FX.co ★ Warren Buffett assails handling of banking turmoil

Many economists have vented their frustrations about the steps taken by the White House during the recent banking crisis. Depositors got their money back, the management of failed banks got away with it, and the US government stopped tremors in the financial sector by paying for everything. However, such a problem-solving approach has sparked outrage from professionals.

Berkshire Hathaway Chairman Warren Buffett was one of the opponents of government assistance. First Republic Bank offered non-government-backed mortgages at fixed rates, sometimes for terms of ten years, which Buffett called “a crazy proposition”. In his view, mistakes could have been easily spotted. “It was doing it in plain sight and the world ignored it ‘til it blew up,” the billionaire said. However, regulation overseeing the banking sector was riddled with skewed incentives and poor communication with the American public about the safety of customer deposits. The latter factor resulted in panic, which in turn caused further hardship. Buffett also noted that executives in charge of failed lenders and the subsequent crisis should at least be fined.

Notably, First Republic Bank was rescued by its rival. It was taken over by top financial conglomerate JPMorgan Chase. Prior to that, the California Department of Financial Protection and Innovation (DFPI) shut down the bank, but then the Federal Deposit Insurance Corporation (FDIC) agreed on a deal. Interestingly, according to the Fed's report assessing the resilience of the US financial system, the national banking sector is currently stable.