Subject: Re: He sold more BAC
I would therefore speculate further [and] think he smells a risk in the air, but of what type I can't imagine.
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Is it the recession that's been coming for what, two years now?

I don't think a mere recession would be a cause for Mr Buffett to sell some bank shares. It would be like selling a farm because winter is coming soon...there is always another winter coming, and the value is spread over many future seasons, both good and bad.

It would make sense only if he saw a risk specific to the year in question. Mr Buffett's summary is that banking is a very good business over time, provided you merely avoid doing dumb things. By extension, maybe he is seeing them doing some dumb things?

A famous saying about banks is that the worst of loans are made at the best of times. That's usually the first place to look: loans that won't get paid back. Or it could be management doing something dodgy.

Most really bad recessions involve banking crises. Almost all banking crises result from making way too many loans that won't be paid back. They are almost always overwhelmingly real estate loans. This almost always happens simply because the loan to value calculations used current, rather than cyclically adjusted, real estate prices, allowing loan balances to exceed true values. I look forward to the day that regulators notice this chain of reasoning and require a cyclical adjustment on real estate valuations used by banks, based on historically average price-to-income or price-to-rent or price-to-construction-cost ratios. I think more than half of banking crises would be prevented.

Jim