How to Run a Bank

Buffett has studied banking all his life -- he likes being in the position of the guy who has the money and gets paid to let other people use it. (He also likes being in the position of getting paid to use other people's money -- Buffett likes to win either way, but i digress.) Buffett would really love for Berkshire to own a bank outright, but it can't, legally. So Berkshire buys bank stocks and performs as many bank-like functions as it can.  Berkshire Finance is where many of these functions take place.

This year, Kevin Clayton and Clayton Homes got special mention, and they deserve it. The manufactured home industry has shrunk from sales of 372,843 to 50,046 over 12 years. That’s incredible. In the intervening time, Clayton has come to more or less own the industry. It has been able to survive because of access to Berkshire’s capital and because its loan loss levels are extraordinary.

 Clayton is lending to subprime borrowers and has been getting loan loss ratios of 1.17 – 1.86% on originated loans over the past five years.  A commercial bank would be proud of these ratios.  

When you consider the horrific losses suffered by banks in the mortgage crisis, Kevin Clayton’s achievement (obviously, made under Buffett’s philosophy) is a wow. Buffett tooted the patriotic horn in this section of the report -- the fact is that Berkshire is making very good money lending money to people who can repay. 

(These numbers illustrate all the more why it is so shameful that nearly all the other banks thought they were too clever to make money this simple way, and nearly went broke and had to be bailed out.)