Banks are loaded up with too many bad commercial loans, Berkshire Hathaway Vice Chairman Charlie Munger warns.
“It’s not nearly as bad as it was in 2008—but trouble happens to banking just like trouble happens everywhere else,” Munger told the Financial Times.
Banks’ bloated commercial real estate portfolios are why Munger and Warren Buffett, Berkshire Hathaway chairman, have stayed on the sidelines of the current bank turmoil, the 99-year-old says.
“Berkshire has made some bank investments that worked out well for us,” Munger said. “We’ve had some disappointment in banks, too. It’s not that damned easy to run a bank intelligently. There are a lot of temptations to do the wrong thing.”
In the past, Berkshire has been quick to support U.S. banks during periods of instability, investing $5 billion in Goldman Sachs in the 2008 financial crisis and plowing another $5 billion into Bank of America during the U.S. debt-ceiling crisis of 2011.
Munger spoke with FT from his home of 60 years in a Los Angeles suburb, as CNBC broadcast news about First Republic’s near collapse on a nearby TV.
“A lot of real estate isn’t so good anymore,” Munger said. “We have a lot of troubled office buildings, a lot of troubled shopping centers, a lot of troubled other properties. There’s a lot of agony out there.”
“Every bank in the country is way tighter on real estate loans today than they were six months ago,” Munger explained of why, in the case of the recent failures of Silicon Valley Bank, Signature Bank and First Republic Bank that Berkshire has not dipped into its cash reserves of $100 billion-plus to pitch in.
“They all seem [to be] too much trouble,” Munger said.
20% Annual Returns
Indeed, Berkshire Hathaway has invested primarily in large banks like Wells Fargo and avoided smaller, regional ones.
Both Munger and Buffett dislike the volatility of commercial real estate, including these types of business loans at banks. Munger said he does not see a turnaround anytime soon for office buildings or shopping centers, which have been hard hit by the pandemic and the continuing trend for many to work from home.
Munger spoke days before Berkshire Hathaway’s annual shareholder meeting in Omaha this Saturday, described by some as a “festival of capitalism.”
Munger is also concerned about high interest rates and a crowded field of investors, particularly private equity, chasing bargains and inefficiencies.
Since 1965, Berkshire Hathaway has delivered compound annual returns of nearly 20%, twice that of the S&P 500 benchmark index.
Munger attributes this success to advice from Buffett to “buy wonderful businesses at fair prices.” He also said he and Buffett have benefitted from “lower interest rates, low equity values [and] ample opportunities.”
4 Golden Investments
Estimated to be worth $2.4 billion by Forbes and known to have diversified investments, Munger said he’s made the lion’s share of his money from just four investments: Berkshire Hathaway; Costco; California and New Jersey real estate investment firm Afton Properties; and a fund managed by Li Ly’s Himalaya Capital.
Today, however, there’s a “glut of investment managers that’s bad for the country,” Munger said, describing them as nothing more than “fortune tellers or astrologers who are dragging money out of their clients’ accounts, not being earned by any useful service.”
“There’s too much private equity, too many buyers of all kinds,” Munger continued. “It’s making it a very tough game for everybody.”
Eventually, Munger believes, the gig will be up: “The people getting the fees are still doing well. People that aren’t being served very well by paying all those fees may eventually be unwilling to pay them.”
Unlike Buffett, who has famously said, “Never bet against America,” Munger is not as optimistic about the present.
“I do not think that we can take it as a given that American democracy will prosper and flourish forever,” he said. “But I think we’ll stumble through petty well for quite a while yet.”
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