Warren Buffett said there could be “catastrophic” consequences if US regulators failed to insure deposits at Silicon Valley Bank and Signature Bank, as their failures risked sparking a run on lenders across the country .
“Although the FDIC [Federal Deposit Insurance Corporation] the limit is $250,000. . . this is no more how the United States will behave than it will let the debt ceiling let the world go into turmoil,” the Berkshire Hathaway chief executive told tens of thousands of shareholders gathered in downtown Omaha for the company’s annual meeting on Saturday.
The comments follow a string of bank failures in the United States that have fueled debate over federal government intervention, which has safeguarded deposits at both SVB and Signature Bank above the $250,000 federally insured level.
Regulators have been able to get around that limit by designating both as systemic risks. While shares of regional banks have fluctuated wildly in recent trading sessions, depositors have been somewhat soothed by the implicit guarantee that the government would intervene in the crisis.
“I can’t imagine anyone in the administration or in Congress or in the Federal Reserve. . . saying I’d like to be the one to go on television tomorrow and explain to the American public why we only keep $250,000 insured,” Buffett added. “It would start a run on every bank.”
Berkshire has been pressed on the state of the banking system, with Buffett saying so CNBC last month that the country was not “overtaken by bank failures, but depositors have not had a crisis”.
The sprawling industrial-insurance conglomerate had previously used its balance sheet, which Buffett likened to a fortress, to invest in troubled financial institutions. Berkshire invested in both Goldman Sachs and Bank of America during the financial crisis.
However, it has so far not intervened during the current crisis. Investors noted that Berkshire’s portfolio already has positions in a number of large financial institutions.
Councilors of the First Republic, that was sold this month to JPMorgan Chase in a deal orchestrated by US regulators, told the FT that an investment by Berkshire in the bank had been seen as an unlikely solution.
This was due to the rapid depot flight the First Republic was undergoing. Advisors believed the bank would burn through a multibillion-dollar capital infusion if the Berkshire investment was not enough to boost confidence.
Buffett said the potential for depositors to move money out of a bank quickly has made Berkshire much more “cautious” than in previous financial crises. He warned: “fear is contagious”.
The American people are “probably more confused about banking than ever before and that has consequences,” he added.
“You don’t know at all what happened to the viscosity of the deposits. . . and that changes everything. You can be on a run in seconds.
The so-called Oracle of Omaha said some of the problems in the banking system could be seen by anyone willing to dive into annual reports from banks that have already failed, pointing to jumbo mortgages signed by the First Republic at low interest rates.
The Fed has blamed weakened regulations during the Trump administration, as well as failures by regulators, for inadequate risk management processes that ultimately led to the demise of SVB.
Buffett added that while Berkshire was on the sidelines, it had capital ready should an opportunity arise.
“We keep our money in cash and treasury bills at Berkshire. . . because we want to be there if the banking system crashes even temporarily,” he said. “I don’t think it will, but it could.”
Buffett spent Saturday morning answering shareholder questions that touched on wealth planning, value investing, US-China relations and, most critical of all to those gathered at the CHI Health Center in downtown Omaha, succession to the Berkshires.
The 92-year-old investor confirmed that Greg Abel, the company’s vice president charged with managing all of its businesses outside of insurance, remained his anointed successor.
“Everyone is talking about the managerial bench, which is nonsense,” he added. “We don’t have that many people who could run five of the largest net-worth GAAP companies and all kinds of different businesses.”
Abel has been with the company for more than two decades, when Berkshire acquired utility MidAmerican Energy in 2000. In 2018, he was named a vice president alongside Ajit Jain.
Charlie Munger, Buffett’s longtime right-hand man and the company’s vice president, added that there was a reason Berkshire had outperformed other large conglomerates.
“We change managers much less frequently than other people and that has helped us,” he said.
—————————————————-
Source link