Warren Buffett is the Oracle of Omaha, a national treasure, our Yoda grandpa of investing, so we should probably just take his word for it when he says that the banks in his portfolio are in perfectly fine health and are not going to hurt our economy or anything.
In fact, Buffett, in an interview with Bloomberg discussing his candid views on the stocks he owns, takes a big personal risk in praising these banks. Not only could he possibly have to pay higher capital-gains taxes when their share prices rise, but he also personally believes that “the banks will not get this country in trouble, I guarantee it.” This is exciting, what will Warren Buffett give us if he's wrong? He's a billionaire, so it could be anything. Maybe jobs? Nice, thick cardboard for our shantytowns? The possibilities are endless.
Actually, if the banks do get us into trouble again with another financial crisis, Buffett will probably just buy more shares, which is what has been doing since the last crisis, all the while telling us that everything's just fine now. And we have believed him, to the point where we're starting to go a little squishy on trying to prevent another crisis. Global regulators recently backed down on new Basel III capital and liquidity requirements for banks, for example, buying the classic argument that making banks safer will keep them from lending. Writing in the New York Times, MIT economist Simon Johnson suggests Basel III should be a "floor, not a ceiling" for bank regulation in the U.S. Though I don't have as much to offer as Buffett if I'm wrong, I will personally guarantee you that's not happening, at least not without another crisis.
Other stories today suggest either that not all banks are in quite the fine fettle Buffett says, or at least that a few regulators aren't willing to just take Buffett's word for it. Morgan Stanley announced it was slashing jobs at its trading business, and it may need to shrink even further, raising questions about just what kind of bank it will be, writes Susanne Craig of the New York Times. But Morgan Stanley is not alone; other large investment banks still need to trim down, too, writes Reuters.
The Wall Street Journal, meanwhile, reports that Deutsche Bank turned a neat profit of $654 million betting on the heavily manipulated benchmark lending rate known as Libor in 2008, a time when global markets were at their absolute craziest. The story kinda-sorta hints the bank was manipulating Libor to help its own book, which is something many banks were doing at the time. Deutsche Bank denies it was doing that. But the story is a reminder that, however healthy banks will be, they still need somebody keeping an eye on them.
Speaking of which, the Consumer Financial Protection Bureau will issue new rules today keeping a tight lid on the kind of dicey mortgages banks sold before the financial crisis, in order to help prevent a rerun. The Washington Post points out that these rules could crimp mortgage lending. But that's kind of the point. When banks are as healthy as Warren Buffett says they are, they start reaching for risk. Now's as good a time as any to figure out what the limits of that risk should be.
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