The CEO of Morgan Stanley MS, James Gorman, has echoed Berkshire Hathaway’s BRK Warren Buffett’s sentiments, attributing recent bank failures to poor management decisions.
What Happened: In an interview with Financial Times, Gorman argued that mismanagement and recklessness have been the main contributors to the series of bank collapses earlier this year.
He stated that while regulatory measures have strengthened the financial system’s safety, the “stupidity of their own management” has emerged as one of the biggest threats to lenders.
As his tenure as CEO comes to an end on New Year’s Day, Gorman labeled the failures of Silicon Valley Bank and two other banks as “entirely their own doing.”
Previously, Buffett had also criticized regional banks for similar reasons, faulting them for inflating profits and deceiving investors and analysts with poor asset valuation and mismatches between assets and liabilities, reported Markets Insider.
“Some of the dumb things that banks do periodically become uncovered during this period,” he said in April, slamming lenders for valuing assets at cost rather than market value to enhance profits and mislead investors.
He also condemned their mismatched handling of assets and liabilities, using easily withdrawable customer deposits to invest in long-term government bonds and mortgage-backed securities.
The criticism follows the failure of the Silicon Valley Bank this spring, which resulted from a surge in withdrawals, leading to government intervention.
Despite his criticisms, Gorman remains optimistic about investment banks’ future, anticipating a surge in activity once interest rates stabilize. “The minute the Federal Reserve has concretely signaled that they’ve stopped raising rates, let alone the point at which they first do a rate cut, these markets will take off. And we are right in the center of where that action is going to be.”
Why It Matters: The collapse of Silicon Valley Bank earlier this year marked the largest banking collapse since 2008, raising concerns across multiple sectors. The bank had failed to raise sufficient capital to continue, leading to its eventual closure by U.S. regulators.
This fallout was not limited to Silicon Valley Bank alone. Two other institutions, Signature Bank and Silvergate Capital Corp, also faced shutdowns, raising questions about the banking sector’s health.
The root cause of these collapses can be traced back to a combination of a short-lived surge in cash positions and swift action on inflation by the Federal Reserve.
This content was partially produced with the help of Benzinga Neuro and was reviewed and published by Benzinga editors.
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