How Warren Buffett avoided damage from the current banking crisis

Warren Buffett hasn’t emerged yet as a white knight for regional banks in this current crisis. What he has done, however, is sidestep damage to Berkshire Hathaway’s portfolio.

The Oracle of Omaha sold a large portion of Berkshire’s holdings in US banks between 2020 and 2022, some just months before the banking system upheaval that began in mid March.

Berkshire exited giant stakes of JPMorgan Chase (JPM), Wells Fargo (WFC), and Goldman Sachs (GS) during the period, and it also considerably reduced its ownership in regional lender US Bancorp (USB) and custody bank Bank of New York Mellon (BK).

Berkshire still has sizable holdings in giants Bank of America (BAC) and Citigroup (C) as well as a smaller piece of online bank Ally Financial (ALLY).

“I would assume they did not think that they were going to make over the following five to ten years as much as they could by doing something else,” said Bill Smead, founder and chairman of Smead Capital Management, when asked why Berkshire exited banks when it did.

Buffett said earlier in the pandemic that he didn’t want to be overexposed to the industry. He has said little on the subject this year beyond a recent interview with CNBC’s Becky Quick, where he did acknowledge reducing his exposure amid concerns that banking could run into a lot of “trouble.”

“I didn’t like the banking business as well as I did before,” he said during the April 12 interview. “I just think the system isn’t set up quite right in terms of connecting punishment to culprits,” he added. “It’s incredibly important that your banking system run well.”

Buffett’s specific thoughts on the banking system will likely be front and center this weekend at the Berkshire Hathaway annual meeting, an annual Omaha, Neb. extravaganza that attracts tens of thousands of Buffett followers from around the country. The highlight of the event is a wide-ranging question-and-answer session with Buffett on Saturday.

The 92-year-old billionaire has over the decades played the role of rescuer to a number of financial institutions while also serving as an unofficial adviser to Washington officials during periods of extreme financial turmoil.

He has yet to play the role of rescuer during this crisis, at least in any way that has thus far been made public, but he may have offered some of his advice to the White House.

Reuters reported that he talked to the Biden administration in March as the banking unrest raged. When asked about those talks, he told CNBC that “I haven’t spoken to anybody that recently, but I’ve spoken with people.”

‘A remarkably good business’

Buffett’s complicated history with banks spans more than five decades. It started when Berkshire in 1969 bought Illinois National Bank and Trust in Rockford, Ill. Buffett eventually spun it off after a change in US banking laws made it difficult for him to own non-banking businesses at the same time.

During the 1987 market crash he invested in Wall Street investment bank Salomon Brothers, only to see that investment backfire when a bond trading scandal nearly pushed the company into bankruptcy. Buffett became chairman of the firm and ran it for nine months. He saved the company but called the experience “far from fun” in a 1992 shareholder letter.

This didn’t stop him, however, from making big bets on more traditional commercial banks that took deposits and made traditional loans. In fact, he became the largest investor in Wells Fargo, Bank of America, Bank of New York Mellon, and US Bancorp.

His Wells Fargo ownership, which started in 1989, rose as high as 13% in 1994.

“Banking has been a remarkably good business in this country,” he told shareholders at the 2003 annual meeting.

Bank of America Chairman and CEO Brian Moynihan testifies before a House Committee on Financial Services Committee hearing on

Bank of America CEO Brian Moynihan was a beneficiary of Buffett’s vote of confidence. (AP Photo/Andrew Harnik)

His connection to the industry deepened in 2008, when he played a key role in restoring confidence in banks during the worst financial crisis since the Great Depression. Goldman Sachs came to him seeking capital, along with his stamp of approval. Buffett injected $5 billion into Goldman.

It was also Buffett who suggested in 2008 to then-Treasury Secretary Hank Paulson that the federal government should inject capital into banks to stabilize the industry. That became an official proposal of $250 billion, even though some of the biggest banks insisted they didn’t need the money.

He played the role of rescuer again in 2011 when he injected $5 billion into Bank of America. At the time Brian Moynihan was still a relatively new chief executive and the lender’s shares were under severe pressure due to losses from subprime loans.

More investments followed, including a $4 billion stake in industry giant JPMorgan Chase in 2018 and a new bet on PNC Financial Services Group (PNC), another regional lender.

He even told Yahoo Finance before the JPMorgan purchase that he should have bought the stock earlier: “I wish we bought a lot more. I made a mistake.”

‘Sure, I noticed it’

But Berkshire’s actions changed during the COVID-19 pandemic, as it started to unload many of those same holdings it had been amassing for years.

The most significant, perhaps, was Wells Fargo given Buffett’s long-time association with the stock and the company.

At Berkshire’s 2015 annual meeting, Wells Fargo even rolled its signature stagecoach down Omaha’s 10th street as part of a celebration of Buffett’s 50th year in charge of the conglomerate. It also parked another inside the exhibition hall where companies partly or fully owned by Berkshire displayed their goods.

Buffet began unloading the Wells position in 2018 after a series of scandals rocked the bank, including revelations that employees pressured by sales goals opened millions of accounts that customers didn’t want and charged fees that weren’t necessary.

He unloaded his last stakes in 2022.

Wells Fargo Bank sign with stagecoach logo, northern Idaho. (Photo by: Don & Melinda Crawford/Education Images/Universal Images Group via Getty Images)

The Wells Fargo stagecoach, shown here on a bank sign, made an appearance at the Berkshire annual meeting in 2015. (Photo by: Don & Melinda Crawford/Education Images/Universal Images Group via Getty Images)

Berkshire also no longer owns any of JPMorgan, Goldman, PNC and M&T Bank (MTB). All were sold during the pandemic.

The last reduction disclosed thus far in public filings came in the final quarter of 2022, when Berkshire cut its stakes in Bank of New York Mellon and US Bancorp by 69% and 95%.

Buffett didn’t discuss specific banks or positions in his CNBC interview on April 12. But he did make it clear he had noticed some concerning trends in the run up to the current banking chaos.

“Accounting procedures have driven some bankers to do some things that may have helped their current earnings a little bit…and caused the recurring temptation to get a little bit bigger spread and report a little more in earnings,” he said. “And it’s ended in a result you could predict.”

“So you noticed it,” Quick said. “You saw it.”

“Sure,” Buffett said. “Sure, I noticed it.”

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2023-05-05 15:06:31