Berkshire Hathaway chairman and CEO Warren Buffett believes that the recent banking crisis, headlined by the rapid collapse of Silicon Valley Bank and Signature Bank, isnt over just yet. Were not through the bank failures, The Oracle of Omaha told CNBC Wednesday in an interview from Tokyo. But the 92-year-old billionaire noted that consumers shouldnt worry about their savings after regulators at the Federal Reserve, FDIC, and Treasury Department used the systemic risk exception to backstop all depositors at failed U.S. banks last month.
Depositors havent had a crisis, he said, adding that, with regulators backing, banks can go bust, but depositors arent going to be hurt.
While some economists have cautioned that backstopping both uninsured and insured depositors could create a moral hazard issuewhere bank executives are incentivized to take more risk since they know depositors are insured no matter whatBuffett believes regulators made the right choice by stepping in when they did.
You dont need to turn a dumb decision by [bank] managers into panicking the whole citizenry of the United States about something they dont need to be panicked about, he said. We set up the FDIC to relieve the worry of people.
In Buffetts view, regulators had no choice but to step in after bank executives mismanaged their businesses, putting the economy at risk. The blame for the latest banking crisis lies squarely with executives who have become too focused on earnings, he said, leading them to do dumb things and forget basic banking principles.
The billionaire warned that this type of mismanagement is a serious issue, because banks need to maintain the confidence of the public and they can lose it within seconds.
I just think the system isnt quite right in connecting punishment to culprits on something thats this important, he added. Its credibly important that your banking system runs well in the country. It just isnt going to work unless you have a banking system that works, and you dont want them [bank managers] to create periodic crises unnecessarily.
Buffett also noted that bank failures arent as rare as many people think, referencing past blow-ups at institutions that were once thought to be impregnableincluding Continental Illinois National Bank, which failed in 1984. To his point, since 2001, 563 U.S. banks have gone bust, according to the FDIC.
Sometimes they go broke because they make too many dumb loans, sometimes its because they mismatch maturities, Buffett said. SVB famously suffered from the latter, a mismatch in maturities which meant its investments didnt return enough, quickly enough, to fund its deposits.
For SVB, it all started when the start-up focused bank saw an influx of deposits during the pandemic and quickly put them into long-term U.S. treasuries and mortgage backed securities that, in total, yielded under 2%. This was a paltry return, but it was still far more than the less risky short-term options. Then, when the Fed jacked up interest rates, SVB was forced to pay higher interest rates to depositors, but it couldnt fund them because it was locked into low-yielding, long-term investments.
Buffett said that what SVBs execs did during the pandemic was a classic mistakesearching for a little extra return while ignoring the risk of rising interest rates. Bankers have been tempted to do that forever, he argued.
But something must have been different about this crisis, because it led Buffett to sell Berkshire Hathaways shares in many top U.S. banks, including JPMorgan, Wells Fargo, U.S. Bancorp, and Goldman Sachs. When asked about why he sold, the billionaire said: I did think that banking could get in a lot of trouble just because of the kinds of things they did. And I didnt like the banking business as much as I did before.
However, Buffett didnt sell his shares in Bank of America, and he gave an unusual answer when asked why. They made a very decent deal for us and I like Brian Moynihan [BofAs CEO] enormously. AndI just dont want to sell it, he told CNBC.
Berkshire famously made a $5 billion bet on Bank of America in 2011, when it was struggling to recover after the Global Financial Crisis. It was a vote of confidence in CEO Brian Moynihan, who had taken control of the firm just a year earlier in January 2010. Moynihan promised to turn BofA into a profitable enterprise, earning $10 billion a yearand he turned out to be right. In 2022, the bank earned $26 billion, and its shares have soared in the years since Buffetts investment, earning him roughly seven times what he paid.
