- Warren Buffett sold his stakes in several banks after spotting red flags in their financials.
- The famed investor said their bosses were acting recklessly and misleading investors and analysts.
Warren Buffett dumped his stakes in several banks because their bosses were taking "dumb" risks and using deceptive accounting to flatter their earnings, and he believed they would ultimately pay for their misdeeds, he revealed in a recent CNBC interview.
The famed investor's revelation that he predicted trouble in the banking sector is notable given its current turmoil. The sudden collapse of Silicon Valley Bank and Signature Bank in March has sparked concerns of an international banking crisis, worries about the safety of deposits, and fears of lenders pulling back and causing a credit crunch that squeezes consumers and businesses and shoves the US economy into a recession.
Here's a closer look at what the Berkshire Hathaway CEO said, and which bank stocks he's sold in recent years.
Red flags
Buffett noticed that several banks were valuing their assets at cost instead of market value, which artificially inflated their profits and misled investors and analysts, he told CNBC.
They also made a fundamental error by mismatching their assets and liabilities, he noted. For example, they took customer deposits that could be withdrawn immediately, and used them to buy long-dated government bonds and mortgage-backed securities. Silicon Valley Bank did exactly that, and collapsed under a wave of withdrawals in March.
"I don't like it when people get too focused on the earnings number, and forget what in my view are basic banking principles," Buffett said about his decision to pare his bank bets.
"I did think that banking could get in a lot of trouble just because of the kind of things that they did," he continued. "I didn't like the banking business as well as I did before."
Buffett also seemed to address his Wells Fargo wager specifically. The 92-year-old billionaire invested in the scandal-hit Wall Street titan in 1989 and counted it as a cornerstone of his stock portfolio for many years, but sold the last of his shares in the first quarter of 2022.
"I did sell banks that we'd owned for 25 or 30 years," he said. "I just think the system isn't set up quite right in terms of connecting punishment to culprits ... it's incredibly important that your banking system runs well."
Bailing out
Berkshire has exited its stakes in JPMorgan, Goldman Sachs, Wells Fargo, M&T Bank, and PNC Financial over the last three years, Securities and Exchange Commission filings show.
It also slashed its BNY Mellon stake by 69% and its US Bank stake by 95%. The disposals cut the combined value of those positions from nearly $12 billion at the end of 2019, to below $1.5 billion at the end of 2022.
On the other hand, it built new positions in Citigroup, Ally Financial, Jefferies, and NuBank. It also boosted its stake in Bank of America by over 9%, and still counts the lender as its number-two holding after Apple.
Buffett told CNBC that he's stuck with Bank of America because he got a "very decent deal" when he first invested in 2011, he likes CEO Brian Moynihan, and he simply didn't want to sell it.
Despite Berkshire's purchases, the overall value of its bank stocks has shrunk by 49% over the last three years, from $75 billion to $39 billion.
Berkshire discloses the total value of its banking, insurance and financial stocks each quarter. That figure plunged from $102 billion at the end of 2019, to $70 billion at the end of 2022. Moreover, that category of stocks went from making up 41% of its entire equity portfolio to less than a quarter.
Falling share prices were partly responsible for that sharp decline in value. But the main driver was Berkshire's disposals, given the company's cost base for its banking, insurance and financial stocks fell from $40 billion to $26 billion during the three-year period.
It's worth emphasizing that Buffett didn't say which banks had red flags in their financials. He also underscored that just because he sold a bank's stock doesn't mean it's badly run. Yet the investor clearly spotted problems at some of the banks in his portfolio, and decided to cash out before they ran into trouble.