Buffett on Banks - Investing in Mortgages “Dumb”

hank

”In a recent CNBC interview, Berkshire Hathaway (BRK.A) CEO Warren Buffett criticized banks for investing in mortgage securities at historically low yields, calling them a ‘very dumb holding for banks.’The problem for mortgage securities holders is that effective maturities lengthen when interest rates rise, the opposite of what the banks want. It leaves banks with relatively low yielding portfolios for potentially long periods. BofA's bond holdings yield about 2.6%, which could weigh on its returns, particularly if it has to pay more for deposits. The portfolio has an estimated average life of eight years. Unlike the banks, Berkshire chose to invest its cash of over $100 billion largely in short-term U.S. Treasury bills. It accepted rates near zero in 2020 and 2021 but is now getting 5% on its holdings. If Bank of America had taken more of a Berkshire-type approach, it now could be earning twice the current rate. Berkshire is Bank of America's largest investor, with a roughly 13% stake—some one billion shares. It's notable that Buffett has decided against putting new money into Bank of America this year even after the stock's weakness.”

Excerpted from Barron’s April 24, 2023 (Print)

Article: “Bank of America’s $99 Billion Bond Problem” - Andrew Bary

LewisBraham

Difference between short and long-term thinking. Banks CEOs like most CEOs of publicly traded companies often only think from quarter to quarter. To accept zero yields in 2020 and 2021 as Buffett did would be unacceptable to such CEOs trying to hit quarterly earnings estimates in 2020 and 2021 and collect their sizable bonuses for hitting those quarterly numbers. Ultimately, such short-term thinking is bad for everyone but the CEOs and the analysts setting the earnings targets. Investors suffer as Buffett rightly pointed out. But society suffers as well. Banks go bust, we bail them out, people lose their jobs, etc.

Vanguard’s John Bogle called this the “agency society” in which the agents of investors, i.e., executives are the only ones who benefit. This problem could be alleviated if CEO bonuses and other compensation were shifted from short- term ones to long-term ones based on, say, a company’s three-year or five-year profitability and if analysts and Wall Street in general stopped being so short-term oriented. Raising the taxes on short-term capital gains from 20% to 30% or even 40% and lowering the taxes on long-term gains for stocks held 5 years to 15% or even 10% might “inspire” or incentivize Wall Street analysts, traders and money managers to think differently.

Importantly, most of Buffett’s wealth comes from his long-term ownership of Berkshire stock. His salary is minimal and I don’t think he receives a quarterly bonus.