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Loews CEO James Tisch used a colorful Warren Buffett quote to describe the recent banking chaos.
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The insurance, energy, and hotel company’s boss praised regulators for staving off catastrophe.
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Tisch warned of more turmoil ahead, and urged the Fed to pause its rate hikes for three months.
Loews CEO James Tisch employed one of Warren Buffett’s favorite maxims to describe what happened during the recent banking fiasco. He also praised regulators for acting swiftly to stop the bank failures from escalating into a financial crisis, but warned there could still be more collapses to come.
“As Warren Buffett says, ‘When the tide goes out, you see who was swimming without a bathing suit,'” Tisch said. He spoke during his insurance, natural-gas logistics, and hotel company’s earnings call this week, according to a transcript provided by AlphaSense/Sentieo.
Buffett — the billionaire investor who runs Berkshire Hathaway — was asked about the banking debacle during a recent interview and replied with a twist to his famous saying.
“We actually ran into a nudist colony here, in terms of banks all over doing that sort of thing,” Buffett said.
Silicon Valley Bank and Signature Bank ran into trouble earlier this year because they had an unusually large percentage of uninsured deposits, and invested heavily in long-dated bonds that slumped in price as interest rates climbed over the past year or so.
Their customers grew worried about the safety of their money and withdrew it in droves, forcing the Federal Deposit Insurance Corp. to seize both lenders and guarantee all of their deposits. First Republic also saw more than $100 billion of deposit outflows in the first quarter, and was acquired by JPMorgan this week.
The bank turmoil in early March was a “calamity” that raised the terrifying prospect of a sweeping run on American banks, Tisch said. If authorities hadn’t intervened, they risked a “full-fledged banking catastrophe” and a “massive, uncontrolled bank scare” with huge repercussions, he continued.
“It would have been the equivalent of a neutron bomb hitting the economy,” he said. “The best way to stop a bank run — as well as a brush fire and a riot — is not to let it get started in the first place.”
However, Tisch warned of more trouble ahead. Regulators still haven’t guaranteed bank deposits beyond the FDIC’s $250,000 limit, he noted, meaning smaller lenders remain at a competitive disadvantage to peers that are “too big to fail.”
“I wouldn’t be surprised if other flare-ups appear in the coming months,” he said.
In response to inflation hitting a 40-year high last year, the Fed has hiked interest rates from nearly zero to about 5% within the past 14 months.
Those increases have allowed banks to charge more interest on loans. But they’ve also eroded the value of their bond portfolios, boosted the risk of default in their loan books, and hit asset prices in key sectors they lend to including commercial real estate.
Higher rates also encourage saving over spending, and increase borrowing costs for consumers and businesses more broadly, raising the risk of an economic slowdown or recession.
There are already signs the economy is slowing, Tisch said. He also emphasized that rate hikes have a delayed impact, and flagged the risk of a credit crunch if lenders balk at making loans given their deteriorating finances and the risk of further bank runs.
As a result, Tisch called on the Fed to halt its rate hikes for three months. A prolonged pause would give the central bank time to assess a slew of economic data, and properly gauge the threat posed by inflation.
Read the original article on Business Insider
Source: finance.yahoo.com