(BRK.A), (BRK.B)
“I don’t think you can trust bankers to control themselves. They’re like heroin addicts,” Charlie Munger famously said.
At age 94, Berkshire Hathaway’s vice chairman has seen enough business cycles to know that when things go bad, banks fail.
Yet, now that the Great Recession is far enough in the rearview mirror you get the inevitable push to loosen the proprietary trading regulations and bank debt to equity financial requirements that were put in place to prevent the very excesses that brought on the most devastating financial crisis since the Great Depression of the 1930s.
Among the changes, thanks to bank and financial institution lobbying, U.S. regulators are proposing changes to the “Volker Rule” introduced after the 2007-2009 financial crisis that bans banks from trading on their own account in order to make compliance easier for many firms.
The 2010 Dodd-Frank financial reform law banned banks that held U.S. taxpayer-insured deposits from engaging in proprietary trading.
Former Federal Reserve chairman Paul Volker, whom the rule is named after, supports simplification, as long as the new rules meet the intent of the the current regulations.
“What is critical is that simplification not undermine the core principle at stake — that taxpayer-supported banking groups, of any size, not participate in proprietary trading at odds with the basic public and customers’ interests,” Volcker notes.
The proposed changes are now undergoing a 60 day public comment period.
President Trump has already signed into law changes in regulations impacting small and medium-sized lenders. Among the changes, the bill raised to $250 billion from $50 billion the threshold under which banks are deemed too big to fail, and eliminated the requirement for stress tests for the banks below that threshold as well.
Loosening some regulations may in fact bring some needed relief and improved efficiency for banks, but the fact that a number of democrats have signed on to this effort in addition to republicans says as much about the power of the banking lobby as it does about bipartisanship.
Berkshire Hathaway shareholders have a direct interest in the solvency of some of the largest financial institutions because Berkshire owns sizeable stakes in Wells Fargo, American Express, and Bank of America, not to mention Goldman Sachs.
While loosening of financial regulations may boost share prices and increase dividends in the short term, the question is whether it increases the likelihood of catastrophic financial institution failures in the future.
The Great Depression and the Great Recession are certainly the two most memorable periods of mass bank failures, but investors should keep in mind that there have been many more, including the Panic of 1819, the Panic of 1837, the Panic of 1873, and the Panic of 1907.
And don’t forget the Savings and Loan Crisis of the 1980s and 1990s, which saw 1,043 failures, accounting for roughly one third of all Savings and Loan associations.
Over the years, Charlie Munger has astutely noted that free market objectives are different than letting the fox have unfettered access to the henhouse, and he hasn’t been afraid to say so.
“People really thought that giving a predatory class of people the ability to do whatever they wanted was free-market enterprise, Munger wryly observed at the WESCO annual meeting in 2009. “It wasn’t. It was legalized armed robbery. And it was incredibly stupid.”
As for the push for tight regulations, “Banks will not rein themselves in voluntarily. You need adult supervision,” Munger wisely pointed out.
© 2018 David Mazor
Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.