Berkshire Hathaway Inc. (A:US) Vice Chairman Charles Munger, whose firm owns stakes in some of the biggest U.S. lenders, said Wall Street trading risks should be curbed at deposit-taking institutions.
“I do not see why massive derivative books should be mixed up with” government-insured deposits, Munger, 89, said yesterday during Omaha, Nebraska-based Berkshire’s annual meeting. “The more bankers want to be like investment bankers, instead of like bankers, the worse I like it.”
Munger’s comments echo those of former financial executives and lawmakers who say the largest lenders still pose risks to the economy years after reforms and U.S. bailouts. Derivatives, which are used to hedge risks or for speculation, magnify the interconnectedness of firms including JPMorgan Chase & Co. (JPM) and Bank of America Corp. (BAC:US) Critics say that these so-called too-big-to-fail companies would get taxpayer help in a future crisis.
SPECIAL REPORT: Berkshire Hathaway Annual Meeting 2013
The Berkshire vice-chairman said his views about the industry differ with those of his longtime business partner, billionaire Chairman Warren Buffett. Responding to a question at the meeting about how too-big-to-fail affected Berkshire holdings, Buffett reiterated his support of U.S. lenders. In January, he said he guaranteed that banks no longer posed a threat to the economy because capital levels were higher.
“I don’t worry about the banking system being the cause of the next bubble,” Buffett, 82, said yesterday. While lenders “won’t earn as high a return as they would’ve” previously, because of regulation, they still are “decent” investments, he said.
Munger said that he was “a little less optimistic about the U.S. banking system” than Buffett is.
The two also disagreed over corporate taxes. Buffett said yesterday that complaints over rates should be ignored, while Munger said higher U.S. levels were a competitive disadvantage.
Buffett boosted investments in the largest U.S. banks, which became even bigger under government-approved consolidations, since the crisis. Berkshire has a stake of more than $16 billion in San Francisco-based Wells Fargo & Co. (WFC) and injected $5 billion in Bank of America in 2011 in exchange for preferred shares and warrants.
Buffett struck a deal with Goldman Sachs Group Inc. in March tied to his warrants in the bank that stands to give him a common stock holding. Buffett said yesterday in an interview that he passed on a chance to buy $5 billion of Goldman Sachs shares at below-market prices, taking the smaller stake instead as he focuses on his top holdings. Buffett has also said that he owns JPMorgan shares in a personal account.
JPMorgan Chief Executive Officer Jamie Dimon has faced calls from some investors to relinquish his chairman role after risk-management lapses fueled more than $6.2 billion in losses on derivatives bets. Derivatives are derived from stocks, bonds, loans, currencies and commodities, or linked to specific events such as changes in the weather or interest rates.
Buffett supported Dimon’s dual role, saying last week he “couldn’t think of a better chairman” for New York-based JPMorgan.
JPMorgan’s bungled bets were cited by critics who say that even the better-managed banks, some with more than $1 trillion in assets, are too large and complex to be properly run. Senators Sherrod Brown, a Democrat, and Republican David Vitter proposed last month to raise capital requirements for firms with more than $500 billion in assets. Last year, Citigroup Inc. ex-CEO Sanford “Sandy” Weill said that deposit-taking operations should be split from investment banking to prevent another financial crisis.
Munger has voiced criticism of Wall Street activities before. In May 2009, he said he supported expanded regulation of banks and a total ban of credit-default swaps, the derivatives tied to bonds.
“I would eliminate it entirely -- 100 percent,” Munger said at the time. “That’s the best solution. It isn’t as though the economic world didn’t function quite well without it, and it isn’t as though what has happened has been so wonderfully desirable that we should logically want more of it.”
In 2011, he said the financial crisis was caused by “some combination of megalomania, insanity and evil in, I would say, investment banking, mortgage banking.”
To contact the reporters on this story: Noah Buhayar in Omaha at firstname.lastname@example.org; Margaret Collins in Omaha, Nebraska at email@example.com; Hugh Son in New York at firstname.lastname@example.org
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