequently checking a stock’s price, Buffett said, “you’d look to the earnings and dividends over the years as determining whether you made a good investment or not. And that’s what people should do with stocks.”

‘Woodstock for capitalists’

The annual Berkshire shareholders meeting, dubbed by Buffett and fans as the ‘Woodstock for Capitalists,’ has seen as many as 40,000 attendees pile into the largest convention center in Omaha, Nebraska. It will be the 59th time Buffett has presided over Berkshire’s annual shareholder meeting.

The gathering has also become known for its marathon Q&A session: Buffett, 92, and Berkshire Vice Chairman Charlie Munger, 99, are slated to take questions from attendees for at least five hours on Saturday.

Like most investors, Berkshire is coming off a down year, at least on paper: It reported an annual loss of $22.8 billion for 2022. But in his most recent annual letter to shareholders — the release of which is itself a seminal event on investors’ calendars — Buffett called that figure “100% misleading” because it includes losses on stock holdings whose “quarter-by-quarter gyrations, regularly and mindlessly headlined by media, totally misinform investors.”  

Instead, Buffett said, investors should look at the operating earnings of Berkshire’s wide-ranging portfolio of companies, which as of year-end included American Express, Bank of America, Coca-Cola, Occidental Petroleum and Paramount Global. On that basis, Berkshire ‘set a record at $30.8 billion,’ Buffett said.

What’s more, Buffett calculated that the rate of return to Berkshire shareholders over its 58 years of existence has been 3,787,464%. He attributed this success to continuous savings, ‘the power of compounding,’ avoiding ‘major’ mistakes, and what he called ‘the American Tailwind.’

‘America would have done fine without Berkshire,’ Buffett wrote. ‘The reverse is not true.’

Berkshire on Saturday reported a 12.6% increase in operating earnings between March 31 and the same time last year. But Buffett said a slowdown in the economy would likely lead to a “majority of our businesses” reporting lower earnings this year than last year.

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