Large related party transactions reported by the Wall Street Journal were disclosed in the company's 145 page proxy statement, available for all to see for nearly a year.
I was asked why I am not interested in buying regional banks despite the carnage. Simple answer is that I delegate this to Buffett. It was widely reported that dozens of private jets landed in Omaha last weekend. No deal so far. If there’s something to do, Buffett will do it. Does that mean others might not want to play in this game themselves? Sure, but I see no reason to think I have any edge playing this game myself. Too much depends on the actions of regulators and politicians. And often fickle depositors in a panic, with people like Ackman spreading panic on social media. Too hard pile for me.
“With the caveat that I am not an expert when it comes to this bank and am not commenting on the ethics or intentions of its management, it does seem quite obvious that the company has provided generous pay to its executives and directors.”
While the absolute numbers are obviously eye popping, do you believe that the pay is overly generous on a relative basis? And if so, why? I’m curious how seriously you take the statement on the CEO’s pay being in the 79th percentile relative to 93rd percentile performance.
There are major agency problems in corporate America that act in concert to elevate pay. It starts with boards that typically lack meaningful ownership purchased with the director’s own money, giving directors limited incentives to object to high pay. Compensation consultants are usually employed to provide counsel, and they look to comparable companies that also have similar structural issues. Many board members are either current executives at other firms or retired executives who themselves have reasons to like generally elevated levels of pay. The end result of multiple factors is that pay for executives is extremely high. I don’t have a solution other than to adopt a policy like Berkshire’s which isn’t going to happen at 99% of companies.
“ Too often, executive compensation in the U.S. is ridiculously out of line with performance. That won’t change, moreover, because the deck is stacked against investors when it comes to the CEO’s pay. The upshot is that a mediocre-or-worse CEO – aided by his handpicked VP of human relations and a consultant from the ever-accommodating firm of Ratchet, Ratchet and Bingo – all too often receives gobs of money from an ill-designed compensation arrangement.….”
Another excellent article. Thank you. I have invested in 3 banks, all of which Buffett/Munger have current or prior to investment. A lesson learned is that when they divest, I should have followed. The first one was Bank of America, when he bought the preferred with warrants. The dramatic falls of seemingly healthy banks is extremely alarming and reinforces my belief that analysis of such complex financial institutions is best left to Buffett.
The speed of bank runs in the age of social media is extreme and unprecedented. Combined with seemingly capricious behavior of regulators and politicians, this makes the sector too hard for me. Buffett definitely has a level of insight and connections that few others have.
You have reemphasized my curiosity about what the various banks that 'lent" First Republic $30 billion got for their money. Evidently, some goodwill with the regulators and the possibility of stabilizing the system? Time will tell.
I was asked why I am not interested in buying regional banks despite the carnage. Simple answer is that I delegate this to Buffett. It was widely reported that dozens of private jets landed in Omaha last weekend. No deal so far. If there’s something to do, Buffett will do it. Does that mean others might not want to play in this game themselves? Sure, but I see no reason to think I have any edge playing this game myself. Too much depends on the actions of regulators and politicians. And often fickle depositors in a panic, with people like Ackman spreading panic on social media. Too hard pile for me.
Regarding this statement:
“With the caveat that I am not an expert when it comes to this bank and am not commenting on the ethics or intentions of its management, it does seem quite obvious that the company has provided generous pay to its executives and directors.”
While the absolute numbers are obviously eye popping, do you believe that the pay is overly generous on a relative basis? And if so, why? I’m curious how seriously you take the statement on the CEO’s pay being in the 79th percentile relative to 93rd percentile performance.
There are major agency problems in corporate America that act in concert to elevate pay. It starts with boards that typically lack meaningful ownership purchased with the director’s own money, giving directors limited incentives to object to high pay. Compensation consultants are usually employed to provide counsel, and they look to comparable companies that also have similar structural issues. Many board members are either current executives at other firms or retired executives who themselves have reasons to like generally elevated levels of pay. The end result of multiple factors is that pay for executives is extremely high. I don’t have a solution other than to adopt a policy like Berkshire’s which isn’t going to happen at 99% of companies.
Buffett has written extensively on problems with executive pay over the years. One
letter that comes to mind is 2005 starting on page 16:
https://www.berkshirehathaway.com/letters/2005ltr.pdf
“ Too often, executive compensation in the U.S. is ridiculously out of line with performance. That won’t change, moreover, because the deck is stacked against investors when it comes to the CEO’s pay. The upshot is that a mediocre-or-worse CEO – aided by his handpicked VP of human relations and a consultant from the ever-accommodating firm of Ratchet, Ratchet and Bingo – all too often receives gobs of money from an ill-designed compensation arrangement.….”
Very helpful - thanks for the response
Another excellent article. Thank you. I have invested in 3 banks, all of which Buffett/Munger have current or prior to investment. A lesson learned is that when they divest, I should have followed. The first one was Bank of America, when he bought the preferred with warrants. The dramatic falls of seemingly healthy banks is extremely alarming and reinforces my belief that analysis of such complex financial institutions is best left to Buffett.
The speed of bank runs in the age of social media is extreme and unprecedented. Combined with seemingly capricious behavior of regulators and politicians, this makes the sector too hard for me. Buffett definitely has a level of insight and connections that few others have.
You have reemphasized my curiosity about what the various banks that 'lent" First Republic $30 billion got for their money. Evidently, some goodwill with the regulators and the possibility of stabilizing the system? Time will tell.