Warren Buffett does a lot of interviews, and I must say that most of the time the questioners repeat the same questions and he repeats the same answers. But in this Fortune interview on Wells Fargo he reveals some new information about how he values banks and bankers.
Here is his response to a question about tangible common equity, a topic of great importance to banking analysts and regulators:
What I pay attention to is earning power. Coca-Cola has no tangible
common equity. But they've got huge earning power. And Wells ... you
can't take away Wells' customer base. It grows quarter by quarter. And
what you make money off of is customers. And you make money on
customers by having a helluva spread on assets and not doing anything
really dumb. And that's what they do . . .
You don't make money on tangible common equity. You make money on the funds that people give you and the difference between the cost of those funds and what you lend them out on. And that's where people get all mixed up incidentally on things like the TARP. They say, 'Well, where'd the 5 billion go or where'd the 10 billion go that was put in?' That isn't what you make money on. You make money on that deposit base of $800 billion that they've got now. And that deposit base I guarantee you will cost Wells a lot less than it cost Wachovia. And they'll put out the money differently.
You don't make money on tangible common equity. You make money on the funds that people give you and the difference between the cost of those funds and what you lend them out on. And that's where people get all mixed up incidentally on things like the TARP. They say, 'Well, where'd the 5 billion go or where'd the 10 billion go that was put in?' That isn't what you make money on. You make money on that deposit base of $800 billion that they've got now. And that deposit base I guarantee you will cost Wells a lot less than it cost Wachovia. And they'll put out the money differently.
Disclosure: Long Berkshire Hathaway
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