Saturday, May 2, 2009

Buffett Dismisses Stress Tests, Praises Wells Fargo

Buffett Dismisses Stress Tests, Praises Wells Fargo  

By Erik Holm, Betty Liu and Andrew Frye

May 2 (Bloomberg) -- Berkshire Hathaway Inc. Chairman Warren Buffettdismissed the importance of government stress tests in helping him assess banks, and said Wells Fargo & Co. will prosper no matter what the results show.

“I think I know their future, frankly, better than somebody that comes in to take a look,” Buffett today said of the bank stocks that Omaha, Nebraska-based Berkshire owns. Regulators “may be using more of a checklist-type approach.”

The stress tests are designed to show whether the banks need more capital to withstand a deterioration of economic conditions, and results are expected to be disclosed on May 7, according to a government official familiar with the plan. Buffett said he instead judges banks by their “dynamism” and their ability to attract deposits, and singled out San Francisco-based Wells Fargo as a “fabulous” company.

“If you look at Coca-Cola today, for example, and just looked at a balance sheet, it wouldn’t tell you anything at all about Coca-Cola,” the billionaire investor said today in a Bloomberg Television interview before Berkshire’s annual meeting. “It’s what the product is.”

Wells Fargo is Berkshire’s second-largest holding by market value after Coca-Cola Co. and the biggest bank on the U.S. West Coast. Berkshire also owns stakes in Goldman Sachs Group Inc., Bank of America Corp., the biggest U.S. bank by assets, as well as U.S. Bancorp, M&T Bank Corp. and SunTrust Banks Inc. Buffett has praised Wells Fargo for gathering funds at a low cost and taking fewer lending risks than competitors.

Competitive Advantages

“All banks aren’t alike by a long shot, and in our view Wells Fargo, among the large banks, has some advantages the others do not,” Buffett said today at Berkshire’s annual meeting in Omaha, Nebraska.

Wells Fargo has declined 33 percent this year on the New York Stock Exchange on concern the bank will take losses on loans acquired with the purchase of Wachovia Corp. The bank slashed its dividend 85 percent in March, reducing investment income for Berkshire.

Wells Fargo stock closed at $19.61 yesterday after falling below $9 in March. Buffett said he was speaking to a class the day the shares dropped that low and told students that, at that price, “If I had to put all of my net worth into stock, that would be the stock.”

Buffett told shareholders today that he’d “love” to buy the entire bank or U.S. Bancorp and is unable to do so because Berkshire wouldn’t get permission from regulators.

Record Attendance

The annual meeting gives Buffett and Vice Chairman Charles Munger a platform to discuss markets, the economy and Berkshire’s businesses. A record 35,000 people filled Omaha’s Qwest Center arena, its overflow rooms and a ballroom at a hotel across the street as the two fielded questions concerning Buffett’s replacement, Berkshire’s investments and its derivative bets on the world’s stock markets.

Berkshire, with a U.S. stock portfolio of $51.9 billion, has been pressured as equity markets dropped and U.S. unemployment rose to its highest in 25 years. Berkshire shares have plunged 31 percent in the past 12 months, and profit has fallen in five-straight quarters through the end of 2008 on deteriorating results at insurance units and liabilities from the derivatives.

Buffett said today that first-quarter operating earnings fell to about $1.7 billion from $1.9 billion. The figure doesn’t count some investment results. Buffett is scheduled to release net income on May 8.

Back to Business

Known as the “Oracle of Omaha,” Buffett has grown into a cult figure among investors who admire him as much for his homespun aphorisms as for his stock-picking savvy. Some shareholders at today’s meeting rushed to the front rows of the arena as soon as the doors opened at 7 a.m., while others browsed booths in an adjacent exhibit hall where Berkshire units including See’s Candies and car insurer Geico Corp. hawk their wares.

The meeting, as in recent years, began with a movie in which Buffett hobnobbed with celebrities -- this year rebroadcasting clips that included actress Susan Lucci. Then Munger and Buffett took the stage for a five-hour question-and- answer session whose format was adjusted from past meetings.

The new arrangement, in which half the questions are pre- screened by reporters, was adopted after unscreened shareholder questions in prior years resulted in inquiries about baseball, abortion and Buffett’s personal relationship with Jesus Christ - - and few about Berkshire and its operations.

Buffett, Munger

Carol Loomis, the Fortune reporter who was one of the three journalists on the panel, said they received 5,000 proposed questions. Buffett instructed the panelists to ask questions only about Berkshire.

“I’ve been to about a dozen meetings, and this is probably the best one,” said a shareholder who was picked by lottery to ask an unscreened question. “Thanks for the new format.”

Buffett and Munger have used recent meetings to promote Berkshire as a buyer of non-U.S. businesses and distinguish their operations from what they consider the sometimes reckless behavior they see on Wall Street. Their pronouncements reach shareholders, potential customers and ratings firms.

Moody’s Investors Service and Fitch Ratings cut Berkshire’s top AAA credit rating in the last two months, a move that “has no economic impact” on Berkshire, Buffett said in the interview before the meeting began.

“It just doesn’t,” he said. “We don’t use borrowed money in any real significant sense. My pride may be wounded just a bit.”

To contact the reporters on this story: Erik Holm in Omaha ateholm2@bloomberg.net; Betty Liu in Omaha at bliu17@bloomberg.net;Andrew Frye in Omaha at afrye@bloomberg.net.

Last Updated: May 2, 2009 14:40 EDT 

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