Why Warren Buffett Sold Bank Stocks EXCEPT Bank of America? | Berkshire 2023

Summary

In this transcript, the speaker reflects on the banking industry, comparing big banks to regional ones in light of recent events at Silicon Valley Bank. He emphasizes the importance of sound banking practices and shares his personal experience with Berkshire's investment in a bank in 1969. The speaker also discusses the impact of the 1970 Bank Holding Company Act on Berkshire's business direction. He expresses caution about owning banks due to the unpredictable influence of politics and public misunderstanding of the banking system, while acknowledging his continued investment in Bank of America due to his confidence in its management.

Takeaways

• 🏦 The speaker initially invested in a bank in 1969 and found it to be a sound investment with no bad debts or unnecessary costs.
• 📉 The Banking Holding Company Act of 1970 forced the speaker to divest from the bank, which led to a shift in investment focus from banking to insurance.
• 💼 The speaker believes that banks can still be run soundly and can earn good money, despite the changes and innovations in the banking industry.
• 🔮 Uncertainty about the future of banks, especially in light of recent events and the involvement of politicians, makes it difficult to predict their trajectory.
• 🤔 The American public is likely confused about banking due to imperfect communication and a lack of understanding of the banking system.
• 🏦 The speaker has personal investments in a local bank, which they do not worry about despite the FDIC limits.
• 💔 The speaker sold bank stocks during the pandemic and in the last six months, indicating a lack of confidence in the banking sector's stability.
• 📉 The speaker is cautious about owning banks due to the unpredictable dynamics and consequences of banking events.
• 🤝 The speaker maintains a relationship with Bank of America, appreciating its management and the deal they have with them.
• 🚀 The speaker acknowledges a lack of understanding about certain aspects of banking and the broader economy, comparing it to not understanding complex subjects like spaceships.
• 💔 The speaker expresses a general distrust of situations where everyone wants to get rich, viewing such an atmosphere as toxic.

Q & A

What is the speaker's initial perspective on the business models of big banks compared to regional banks?

The speaker suggests that if banks follow sound banking methods and avoid risky practices, they can be a good investment, without explicitly comparing big banks to regional banks in the context of the Silicon Valley Bank event.

Why did Warren Buffett and Charlie Munger initially invest in a bank in 1969?

They invested in a bank because they found it to be a sound investment opportunity, with the bank being a 'lovely sound, constructive institution' that made money without unnecessary risks or bad debts.

How did the Banking Holding Company Act of 1970 impact Berkshire Hathaway's investment strategy?

The Act forced Berkshire Hathaway to divest from the bank they had invested in, as it changed the rules around bank ownership and investment, leading them to focus more on insurance companies instead.

What was the speaker's experience with the bank they invested in?

The speaker describes their experience as positive, with the bank never having a bad debt, unnecessary cost, or presenting any deposit insurance risk to the government.

Why did Berkshire Hathaway sell bank stocks during the pandemic and in the last six months?

The speaker does not provide a specific reason for the sale, but it is implied that it was due to uncertainty and changing dynamics in the banking sector.

What is the speaker's current stance on owning banks?

The speaker expresses caution about owning banks due to the unpredictable nature of events and the lack of understanding of the banking system by the public and some politicians.

How does the speaker view the impact of the 2008 financial crisis on the banking system?

The speaker believes that the 2008 crisis changed the 'stickiness of deposits' and the banking system's dynamics, which has consequences that are difficult to predict.

What is the speaker's personal banking situation?

The speaker has personal money with a local bank, possibly above the FDIC limit, and does not express concern about the safety of their deposits.

What deal did the speaker propose to Bank of America and why does he stick with it?

The speaker does not detail the specific deal but mentions that he likes Bank of America and its management, which is why he proposed the deal and continues to support it.

How does the speaker perceive the American public's understanding of the banking system?

The speaker believes that the American public is confused about banking and that this lack of understanding has consequences, although he does not specify what those consequences are.

What is the speaker's view on the atmosphere in investment banking?

The speaker expresses distrust for situations where everyone wants to get rich and envies others, describing this atmosphere as toxic.

Outlines

00:00

🏦 Reflections on Banking Investments and Regulations

The speaker reflects on the banking industry's evolution and the impact of regulations on investment decisions. They recount their initial investment in a bank in 1969 and the subsequent divestment due to the Banking Holding Company Act of 1970. The speaker emphasizes the potential for sound banking practices to yield good returns and expresses a preference for banking over insurance, had the opportunity continued. They also mention recent sales of bank stocks during the pandemic and the last six months, indicating uncertainty about the future of banking, influenced by political and public misunderstandings of the banking system. The speaker concludes with a personal stance on banking, indicating caution and a limited understanding of the industry's dynamics.

