The famous stockbroker and billionaire says more banks will likely fail this year, but he’s betting $1M that not a single U.S. investor will lose money.
NEW YORK – Renowned global stockbroker and billionaire Warren Buffett said there’s a possibility that more United States’ banks could eventually fail, but quickly added a reassuring note that he’s extremely confident that no depositors will lose the money they have parked in the banking system.
In fact, he’s willing to bet on it.
“We’re not over bank failures, but depositors haven’t had a crisis,” the Berkshire Hathaway chairman and CEO said in an interview on CNBC on Wednesday.” More banks could go bust, but “depositors aren’t going to be hurt,” he added.
Buffett said he would be willing to wager $1 million that no taxpayers would lose deposits due to a bank failure this year, thanks to the Federal Deposit Insurance Corp (FDC), an entity he said is poorly understood by the general public.
The FDIC insures deposits up to $250,000, although U.S. authorities guaranteed higher deposits in Silicon Valley Bank and Signature Bank, two of the largest bank failures in U.S. history.
Crypto-focused Silvergate Bank also shut down last month. The failures of three banks contributed to a crisis of confidence that had repercussions as far away as Switzerland, where UBS Group struck a government-backed deal to take over crosstown rival, Credit Suisse.
“The costs of the FDIC are borne by the banks. Banks have never cost the Federal Government a dime. The public doesn’t understand that,” Buffett said.
‘Nobody is going to lose money on a deposit in a U.S. bank. It’s not going to happen. You don’t need to turn a dumb decision by managers into panicking the whole citizenry of the United States about something they don’t need to be panicked about.”
Banking collapses ‘won’t cost the government a penny’
Comparing the latest round of banking-sector ructions to the 2008 crisis that led to the bankruptcy of Lehman Brothers and the collapse of Bear Stearns, Buffett said bankers’ behavior in the run up to the previous crisis was more “reprehensible.”
Still, he blamed profit-hungry management teams for making a “mishmash” of assets and liabilities this time around, saying accounting practices that allow banks to hold to maturity rather than marking them to market value were partly to blame.
“Accounting procedures,” he stated, “have driven bankers to do some things that would help their current earnings a little bit and caused the recurring temptation to get a little bit bigger spread and get a little bit more earnings.”
Asked about the potential risks of shielding all banking deposits from losses, Buffett offered up a seemingly novel plan for holding bankers accountable. If a bank fails because of management missteps, the Board of Directors should be forced to return all the money they were paid, and the management team should be stripped of their pensions and cushy lifestyles. Anybody that’s CEO of a bank that screws up and costs shareholders a lot of money, they get no pension, that they go back to living like a person who works on the production line of Ford. “They don’t deserve anything special,” he said.
Buffett pushed back when asked if banks like First Republic Bank are currently a “steal” for investors due to their heavily depressed share price. Equity holders and bond holders would be wiped out if the bank fails, he said. Berkshire’s decision to dump its bank stocks isn’t a reflection on management, he said, but rather an indication of his cooling interest in the sector.
The conversation soon turned to banks’ loan books, particularly risks posed by souring loans on office buildings that have shone an uncomfortable spotlight on the sector’s exposure to commercial real estate.
Some banks might be forced to eat losses on their CRE loans. But Buffett doesn’t expect their exposure to pose a broader threat, he said. “Banks can take a lot of loan losses, but they can’t take something that wipes out their capital,” he said. “You expect to lose some money in banking. It’s not a sure thing on every loan.”
Ultimately, some banks might be forced to take possession of buildings from defaulting borrowers.
Before cutting to a commercial break, Buffett’s interlocutors solicited his view on the Federal Reserve. Did the central bank keep interest rates too low for too long?
“Who knows? I don’t know precisely what they should do, nobody does,” he said. “They followed conventional wisdom. Sometimes it works out, sometimes it doesn’t.”
Earlier in the interview, Buffett discussed why he decided to increase Berkshire’s stake in five Japanese trading houses, including Sumitomo and Mitsubishi. He told CNBC that when he looked at the companies roughly four years ago, he “generally understood” what they did and noted similarities to Berkshire. “They were selling at what I thought was a ridiculous price, compared to the prevailing interest rate at the time,” he added.
Copyright April 2023, CNBC