Warren Buffett, whose Berkshire Hathaway Inc. (A:US) has more than $20 billion invested (2FA:US) in U.S. banks, said the nation’s lenders have “liquidity coming out of their ears” and are in better shape than European rivals.
“I would put European banks and American banks in two very different categories,” Buffett, Berkshire’s chief executive officer, said May 5 at the firm’s annual meeting in Omaha, Nebraska. “The American banking system is in fine shape. The European system was gasping for air a few months back” until getting assistance from the European Central Bank, he said.
Wall Street firms including JPMorgan Chase & Co. and Bank of America Corp. (BAC:US), emboldened after raising capital levels ahead of stricter international guidelines, are contesting efforts by U.S. policy makers to limit trading and risk. European banks have struggled amid the continent’s sovereign debt crisis and turned to the ECB for 1 trillion euros ($1.3 trillion) in three- year loans at a 1 percent interest rate.
Buffett, 81, is seeking to insulate Berkshire’s holdings from the concerns that weighed on the stocks of European lenders, said Mark Williams, a former Federal Reserve bank examiner who teaches finance at Boston University. Bank of America and JPMorgan posted their worst weekly declines of the year in the five days ended May 4 amid signs the European crisis is worsening as the Euro Stoxx Banks Index (SX7E) slumped 6 percent.
‘Talking His Book’
“He is talking up his book, and it’s true that U.S. banks are healthier than those in Europe,” Williams said in a telephone interview. “What that doesn’t speak to is, ‘What happens if the European crisis isn’t fixed and it triggers a second recession in the U.S.?’ We’re liquid today, but that doesn’t speak to what we may need in the future.”
Referring to the ECB emergency-loan program that started in December, Buffett said that he’d “like to have a lot of money (2FA:US) for three years at 1 percent, but I’m not in trouble.”
The ECB bolstered banks “loaded with sovereign debt, which is questionable in many cases,” and the recipients may use the funds to add more of the securities, Buffett said. Sovereign wagers by MF Global Holdings Ltd. “had a bad ending, and it may have a bad ending over there,” Buffett said of Europe.
MF Global, formerly run by ex-Goldman Sachs Group Inc. (GS:US) co- chairman Jon S. Corzine, filed for bankruptcy Oct. 31 after a $6.3 billion bet .
Holdings of Spanish government debt by lenders based in the country jumped 30 percent in the three months through February to 231 billion euros, data from Spain’s treasury show. Italian banks increased ownership of their nation’s sovereign bonds by 31 percent to 267 billion euros in the same period, according to Bank of Italy data.
Buffett said in September that he wasn’t interested in taking stakes in European lenders and that some of the firms need more capital. U.S. firms have greater access to retail deposits and are less vulnerable to so-called bank runs, Buffett said at the meeting.
Buffett’s company has investments (2FA:US) in at least four of the seven biggest U.S. lenders by assets. Berkshire is the largest stockholder in San Francisco-based Wells Fargo & Co. (WFC:US) with a stake of more than $12 billion. The company also injected $5 billion into Charlotte, North Carolina-based Bank of America in exchange for preferred shares and warrants.
Berkshire also has warrants that allow him to buy $5 billion of Goldman Sachs shares and owns a stake in U.S. Bancorp (USB:US) valued at $2.2 billion as of May 4. The company has an investment in M&T Bank Corp. and Buffett has said he owns JPMorgan shares in his personal account.
Wall Street leaders joined in a closed-door meeting last week to lobby the Federal Reserve to soften proposed rules that they said could harm the economy. CEOs including Jamie Dimon of JPMorgan, Bank of America’s Brian T. Moynihan and Goldman Sachs’s Lloyd C. Blankfein gave their views on Fed proposals to limit counterparty risk and proprietary trading.
“It’s great that people get together and collaborate, talk about the facts and the analysis, all in the interest of having a great financial system,” Dimon, 56, said last week. “The better we do here, the better it will be for the U.S. economy.”
The Fed’s proposed 10 percent limit in counterparty risk to an entity is meant to contain the damage from the collapse of a large financial institution or government. It’s stricter than the 25 percent cap in the Dodd-Frank financial overhaul law.
Buffett’s comments illustrate the complexity of his relationship with Wall Street. He bolstered confidence in Goldman Sachs, a firm with which he’s had four decades of ties, and Bank of America with a combined $10 billion in investments and has praised the CEOs of the companies.
At the same time, Buffett has lauded regulators’ efforts to reduce leverage, supported the creation of a strong consumer finance watchdog and lent his name to President Barack Obama’s proposal to raise taxes on the wealthy.
“The fact that he thinks U.S. banks are in fine shape would be consistent in arguing against further regulation,” said David Kass, a professor at the University of Maryland’s Robert H. Smith School of Business. “However, he has said that it’s not necessary to agree on all issues with everyone you have dealings with.”
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