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December 7, 2021

When financial institutions swim naked


“You only learn who has been swimming naked when the tide goes out…”

This quote comes from Warren Buffett in his letter (February 2008) to Berkshire Hathaway shareholders for Year 2007. Mr Buffet was commenting on the woes facing financial institutions.

Here is an excerpt:
“Some major financial institutions have, however, experienced staggering problems because they engaged in the ‘weakened lending practices’ I described in last year’s letter. John Stumpf, CEO of Wells Fargo, aptly dissected the recent behavior of many lenders: ‘It is interesting that the industry has invented new ways to lose money when the old ways seemed to work just fine.’

“You may recall a 2003 Silicon Valley bumper sticker that implored, ‘Please, God, Just One More Bubble.’ Unfortunately, this wish was promptly granted, as just about all Americans came to believe that house prices would forever rise. That conviction made a borrower’s income and cash equity seem unimportant to lenders, who shoveled out money, confident that HPA – house price appreciation – would cure all problems. Today, our country is experiencing widespread pain because of that erroneous belief.

“As house prices fall, a huge amount of financial folly is being exposed. You only learn who has been swimming naked when the tide goes out – and what we are witnessing at some of our largest financial institutions is an ugly sight.”

Recommended reading:

(1) The Essays of Warren Buffett: Lessons for Corporate America, Third Edition

(2) Berkshire Hathaway Letters to Shareholders, 1965-2013

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