Even when Munger admires a banker, he has choice words. Here he is on Jamie Dimon of JPMorgan Chase & Co. (NYSE:JPM). (Note: Buffett has mentioned that he personally owns some JPMorgan shares):
I think Jamie Dimon is a fine and admirable man. But the world would be better off if JPMorgan didn’t run a gambling casino alongside a legitimate business. I take my hat off to Dimon, but I’d take away his derivative book in a second.
Speaking of derivatives, Munger is downright livid (from 2012):
Some of the most eminent and most admired people in finance, including Greenspan, argued that derivatives trading, in the [modern] form of the old bucket shop, was a great contribution to modern economic civilization. There is one word for this: It is insane.
One last dig from Munger (from 2011):
Greenspan was a smart guy but he totally overdosed on Any Rand when he was young. You can’t give bankers the freedom to create gambling games. That’s what it was. Wall Street was a gambling house, and the house’s odds were better than a Vegas casino. And real casino operators have to build parking lots, fly in entertainers, pay for bars and restaurants. It’s expensive. Wall Street was like a casino with no overhead. It was hog heaven for them. But it created vast damage with terrible consequences to civilization.
What about Buffett? In his 2009 letter to shareholders, he went off on derivatives:
Derivatives are dangerous. They have dramatically increased the leverage and risks in our financial system. They have made it almost impossible for investors to understand and analyze our largest commercial banks and investment banks … Improved “transparency” — a favorite remedy of politicians, commentators and financial regulators for averting future train wrecks — won’t cure the problems that derivatives pose. I know of no reporting mechanism that would come close to describing and measuring the risks in a huge and complex portfolio of derivatives. Auditors can’t audit these contracts, and regulators can’t regulate them. When I read the pages of “disclosure” in 10-Ks of companies that are entangled with these instruments, all I end up knowing is that I don’t know what is going on in their portfolios (and then I reach for some aspirin).
Lately, he’s turned around completely. In January, Buffett told Bloomberg:
The banks will not get this country in trouble, I guarantee it. The capital ratios are huge, the excesses on the asset side have been largely cleared out.
In a separate interview earlier this month, Buffett spoke of Bank of America Corp (NYSE:BAC) :
I have no idea whether it’s going to go up or down tomorrow or next week or next month or next year. But, they are making progress in getting rid of a lot of things that they shouldn’t have been in. They’re making progress on cleaning up mortgage problems from the past. Most of which came from their acquisition of Countrywide. They’re doing the right things, and they’ve got a terrific low-cost deposit base. So over time, they will do well.
Of course, his record here is not infallible. In 2009, he wrote to shareholders:
I made some other already-recognizable errors as well. They were smaller, but unfortunately not that small. During 2008, I spent $244 million for shares of two Irish banks that appeared cheap to me. At yearend we wrote these holdings down to market: $27 million, for an 89% loss. Since then, the two stocks have declined even further. The tennis crowd would call my mistakes “unforced errors.”
Finally, in 1991, Buffett, then temporary CEO of Solomon Brothers amid a scandal, testified before Congress and mentioned a rule he held his banking employees to:
Lose money for the firm and I will be understanding. Lose a shred of reputation for the firm and I will be ruthless.
So it’s a bit of a puzzle. Buffett and Munger are viciously critical of derivatives and the opaqueness they cause, yet invest in some of the largest derivative dealers. They are critical of banks’ morality, yet appear to grant a waiver for immorality committed at banks they own shares of.
I don’t doubt that many of the big banks will make great investments, particularly at the terms Berkshire invests at. But what should you pay attention to: Buffett and Mugner’s words, or their actions? The two can be far apart.
The article What Buffett and Munger Have Said About Big Banks originally appeared on Fool.com.
Morgan Housel owns shares of Berkshire. The Motley Fool recommends Berkshire Hathaway and Goldman Sachs. The Motley Fool owns shares of Bank of America, Berkshire Hathaway, and JPMorgan Chase.
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