Delamaide: Banks, not Trump, worry Buffett
WASHINGTON — Warren Buffett, the legendary investor who has made millionaires out of many of his shareholders, isn’t worried that Donald Trump may become president — but he has some serious concerns about banks and their holdings in derivatives.
The so-called “Oracle of Omaha” held court this weekend at the annual meeting of his Berkshire Hathaway holding company in Nebraska, taking questions for more than five hours from the thousands of shareholders in attendance.
As Trump’s seemingly inexorable rise in the Republican primaries has the GOP establishment wringing its hands, and liberal Democrats only half-joking about moving to Canada, Buffett brushed off a question about a Trump win.
Aw pshaw, the 85-year-old investor, who has endorsed Democratic frontrunner Hillary Clinton, said in effect when asked about a possible Trump win.
“If either Donald Trump or Hillary Clinton becomes president, and one of them is very likely to be, I think Berkshire will continue to do fine,” Buffett said, going on to suggest that the climate in the U.S. will continue to be favorable to business no matter who wins the White House.
“Business in this country has done extraordinarily well for a couple hundred years,” he said. “It has adapted to society and society has adapted to business.”
The billionaire investor, one of the richest people in the world, was much less sanguine about big banks.
Even as regulators are patting themselves on the back and politicians — including Buffett’s favored candidate — insist they have too big to fail and other risks under control, the man who has turned his portfolio of consumer products, insurance, railways and manufacturing into a moneymaking machine is avoiding most big banks.
“If you take the 50 largest banks in the world, we wouldn’t even think about probably 45 of them” as possible investments, Buffett said.
His main concern is with these banks’ large holdings of derivatives — synthetic securities based on underlying financial instruments — which he considers too opaque to evaluate for the risks they represent.
“There can be enormous gaps in things that you thought were fully protected by collateral, or netting arrangements and that sort of thing,” Buffett told the Berkshire shareholders. “So I regard very large derivative positions as dangerous.”
The holding company is the largest investor in Wells Fargo, one of the big six U.S. banks, but most of that bank’s business is in mortgage finance and other retail products, not the derivatives trading that accounts for much of the profit at other giants like JPMorgan Chase and Goldman Sachs. Berkshire also has a stake in Bank of America.
Buffett’s opposition to derivatives is nothing new — he once called them “financial weapons of mass destruction,” blaming them, as most analysts do, for the 2008 financial crisis.
What was significant about his latest remarks is that he has not changed his view about the risks they hold for banks in spite of the new capital requirements and trading restrictions imposed by the Dodd-Frank financial reform in the U.S. and similar measures in other countries.
In fact, the banking industry has successfully lobbied or bullied regulatory agencies into delaying or gutting many restrictions on derivatives trading in the 2010 Dodd-Frank legislation.
“It’s still a potential time bomb in the system,” Buffett said. “Anything where discontinuities can exist can be real poison in markets.”
Berkshire has had its ups and downs in recent years, and some began to question whether Buffett’s old-fashioned value investing was now truly passé. But the stock is up more than 10% so far this year, compared to less than 3% for the market as a whole, so he hasn’t completely lost his touch.
His long-term perspective is a healthy corrective to the frenetic media cycle, obsessed as it has been with the prospective horrors of a Trump victory. Vanity Fair honored it with a headline, “Warren Buffett Is the Only One Not Freaking Out About a President Trump.”
Presidents come and go, not to worry. “We’ve operated under price controls, we’ve had 52% federal taxes applied to our earnings,” Buffett said. We’ve seen worse.
Charlie Munger, Buffett’s longtime investing sidekick, had his own perspective on politics. “I liked it a lot better in tone,” the 92-year-old said on CNBC this week, “when Adlai Stevenson was running against Ike Eisenhower. I liked the politics of that era better than I like the politics of this era.”
Amen to that, but in the meantime, investors, according to these two veterans, should chill on presidential politics. You want to worry, keep an eye on those banks.
Columnist Darrell Delamaide — @ddelamaide on Twitter — has reported on business and economics from New York, Paris, Berlin and Washington for Dow Jones news service, Barron's, Institutional Investor and Bloomberg News service, among others.