Banks Need Long Memories

Warren Buffett has just revealed a $5bn investment in Goldman Sachs, a very significant vote of confidence in a very fragile market.

Meanwhile I found myself reading some early Letters to Berkshire Shareholders for the period 1969-1976 and a couple of particular comments jumped right off the page at me. These were written in March 1973 about the banking subsidiary of Berkshire, The Illinois Bank and Trust Co and in relation to the year 1972:

"During 1972, interest paid to depositors was double the amount paid in 1969. We have aggressively sought customer time deposits, but have not pushed for large "money market" certificates of deposit although, during the past several years, they have generally been a less costly source of time funds".

In conclusion he writes: "Our subsidiaries in banking and insurance have major fiduciary responsibilities to our customers. In these operations we maintain capital strength far above industry norms, but still achieve a good level of profitability on such capital. We will continue to adhere to the former objective and make every effort to continue to maintain the latter".

These comments were made 36 years ago and yet it is the fundamentals underlying these concepts (a conservative capital position and less reliance on wholesale funding) which have been neglected by many financial institutions and which have subsequently led to their demise in this current crisis. If Buffett understood this in 1973, and has had a further 36 years to refine his thinking, no wonder he is the world's greatest investor.