Warren Buffett's Advice for the 2023 Economic Recession

Are we through the banking crisis at this point? Failures, the orders of banks may have lost a hell of a lot of money. The people who want the debt of the holding company, they may lose a lot of money. People can, they can lose a lot of money, uh, but the depositors aren't good. So you don't need to turn a dumb decision by managers and do a panicking the whole citizenry of the United States about something they don't need to be panicked about.

Well, leveraging Valley investors got a very unexpected present this week as Warren Buffett invited Becky Quick of CNBC to fly over to Japan to do a two and a half hour sit-down interview with him, talking all things business and, of course, the state of the financial system. Quite an odd situation all around, but Buffett is there with future Berkshire CEO Greg Abel to visit the five Japanese trading houses that they've been investing in since 2020.

But in this video, we're not going to be talking about those investments; instead, we are going to focus on Buffett's thoughts and opinions on the strength of the banking sector and also the stability of the U.S. economy. With that said, let's talk about what's happening in the banking sector right now.

Is this a banking crisis? Is this financials in turmoil? Is this banking crisis 2.0? What would you call what we've been seeing happen? Well, I would say that some of the dumb things that banks do periodically have become uncovered, uh, during this period. And the banker told me one time, he says, "I don't know why we keep looking for new ways to lose money when the old ones are working so well." They made the same mistake some banks in this period by, by they haven't made as many mistakes. They expect to make some mistakes in making laws, and particularly if you're getting into credit card loans.

I mean, that's just part of the game, but they haven't made it the same sort of mistakes that they made back in 2008 or 2009. The mistakes that Buffett is about to describe predominantly surround taking unnecessary risks and masking losses through accounting trickery to essentially make their earnings look as good as possible. Specifically, he takes aim at banks that keep these long-term government bonds on their books at par value instead of their actual market value, which hides the paper losses that they actually sit on.

But they have mismatched assets and liabilities, and bankers have been tempted to do that forever. And every now and then, and then it bites them in a big way. It's just amazing to me that, uh, banks can make presentations to financial analysis and everything, and if one bank bought a bond at 100 and another bank bought it at 96, and they both held it to maturity, one banker is it at 100; the other bank carries in the 96. I mean, accounting procedures have driven some bankers to do some things that may have helped their current earnings a little bit and pulled it, and cause the recurring temptation to get a little bit bigger spread on report a little more in earnings.

It's entered in a result you could predict, but the banks did not call attention to what they were doing, what was going on. I would read investor contact when they would have meetings with the national analysts or the people following banking, and nobody even brought up the point virtually. And believe me, if we've got a 50 billion dollar loss or something, it's up like a Berkshire—we would expect to be able to know about it. And, uh, it's happened before, it's happened this time, it'll happen again someday.

And I think Warren raises a fair point here. If you do carry big paper losses on your balance sheet, the investors deserve to know about them. He knows that if Berkshire made a 50 billion loss on something, he would expect that people would want to know about it. And that's where it's so important to invest in businesses with honest and transparent management teams.

For example, when Warren writes his annual shareholder letter, he's not in the business of hiding Berkshire's true performance. Heck, the first few pages are always the year-by-year performance of Berkshire Hathaway stock versus the S&P 500. That's the kind of manager that you want.

Listen to this line, and think how many CEOs are honest enough to speak like this: He says, “In 58 years of Berkshire management, most of my capital allocation decisions have been no better than so-so. In some cases, also bad moves by me have been rescued by very large doses of luck.” You know, it's a pretty stark difference to the salesman tone you get on most earnings calls.

And Buffett notes that it's this kind of accounting trickery and potential for hiding things that ultimately led him to sell off most of his bank positions over the last few years. "Did you see this? You were reading through the reports; you followed all these banking earnings that were coming in. So you noticed it? You shot it?"

"Sure, I noticed it. Is that why you sold so many of the banks?"

"We sold a number of banks. I don't like it when people get too focused on the earnings number and forget what I've always viewed as basic banking principles. I'm not going to get into any names or anything like that, but it happened in varying degrees throughout the industry. I just think the system isn't quite right in terms of connecting punishment to corporate responsibility.

It's incredibly important that your banking system runs well in the country. It just isn't going to work unless you have a banking system that works, and you don't want them to create periodic crises unnecessarily. It's important the banks retain the confidence of the public, and they can lose it, you know, in seconds. We saw a country that was not worried about banks, you know, until about Wednesday or Thursday of the week when someone can tell, ‘Don't worry, nothing’s all of a sudden,’ everybody was worried about it all over the country."

So Buffett is basically explaining that the trend in the U.S., unfortunately, is the banks are becoming more and more short-term focused, looking to impress from quarter to quarter instead of keeping their eyes on the horizon, making the best decisions possible for the long-term health and growth of their respective companies. He noted that he started to see this occurring in the U.S. bank stocks he held; he didn't like that trend, so he sold out.

And you can see this in his portfolio history. He's reduced practically every U.S. bank substantially over the past few years, except for one, which is, of course, Bank of America. As you can see here on Simply Wall Street, Bank of America holds up pretty well in terms of financial health versus most other banks and isn't taking big risks to try and chase those bigger profits.

I do want to take this moment to thank Simply Wall Street for sponsoring this video. It's not just financial health we can look for when we look at Bank of America; you can also see things like dividend stats, management analysis, ownership data. Then, if we scroll back up towards the top, we can look at past performance, future growth expectations, valuation metrics, and a whole lot more.

