Warren Buffet Raises Red Flags On Banks


Berkshire Hathaway chairman, Warren Buffett, used his annual address to shareholders to warn about banks, especially investment bankers. In the annual letter, the billionaire investor ridiculed bankers, citing their maneuvers to win merger deals.

According to Buffett, bankers’ appetites for deals mean that they can do almost anything to push for the sale or purchase of a company. He cited how investment bankers usually urge buyers to pay premiums of up to 50% for the target company. Investment bankers usually tell buyers wonderful things that will happen once the deal closes, such as “control value” of the acquisition. The interest of the bankers is to push a deal through and get paid for their action.

However, Buffett said the same bankers would turn up a few years later and urge for the spinoff of the business they had pushed so hard to be acquired. Instead of control value, bankers change the story and urge for spinoff of the acquisition on the basis of unlocking shareholder value.

A case in point

Of course, the Berkshire chairman is correct. Hewlett-Packard Company (NYSE:HPQ) is a case in point. The technology company built an empire through mergers and acquisitions but is now planning to spin off the businesses.

Buffett’s candid observation about flaws in the financial sector have made him one of the few billionaires loved by the masses. However, players in the financial industry hold that Buffett’s comments are based on hearsay. They also say that the Berkshire chairman doesn’t take advice from bankers.

Amid criticism of the financial industry, Buffett is never blind to virtues of certain investment banks. He has JPMorgan Chase & Co. (NYSE:JPM) in his personal account, and Goldman Sachs Group Inc (NYSE:GS) is in the portfolio of Berkshire.

Buffett once said that if Goldman’s CEO, Lloyd Blankfein, had a twin brother he wouldn’t mind voting for him. He also once said that if he owned JPMorgan, Jamie Dimon would be running the business as long as he wanted. Still, he said, Dimon could make more money if he just moved to Berkshire.

Nothing personal

According to Buffett, his critique of bankers isn’t personal. He says he works with them. His mission is to educate Berkshire shareholders. Of course, he says, there is nothing wrong with pointing out biases in a particular field.

Neha Gupta

Neha Gupta has been in the financial space for over six years now. Gupta earned her MBA degree from Symbiosis Centre of Distance Learning in 2009 and her passion for finance led her to pursue Chartered Financial Analyst (CFA) course. She has successfully completed Level II of her CFA. She is a veteran in article writing, which is depicted in her numerous pieces published on SeekingAlpha, Nextiphonenews, InsiderMonkey, MarketWatch, and Techinsider. Her crisp and eloquent writing finds its best place in Researchcows, where emphasis is given on developing rich content for various websites, products, business plans, trainings, and book writing.

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