Dark Buffett, Buying Banks, Jewish Treasury Bills, and Amex's Float: More Alternate History
Buffett: "In Wall Street the old proverb has been reworded. Give a man a fish and you feed him for a day. Teach a man to arbitrage and you feed him forever."
As many of you are gearing up for Berkshire’s annual meeting, I wanted to share a few more what ifs to chew on (What if? Warren E. Buffett, An Alternate History).
This weekend, Munger commented on Berkshire’s past bank investments: “some worked out very well for us. 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.”
Berkshire once owned an entire bank, the Illinois National, but was forced to divest it to avoid becoming a bank holding company. This was at a time when Buffett and Munger were actively hunting for more bank acquisitions!
We bought all of a bank in 1969. We bought a bank in Rockford, Illinois. Charlie and I must have looked at a half a dozen banks at that in a two or three-year period. We trudged around and we found some very oddball banks that we liked. They were characterized by very little risk on the asset side and very cheap money on the deposit side. And even Charlie and I can understand that. And low prices, incidentally, too. And then they passed the Bank Holding Company Act in 1969, and they killed off our chances to do anything further in buying all of banks. — 2002 Annual Meeting
This resurfaced in 2011 during a discussion about currency risk. Believe it or not, Buffett and Munger nearly borrowed money in the Middle East to buy more banks.
Charlie and I, we were trying to buy that bank back in Chicago in the late 1960s, and this was a time of really tight money. And tight money was different then than tight money is today. I mean, tight money meant no money. The only place we could find some money was in Kuwait in dinars, wasn’t it?
Munger: Kuwaiti dinars. (Laughter)
Buffett: : And I thought to myself, and Charlie concurred, who the hell knew what they were going to say the value of the dinar was when we went to pay it back. It was not something over which we had a lot of control. So we decided not to borrow the money in dinars even though I kind of wish we’d bought the bank.
What if Buffett had gone all-in on banking instead of insurance?
Much like insurance, banking per se is not a great business, but individual banks can be. However, bank deposits are a much less flexible source of capital than insurance float. Could Buffett have become a kind of Andy Beal, an opportunistic banker oscillating between hibernation and investments in distressed assets (an excellent example of someone playing the industry’s capital cycle)? Buffett certainly has the patience and discipline. But it is difficult to imagine him giving up his flexibility.
He could have grown his banks through acquisitions like Jamie Dimon who just scooped up First Republic. This Dimon quote wouldn’t feel out of place at Berkshire’s annual meeting:
Don’t do anything stupid. And don’t waste money. Let everybody else waste money and do stupid things; then we’ll buy them.
Could Buffett have ended up building the nation’s largest bank through opportunistic deals and a portfolio of ‘oddball banks’? Perhaps. But I doubt he would have tap danced to work. Then again, what if the acquisition of National Indemnity had fallen through…
Thank you for reading and enjoy the annual meeting to all who are going or watching remotely.
First part: Warren E. Buffett, An Alternate History.
The GOAT of Float. What if the delicate deal for National Indemnity hadn’t happened?
The Payout. What if Buffett had accepted Stanton’s offer and sold his Berkshire stock?
The Business of Investing. What did Buffett really learn at Graham-Newman that was crucial to his success?
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