The spate of bank failures may not be not over but depositors should not be concerned as their money will be protected, according to billionaire investor Warren Buffett.
- Buffett says the banking sector is safe for depositors.
- Banks haven’t made the ‘same mistakes’ as they did in 2008.
- The ‘Oracle of Omaha’ sees government help with further bank failures.
"We're not through with bank failures," said Buffett, Chairman and CEO of Berkshire Hathaway (BRK.A) (BRK.B), in an interview with CNBC though he reassured depositors that they have no reason to worry.
Banks can go bust, but depositors aren't going to be hurt, said Buffett, even though owners of banks or people who bought the debt of the holding companies of banks can lose a lot of money.
His comments are the first time he's made in public following the collapse of Silicon Valley Bank (SVB) and Signature Bank, which were the second and third-largest banking failures in U.S. history. In the case of SVB, depositors pulled more than $40 billion from the bank over a 24-hour period and Buffett noted banks can lose investors’ confidence in a matter of seconds. He also underlined the importance of the Federal Deposit Insurance Corporation (FDIC), which he said was set up to avoid the recent panic and contagion.
“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.”
Its Not 2008 All Over Again
The iconic investor was also quick to distance the recent banking turmoil from the mistakes that led to the financial crisis in 2008.
"Sometimes they [banks] go broke because they make too many dumb loans, and sometimes because they mismatch maturities," Buffett said.
In the latest banking turmoil, according to Buffett some of the "dumb things banks do periodically become uncovered." Unlike in 2008, Buffett said banks may not have made mistakes in the quality of loans they made, rather they "have mismatched assets and liabilities." However, he added bankers "have been tempted to do that forever."
At the heart of the failure of SVB and Signature Bank have been unrealized losses on long-term U.S. Treasuries as interest rates rose, which created big gaps on the banks' balance sheets.
The Oracle of Omaha criticized some of the banks’ accounting procedures and their mismanagement of assets and liabilities. His comments echo those of BlackRock CEO Larry Fink, who said in his annual chairman’s letter that asset-liability mismatches could be the “next domino to fall” after an era of easy money.
Buffett came to the rescue of the banking sector in 2008 with a $5 billion investment in Goldman Sachs (GS) after the collapse of Lehman Bros. He also put $5 billion into Bank of America (BAC) in 2011, with the bank still being one of the largest current stock holdings for Berkshire Hathaway at over 11% of the portfolio.
Buffett made no comment on Bank of America's $5 billion contribution to the $30 billion lifeline handed to First Republic Bank (FRC) in the recent turmoil, which came at the same time he had been reportedly in talks with senior officials in the Biden administration about the regional banking crisis. He did say he expected the U.S. government to backstop all banking deposits if needed, with Congressional approval and an adjusted debt ceiling.
Buffett's Bet on Japan
Buffett is in Tokyo and recently announced that he increased his investments in five Japanese trading houses— Itochu Corp, Marubeni Corp, Mitsubishi Corp, Mitsui & Co and Sumitomo Corp —to 7.4% each. Japanese trading houses called "sogo shosha" are huge companies that have a wide variety of product lines.