2020: How does Buffett analyze banks?
BECKY QUICK: This is one that comes from Thomas Lin in Taiwan. He says, “Warren once said that banking is a good business if you don’t do dumb things on the asset side. Given that the pandemic might put a lot of pressure on the loans, dumb things that got done in the past few years are likely to explode.
“Through reading annual reports, 10-Qs, and other public information, what clues are you looking for to decide whether a bank is run by a true banker who avoids doing dumb things?”
WARREN BUFFETT: That’s a very good question. But I would say that the one thing that made (Federal Reserve) Chairman (Jerome) Powell’s job a little easier this time than it was in 2008 and ’09, is that the banks are in far better shape, so —
In terms of thinking about what was good for the economy, he wasn’t at the same time worrying about what he was going to do with bank A or bank B, to merge them with somebody else, or put strain — added strains on the system or anything.
The banks — the banks were very involved with the problem in 2008 and ’09. They had — they had done some things they shouldn’t have done in —some of them.
And they were certainly in far different financial condition than now, so that — the banking system is not the problem in this particular shutdown. The government — we decided, as a people, to shut down part of the economy in a big way.
And it was not the fault of anyone that it happened. Things do happen in this world. Earthquakes happen, you know. Huge hurricanes happen. This was something different, but —
The banks — banks need regulation. I mean, you know, they benefit from the FDIC, but part of having the government standing behind your deposits is to behave well, and I think that the banks have behaved very well, and I think they’re in very good shape.
I mean, that’s why the FDIC has built up a hundred billion dollars that I’ve talked about. I mean, they’ve assessed the banks, in recent years, at accelerated amounts in certain periods, and they even differentiated against the big banks.
So, they built up great reserves there. And they built their own balance sheets, and they are not, presently, part of Chairman Powell’s problem, whereas they were very much a part of Chairman Bernanke’s problem back in 2008 and ’09.
How you spot the people that are doing the dumb things is not easy because — well, sometimes it’s easy. But — (laughs) — I don’t see a lot that bothers me.
But banks are, in the end, institutions that operate with significant amounts of other people’s money, and if problems become severe enough in an economy, even strong banks can be under a lot of stress, and we’ll be very glad we’ve got the Federal Reserve System standing behind them.
I don’t see special problems in the banking industry now.
I could think of possibilities. And (CEO) Jamie Dimon referred to this a little bit in the Morgan — JPMorgan report. You can dream of scenarios that puts a lot of strain on banks, and they’re not totally impossible. And that’s why we have a (inaudible).
And I think that — I think overall, the banking system is not going to be the problem. But I’m not — I wouldn’t say that with a hundred percent certainty because there are certain possibilities that exist in this world where banks can have problems.
They’re going to have problems with energy loans. They’re going to have problems some — you know, they’re going to have extra problems with consumer credit. They’re going to have — you know, they’re in — but they know it. And they’re well reserved. Well, they’re well capitalized for it. They were reserve building in the first quarter, and they may need to build more reserves.
But they are not a primary worry of mine at all. We own a lot of banks. We own a lot of bank stocks.
Greg, do you have any thoughts on it?
GREG ABEL: No, I really — you touched on it earlier, too, just in general, which is we don’t know how long this pandemic will go, we don’t know if there’s going to be a second event, which are just risks that are really unknown at this time, and the banks will have to continue to manage through that, as businesses do. But you’ve already highlighted that, obviously.
WARREN BUFFETT: Yeah.