Saturday, May 2, 2009

Buffett Dismisses Stress Tests, Praises Wells Fargo

Berkshire Hathaway Inc. Chairman Warren Buffett dismissed 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 19 top firms 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 at Berkshire’s annual meeting.

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 such a price, “If I had to put all of my net worth into stock, that would be the stock.”

U.S. banks can’t be viewed indiscriminately, Buffett said, citing “real differences,” such as varying costs of funding, that separate strong lenders from their weaker rivals. Goldman Sachs, U.S. Bancorp and Wells Fargo have “lots of equity,” he said. All three are among the companies on the stress test list.

Record Attendance

The annual meeting gave 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.
Earnings Slump

Buffett said today that first-quarter operating earnings fell to about $1.7 billion from $1.9 billion in the same period a year earlier. The figure, which doesn’t count some investment results, fell as the recession weighed on Berkshire businesses that make building materials and sell jewelry and furniture.

Utilities and insurance operations fared better, with Berkshire’s Geico Corp., the third-largest auto insurer in the U.S., adding 505,000 new policyholders in the first four months of the year, Buffett said.

Buffett said today that book value, a measure of assets minus liabilities, declined in the first quarter, in part because of losses on derivatives the firm sold on corporate debt. Those losses have since partially reversed, Buffett said. Buffett is scheduled to release complete results, including a figure for net income, on May 8.

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. local time, while others browsed booths in an adjacent exhibit hall where Berkshire units including See’s Candies and Geico hawk their wares.
Back to Business

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 were 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 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.”
Other topics Buffett addressed include:

-- There’s no indication of recovery in housing or retail markets, Buffett said in a Bloomberg Television interview. “You never know for sure, even if there’s a leveling off, which way the next move will be,” he said.

-- While Berkshire has gotten involved in derivatives when Buffett thinks they are mispriced, he said they pose dangers to global financial markets. The company’s bets will likely make money, he said.

-- There are three candidates to take over as CEO of Berkshire, Buffett said, and they already work at the company. There are four potential contenders to manage the firm’s investments, and at least one of them is an outsider, he said. The managers all failed to beat the 38 percent decline of the Standard & Poor’s 500 Index last year, he said.

-- Buffett wouldn’t buy shares of most U.S. newspapers “at any price” and doesn’t expect the companies to return to their previous levels of profitability.