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But back to Buffett. So personally, he decided to sell out of the banks because he noticed some of these banks kind of drifting from those core banking principles. But one thing he was very vocal about in this interview is that the average American doesn't need to worry about losing their deposits. He noted several times that banks may fail, but the American public has no reason to worry.

People shouldn't be worried about losing their money and the deposits they have in an American bank, and today they have no reason to worry. You know, you can say that we're going to hit the deficit ceiling, you know, and does that signaling, uh, and you know it, and everybody makes hay out of it—political empyre thinking we're going to change the debt ceiling again—and the unnecessary apprehension commentary, everything that's caused by the fact that people say, ‘Well, the law doesn't allow the federal nut to get above X.'

Well, they're going to change it. The United States is not going to let a debt ceiling mess up the whole world. It could have been added that the American public is not going to lose, no American advisors can lose any money in their bank, but they got 250,000 or more. But a change is needed; we'll make it emphasize the other banks are going to pay the cost of it.

So Buffett really brings everybody back to reality with this clip in the interview. He discusses at some length just how frustrating he finds that the media and politicians like to twist the story and sensationalize this relatively small issue to be another 2008 moment, but he reiterates multiple times in this interview that the American public has no reason to panic.

At the end of the day, the FDIC, Federal Reserve, and the Treasury will make sure the deposits of the American people are safe. But, of course, when you think about it, this raises a very interesting issue, and it's one that I've spoken about quite recently. You know, if the FDIC and the Treasury and the FED come out and guarantee that all Americans' deposits are safe, won't that just lead to the head honchos at the banks taking unnecessary risks with their balance sheets?

I mean, if the president and Jerome Powell say, "Don't worry, all deposits are safe, we'll back them up," won't bankers take comfort in that kind of fallback option and start chasing riskier and riskier bets in order to try and make more money? You give bank managers or CEOs the notion that all their depositors are going to be protected, and then they're going to keep promising higher rates that they can't deliver, and they're going to do all kinds of things because they're not worried about their depositors anymore.

But you've got an answer for how to deal with that?

Absolutely! I mean, they've got to have something to lose themselves. I mean, in 2008, all kinds of trouble was caused by the banks, but no bank executive—the CEOs that made those decisions—they all continued to live fine. You know, they may have lost their job, but they still got their pensions. So I would absolutely suggest that anybody—the CEO, anybody who's the CEO of a bank that screws up and causes shareholders a lot of money, that in effect, you know, they got no pension from the bank.

They go back to living, you know, like a person that works on the production line of Ford or something like that. They don't deserve anything special, and I would suggest to the directors of the bank that sat there for five years and listened to people come in and give reports and all that sort of thing, that they give back all their directors' fees. I mean, there's got to be consequences for the people who make the decisions, and this is something that was severely lacking in 2008.

Bankers took huge risks in the pursuit of greater profits, but they knew that they personally weren't going to be on the hook when it all blew up. In fact, in many cases, they walked away with handsome bonuses for, let's be honest, destroying America's financial system. Lehman CEO Dick Fold walked away with 34 million dollars in 2007. John Thain at Merrill Lynch spent 1.2 million on office renovations as the sky fell at Citi. Charles Prince resigned as CEO in 2007 and received a 10.4 million dollar bonus.

Joseph Cassano, AIG, earned 34 million dollars in bonuses in 2008. And, of course, you know this is going to keep happening. Personally, I'm very much a realist as opposed to an idealist. I don't think you can stop greed, so I'm definitely in Camp Buffett on this one. Instead of just hoping that the next banking CEOs are good people, actually stamp it into their contracts that they need to perform and act safely for them to be rewarded.

You know, will we ever see this though? Who knows?

But with that said, I have one more clip for you guys, and this one is actually quite interesting. With all the stock price carnage we've seen in the banks over recent times, do any of them actually present good investing opportunities? According to Mr. Warren Buffett, are the regional banks right now, the First Republics and the like, a steal from a value proposition?

"No, they're not going to save the stockholder. I didn't say that they're saving the stockholder; I did the same saving the debt of the holding company. They should lose money. I mean, I don't have any problem with people losing money because if they do dumb things. But the depositors are going to get their money, and they got their money on, you know, in the case of the Silicon Valley on Monday morning, but they were sweating bullets all weekend unnecessarily.

If it's just if they just understood how the system worked. And you know it, uh, you know, it's a failure of all of ours that that message isn't really not communicated. I don't think one person out of a hundred can describe how the FDIC actually operates and where they get their money and who appoints the people that are working there, who pays the salary of the people. It's a misunderstood institution."

So Buffett is very quick to make the distinction that these actions from the Treasury and the FED are not going to save stockholders. So know these failing banks are not a steal, as Andrew says, and in fact, a lot of these shareholders are going to suffer some pretty big losses. The only thing the so-called bailout is going to do is protect the depositors that actually have money sitting in the bank.

And this answer is very much expected from Buffett because what do you know? He's of course been selling his bank stocks over the past few years.

So I think in summary, Buffett's thoughts are that, you know, no, this definitely isn't a 2008 style bank crisis. Although yes, some banks will fail, but rest assured that as an American citizen, you know your bank deposits are not at any sort of risk of disappearing.

But anyway, guys, they are Buffett's recent thoughts on the banking crisis. I'd love to hear what you guys think down in the comments section below. Otherwise, please leave a like on this video if you did enjoy it, subscribe if you'd like to see more, and that'll do me.

Thanks very much for watching, guys. I'll see you guys in the next video.