2012: How do European banks compare to American banks?

AUDIENCE MEMBER: Hello, Mr — Hi, Mr. Buffett. My name is Bernard Fura (PH) from Austria, Vienna.

My question is about banks. What’s your view on the European banks? What’s your view on the U.S. banks? And what must happen that you invest in European banks? Thank you.

WARREN BUFFETT: Well, I have a decidedly different view on European banks than American banks.

The American banks are in a far, far, far better position than they were three or four years ago. They’ve taken most of the abnormal losses that existed, or that were going to manifest themselves, in their portfolios from what’s now 3 1/2 or four years ago.

They’ve buttressed their capital in a very big way. They’ve got liquidity coming out their ears at the bigger banks. The American banking system is in fine shape.

The European banking system was gasping for air a few months back, which is why Mr. Draghi opened up his wallet at the ECB and came up with roughly a trillion euros of liquidity for those banks.

Now a trillion euros is about $1.3 trillion, and $1.3 trillion is about one-sixth of all the bank deposits in the United States.

I mean, it was a huge act by the European Central Bank, and it was designed to replace funding that was running off from European banks. European banks had more wholesale funding than American banks, on average.

If you look at the Bank of America or Wells Fargo, they get an enormous amount of money from a natural customer base. European banks tended to get much more of it on a wholesale basis, and that money can run pretty fast.

So the European banks need more capital in many cases. They’ve done very little along that line.

One Italian bank had a rights offering here three or four months ago, but basically they have not wanted to raise capital, probably because they didn’t like the prices at which they would have had to do so, and they were losing their funding base.

The problem on the funding base has been solved by the ECB because the ECB gave them this money for three years at 1 percent.

I’d like to have a lot of money at three years at 1 percent, but I’m not in trouble, so I can’t get it. (Laughter)

But I just — if you look at our banking system, it’s really remarkable what’s been accomplished.

I thought at the time that the Treasury and the Fed were maybe a little overdoing it when they brought those bankers to Washington and banged their heads together and said you’re going to take this money whether you like it or not.

But overall, I think that policy was very sound for this country’s economy. And if some banks were forced to raise capital that they didn’t need, you know, which I might not have liked as a shareholder at one of them, overall, I think that our society benefited enormously.

And I think the Fed and the Treasury has handled things quite sensibly during a period when if they hadn’t handled this sensibly, that our world today would be a lot different.

Charlie?

CHARLIE MUNGER: Yeah. Europe has a lot of problems we don’t. We’ve got this full federal union, and the country that runs the central bank can print its own money and pay off its own debt and so on.

And in Europe, they don’t have a full federal union and that makes it very, very difficult to handle these stresses. So we’re more comfortable with the risk profile in the United States.

WARREN BUFFETT: It’s night and day. I mean, it — in the fall of 2008, when essentially Bernanke and Paulson, and implicitly, the President of the United States, said we’ll do whatever it takes, you knew that they had the power, and the will, to do whatever it took.

But when you get 17 countries that have surrendered their sovereignty, as far as their currency is concerned, you know, you have this problem. Henry Kissinger said it a long time ago. He said, “If I want to call Europe, what number do I dial?”

You know, and when you have 17 countries and — just imagine if we’d had 17 states in 2008, and we had to have the governors of those states all go to Washington and agree on a course of action when money market funds were — there was a panic in there, the panic in commercial paper, you name it — we would have had a different outcome.

So I would put European banks and American banks in two very different categories.