05:03

📈 The Changing Landscape of Banking and Public Perception

This paragraph discusses the speaker's perspective on the transformation of banking over their lifetime. They acknowledge the positive contributions of early banking services to immigrants and the introduction of credit cards. However, they express a growing concern about the industry's resemblance to investment banking and a pervasive 'get rich quick' mentality, which they view as toxic. The paragraph concludes with a critical note on the current state of the banking industry and its societal implications.

Keywords

💡Banking Models

Banking models refer to the different strategies and structures that banks use to operate and make profits. In the video, the speaker compares the business models of big banks to regional banks, discussing how they may be affected by events such as those at Silicon Valley Bank. The comparison highlights the differences in risk management and investment strategies between larger, more diversified banks and smaller, more localized ones.

💡Implicit Guarantee

An implicit guarantee is an assurance that is not explicitly stated but is understood to exist. In the context of banking, it refers to the perceived safety of deposits in banks, even though not all deposits may be insured by the government. The speaker mentions this concept when discussing how the perception of safety affects both big banks and regional banks, influencing customer behavior and bank operations.

💡Sound Banking Methods

Sound banking methods are practices that ensure the financial stability and profitability of a bank. The speaker emphasizes the importance of these methods, stating that a bank following them can be a good investment. The example given is Berkshire's investment in a bank in 1969, which was profitable and had no unnecessary costs or bad debts, illustrating the concept of sound banking.

💡Banking Holding Company Act of 1970

The Banking Holding Company Act of 1970 is a U.S. federal law that regulates the operations of bank holding companies. The speaker recounts how this act forced Berkshire to divest from a bank they owned, changing their investment strategy and highlighting the impact of regulatory changes on banking operations.

💡FDIC Insurance

FDIC insurance refers to the deposit insurance provided by the Federal Deposit Insurance Corporation, which protects depositors' funds in case a bank fails. The speaker mentions that their personal bank is above the FDIC limit, indicating a level of risk tolerance and trust in the institution beyond government-backed insurance.

💡Risk Management

Risk management is the process of identifying, assessing, and controlling risks to minimize potential harm to an organization. The speaker discusses the importance of risk management in banking, using the example of a bank they owned that never had a bad debt or unnecessary cost, demonstrating effective risk management practices.

💡Investment Banking

Investment banking involves services such as helping companies raise capital by issuing securities or mergers and acquisitions. The speaker expresses a distrust for situations where everyone wants to get rich in investment banking, suggesting that it can lead to a toxic atmosphere and a lack of focus on the core purpose of banking.

💡Credit

Credit in banking refers to the extension of funds by a lender to a borrower, with the expectation that the funds will be repaid with interest. The speaker mentions that their bank provided credit to anyone who deserved it, indicating a responsible approach to lending that aligns with sound banking practices.

💡Regulatory Changes

Regulatory changes refer to modifications in the rules and regulations governing an industry, such as banking. The speaker discusses how changes in banking regulations, like the Banking Holding Company Act of 1970, can significantly impact the industry and the strategies of banks.

💡Public Perception

Public perception is the general view or opinion that the public has about a particular subject. The speaker notes that the American public is confused about banking, which can have consequences for the industry. This highlights the importance of clear communication and education in shaping public understanding of banking.

💡Diversification

Diversification in banking refers to the practice of spreading investments across different types of assets to reduce risk. The speaker mentions that big banks are more diversified compared to regional banks, which may affect their strategies and the perceived safety of their deposits.

Highlights

The speaker discusses the business models of big banks compared to regional banks in the wake of the Silicon Valley Bank event.

They mention that if banks follow sound banking methods, they can be a good investment.

The speaker shares their personal history with banking, having bought a bank in 1969.

They explain how the Banking Holding Company Act of 1970 forced them to divest from the bank they owned.

The bank they owned was a sound, profitable institution with no unnecessary costs or bad debts.

The speaker expresses that banking was more attractive to them than insurance due to more acquisition targets.

They mention selling bank stocks during the pandemic and in the last six months.

The speaker is unsure about the future of big and regional banks due to the involvement of politicians and public misunderstanding.

They believe the American public is confused about banking, which has consequences.

