Charlie Munger: US banks are ‘full of’ bad commercial property loans

Charlie Munger has warned of a brewing storm in the US commercial property market, with American banks “full of” what he said were “bad loans” as property prices fall.

The comments from the 99-year-old investor and sidekick to billionaire Warren Buffett come as turmoil ripples through the country’s financial system, which is reckoning with a potential commercial property crash following a handful of bank failures.

“It’s not nearly as bad as it was in 2008,” the Berkshire Hathaway vice-chair told the Financial Times in an interview. “But trouble happens to banking just like trouble happens everywhere else. In the good times you get into bad habits . . . When bad times come they lose too much.”

Munger was speaking on the veranda of his home in Greater Wilshire, a leafy neighbourhood of Los Angeles where he has lived for 60 years since he designed the property himself.

Dressed in a plaid shirt, Munger held court from his wheelchair as the travails of ailing California-based bank First Republic were playing out in real time on a television screen airing CNBC in the background.

Berkshire has a long history of supporting US banks through periods of financial instability. The sprawling industrials-to-insurance behemoth invested $5bn in Goldman Sachs during the 2007-08 financial crisis and a similar sum in Bank of America in 2011.

But the company has so far stayed on the sidelines of the current bout of turmoil, during which Silicon Valley Bank and Signature Bank collapsed. “Berkshire has made some bank investments that worked out very well for us,” said Munger. “We’ve had some disappointment in banks, too. It’s not that damned easy to run a bank intelligently, there are a lot of temptations to do the wrong thing.”

Their reticence stems in part from lurking risks in banks’ vast portfolios of commercial property loans. “A lot of real estate isn’t so good any more,” Munger said. “We have a lot of troubled office buildings, a lot of troubled shopping centres, a lot of troubled other properties. There’s a lot of agony out there.”

He noted that banks were already pulling back from lending to commercial developers. “Every bank in the country is way tighter on real estate loans today than they were six months ago,” he said. “They all seem [to be] too much trouble.”

Munger grew up in Omaha, Nebraska, a few hundred feet from where Buffett now lives. The two met in 1959, when Buffett was 28 and Munger 35. Munger, who at one point worked in a grocery store owned by Buffett’s grandfather, trained as a lawyer before being coaxed into investment by his soon-to-be partner.

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