Warren Buffett, the esteemed investor and CEO of Berkshire Hathaway, has finally shared his thoughts on the recent banking debacle. He criticized lenders for taking unnecessary risks and concealing their losses and disclosed that he divested his stakes in several banks due to noticing warning signs in their financial reports.
Misleading Accounting Practices by Banks
Buffett told CNBC that numerous banks employed deceptive accounting methods to boost their profits falsely. For instance, he mentioned banks valuing their long-dated bonds at par value rather than their market value, obscuring the reality that their value had declined on paper.
The 92-year-old billionaire stated, “I don’t like it when people get too focused on the earnings number and forget banking principles. Some dumb things banks do periodically become uncovered during this period.”
Buffett observed that the banks which faced issues in recent weeks did not repeat the same reckless mistakes leading up to the financial crisis. Instead, they improperly managed their assets and liabilities, which he characterized as an endless temptation for banks that “bites them in a big way.”
The Importance of Public Confidence in Banks
The Berkshire Hathaway chief emphasized the significance of maintaining public trust in the safety of bank deposits. He said, “It’s important that banks retain the public’s confidence, and they can lose it within seconds.”
Buffett revealed that he sold specific bank stocks after noticing signs of trouble in their earnings. As a result, his company has reduced or wholly divested from numerous financial stocks in recent years, including JPMorgan, Goldman Sachs, Wells Fargo, PNC Financial, US Bancorp, and BNY Mellon. However, the investor clarified that he did not identify issues with all of them.
The Rapid Collapse of Silicon Valley Bank
In March, Silicon Valley Bank (SVB) fell apart within days after attempting to stabilize its finances by selling long-dated assets at a loss and seeking to raise new capital.
This action alarmed its customers, who held uninsured deposits, leading to a “bank run” as they withdrew their funds en masse. The Federal Deposit Insurance Corp. (FDIC) ultimately intervened, taking control of the lender and guaranteeing its deposits.
SVB, Signature Bank, and Silvergate Bank all crumbled quickly in March, raising concerns about additional bank runs, a credit crunch if banks curtailed lending, and the potential for another financial crisis.
Warren Buffett’s insights on the recent banking fiasco are a stark reminder of the importance of prudence and transparency in the financial sector.
His decision to sell stakes in several banks highlights the ongoing need for investors to remain vigilant. In contrast, the rapid collapse of multiple banks underscores the fragility of public trust in the industry.