Bloomberg News

Buffett Says Banks Are ‘Plenty Profitable’ After Leverage Cut

July 08, 2011

July 8 (Bloomberg) -- Warren Buffett, whose Berkshire Hathaway Inc. is the largest shareholder in Wells Fargo & Co., said the U.S. will benefit from reduced leverage at banks and that financial firms will be able to earn sufficient returns.

Banking can “still be plenty profitable,” Buffett told Bloomberg Television’s Betty Liu today on the “In the Loop” program in an interview from Sun Valley, Idaho.

Regulators are limiting banks’ revenue on debit card transactions and overdraft fees and have raised capital requirements. Bankers including Jamie Dimon, chief executive officer of JPMorgan Chase & Co., have said rules may have gone too far and could slow economic growth. Buffett, 80, said financial limits may increase stability.

“Reducing leverage in the financial system was a good idea,” Buffett said. “Leverage causes a lot of problems.”

Berkshire had about 342.6 million shares in San Francisco- based Wells Fargo as of March 31, which is a stake of about 6.5 percent in the largest U.S. home lender. The holding is valued at more than $9 billion, based on yesterday’s closing price. Berkshire also owns furniture stores and jewelry shops, as well as a stake in Wal-Mart Stores Inc. Retailers may benefit from caps on debit-card transaction fees.

‘The Big Picture’

Buffett is “looking at the big picture, whereas lobbyists for the banking industry are being retained presumably to represent the interests of that industry,” said David Kass, a professor at the University of Maryland’s Robert H. Smith School of Business. “He’s trying to take an impartial view of the situation with concern for the overall economy.”

Dimon has criticized new capital requirements, asking Federal Reserve Chairman Ben S. Bernanke in public last month if he “has a fear like I do” that overzealous regulation “will be the reason it took so long that our banks, our credit, our businesses and most importantly job creation to start going again. Is this holding us back at this point?”

The U.S. unemployment rate unexpectedly climbed to 9.2 percent in June, the highest level this year, and hiring by companies was the weakest since May 2010, Labor Department data showed today. JPMorgan slipped 2.6 percent on the New York Stock Exchange this year through yesterday and Wells Fargo dropped 7.5 percent. That compares with the 7.6 percent gain of the Standard & Poor’s 500 Index.

“You will earn less on capital than was the case a while back,” Buffett said. “But you can still earn pretty good returns on capital.”

Record Profit

Wells Fargo’s first-quarter profit climbed 48 percent to a record $3.76 billion as costs for soured real-estate and business loans fell. JPMorgan’s net income surged 67 percent to a record $5.56 billion.

Berkshire also has holdings in U.S. Bancorp and M&T Bank Corp. Buffett took a preferred stake in 2008 in Goldman Sachs Group Inc. at the depths of the financial crisis, an investment that he previously said was a wager that Bernanke and then- Treasury Department Secretary Henry Paulson would prop up the economy. The Treasury created the Troubled Asset Relief Program in 2008 to help bolster banks.

Buffett praised Elizabeth Warren, 62, the Harvard University law professor, assigned by President Barack Obama to set up the U.S. Consumer Financial Protection Bureau. Senate Republicans have sought changes to the new agency’s structure before confirming anyone as its director.

Representative Patrick McHenry, a North Carolina Republican, in a May hearing, questioned the “veracity” of Warren’s previous statements. The two also clashed about whether the committee pledged to a time limit on her appearance.

‘Lot of Enemies’

“She’s made a lot of enemies,” Buffett said. “But we needed a lot of correction. I mean, when you see what happened in the mortgage issuance market of five years ago, a lot of things took place that shouldn’t have taken place.

“It’s up to both the industry and the government to correct it,” Buffett said. “It’s great if the industry does it by itself, but it’s clear you need a policeman. And she’s a pretty good policeman,” he said.

“Buffett shares the sense that a lot of bankers acted badly and they got bailed out,” said Jeff Matthews, author of “Secrets in Plain Sight: Business and Investing Secrets of Warren Buffett,” in an interview today. “I don’t think he has any sympathy toward investment or commercial bankers in general.”

JPMorgan supports creation of a bureau that is “effective for both consumers and banks,” Dimon wrote in his most recent annual letter. Dimon, who steered the company through the recession while posting a profit every quarter and was praised by Buffett today as a “fabulous banker,” said in his letter that stronger standards in the mortgage industry could have minimized the types of loans that fueled the housing bubble.

--With assistance from Carter Dougherty in Washington. Editors: Dan Kraut, Steve Dickson

To contact the reporters on this story: Andrew Frye in New York at afrye@bloomberg.net; Noah Buhayar in New York at nbuhayar@bloomberg.net; Dakin Campbell in San Francisco at dcampbell27@bloomberg.net

To contact the editor responsible for this story: Dan Kraut at dkraut2@bloomberg.net


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