The speaker mentions the stickiness of deposits has changed due to past events, affecting the banking system.

They express caution about owning banks due to unpredictable dynamics and events.

The speaker has personal money in a local bank and is not worried about FDIC limits.

They mention maintaining a relationship with Bank of America and their confidence in its management.

The speaker acknowledges the difficulty in projecting the future of banks due to many variables.

Charlie comments on the evolution of banking in his lifetime, from early banking for immigrants to credit cards.

He expresses distrust for situations where everyone wants to get rich, which he views as toxic.

Transcripts

uh this question comes from Davis Hance

in Houston Texas

he writes what do you think about the

business models of the big Banks as

compared to the regional banks in the

wake of the events at Silicon Valley

Bank and how does the perceived implicit

guarantee of all deposits at all banks

affect big Banks and those Regional

Banks yeah well I I

can say this if if you if you found if

you follow sound banking methods which

means not doing some things that other

people do

huh a bank could be a perfectly decent

investment in fact Charlie and I

was me originally in 1969 we bought a

bank at Berkshire and we had 19 million

dollars invested in that bank and we had

17 million I think invested in our

insurance companies and if the banking

holding company Act of 1970 hadn't been

passed we might have ended up owning a

lot of banks instead of a lot of

insurance companies we were looking at

more Banks and Harry Kip was taking us

around Chicago and there were other

things we could do and then Bingo they

passed the 1970 Bank holding company act

and we had to divest ourselves of that

bank in in in 10 years which by the way

I'd never had a bad debt oh it never had

an unnecessary cost it made nothing but

money with no risk it never presented

any Deposit Insurance risk to the

government zero it was a lovely sound

constructive institution in this

community and any person already

deserved credit could get credit and we

were going to buy more we were forced

out of it and we were going to buy more

Banks and if we bought more Banks we

probably wouldn't have expanded the

insurance business but

you know the law changed and so we

divested and and we've done all kind of

insurance but banking was more

attractive to us it was bigger than

there were more targets uh to buy and uh

you could run a perfectly sound bank

then and uh no negotiable certificate

said all these things all the inventions

that came later and you could still run

them today and you could earn

you don't know a lot you can earn good

money very good money and we didn't

we would have found more Banks but uh

were precluded from doing that and

we've sold Banks

Bank stocks uh in the last well we sold

them first when the pandemic broke out

and then we sold some more

in the last six months and uh

we don't know where

the shareholders of the big Banks

necessarily or the regional Banks or

anybody are heading I've got my bank

I've got my own personal money and I'm

probably above the

FDIC limited I've got it with a local

bank and I think I don't worry about it

in the least but in terms of

owning Banks events will determine

their future and you've got politicians

involved you've got

you've got a whole a lot of people don't

really understand how the system works

uh and I would say that the event

something less than a perfect

communication

between various people and the American

public so the American public is

probably as confused about

banking as ever and that has

consequences and nobody knows what the

consequences are because

uh every event

starts recreating a different Dynamic I

mean in physics you know that

Pi is going to be 3.14 you know infinite

number of numbers after that but uh no

matter what happens but you don't know

what has happened to the stickiness of

deposits at all they got changed by 2008

it's gotten Changed by this I mean it

and that changes everything and so we're

very cautious in a situation like that

about ownership

uh

of Banks and we do

remain with

One Bank holding a a a a a deal that but

we originated that deal and uh with the

Bank of America I like Bank of America I

like I like the management and

I proposed the deal to them so I'm I'm I

stick with it but

do I know how to project out what's

going to happen from her the answer is I

don't because I've seen so many things

in the last

feel much which really weren't that

unexpected to me to see but which

reconfirmed my beliefs that the American

public doesn't understand their banking

system and some people in Congress

perhaps don't understand it any more

than I underst I don't understand what

the spaceships go up I mean there's all

kinds of things I don't know about

uh

if you're in Congress you've taken a

position on everything and sometimes

it's to your advantage if you really

understand it not to say exactly what

you

what you feel and uh and here we are

Charlie yeah

well a lot has happened in banking in my

lifetime I welcomed all that early

banking of the deserving immigrants by

the early Bank of America

and I think all the credit cards when

they came in as original bank cards were

a great contribution to civilization

and

but

the game year it gets the more it looks

like Investment Banking the last I like

it as a citizen

I don't want I have always I am deeply

distrustful situations in which

everybody wants to get rich and envies

everybody else I regard that atmosphere

as utterly toxic

[Music]