Buffett Criticizes Bank Stress Tests; Eyes Insurance for Flu Pandemic

By and | May 4, 2009

Warren Buffett criticized the government’s stress tests of 19 large U.S. banks, and said he would buy more shares of three big banks in the portfolio of his Berkshire Hathaway Inc.

Buffett also told reporters on Sunday that Berkshire, which generates about half its business from insurance, would consider writing policies to insure against a potential swine flu pandemic if it got paid enough.

Buffett and Berkshire Vice Chairman Charlie Munger spoke a day after Berkshire’s annual meeting, which brought 35,000 shareholders to Omaha to hear the two field questions on the company, the economy, and other matters. The weekend is known as Woodstock for Capitalists.

Three Berkshire holdings, Wells Fargo & Co, U.S. Bancorp and SunTrust Banks Inc are among 19 large U.S. banks the federal government is stress testing to gauge whether they need more capital to survive a deep recession.

Buffett said Wells Fargo, U.S. Bancorp, and a third Berkshire holding, M&T Bank Corp, do not need more equity capital, and “we would buy stock in any of the three banks at present prices.” He expressed no opinion on SunTrust’s capital needs. M&T is not being tested.

Buffett said the government is taking the wrong approach in assessing banks by ignoring differences in lenders’ business models.

“The question is whether the people conducting tests have a bunch of markers” to write down a variety of assets, requiring new capital, Buffett said. “You get the impression from reading it, there will be percentage whacks (at various assets). That is not a very sophisticated way of looking at it.”

Munger added: “This one-size-fits-all reasoning in the case of bank stress tests is very likely to be done poorly.”

Buffett nevertheless endorsed government efforts to stabilize the financial system, saying that “to call those 19 banks too big to fail is wrong,” and that the government would find a home for those that did.

“There is no reason ever in the United States to have a run on the bank,” Buffett said. While equity investors do not deserve protection, Buffett said, “The United States government has demonstrated that whatever it takes is what is going to get done, and they are right to do so.”


Berkshire would consider writing insurance policies for pandemics, including one that Buffett said assumes the U.S. mortality rate rises by 25 percent in 2010, equivalent to roughly an additional 600,000 deaths.

“You could get us to quote a policy on the present potential pandemic,” Buffett said, adding that “you may not like” the amount Berkshire would charge. “You need someone with a real sense of the probabilities” to write such policies, he said.

Buffett said Berkshire has reduced the amount of bond insurance business it writes, though this was not the result of the recent loss of its “triple-A” ratings from two credit rating agencies.

“We basically don’t like the pricing,” he said. “We’ve written some business, and we’ll write more tomorrow if the price is right. It depends on what our competition is doing.”

Berkshire, he said, continues to look for acquisitions, even though its cash stake this quarter fell below $20 billion, less than twice the minimum $10 billion Buffett wants.

Buffett said he would quickly disclose any serious problems with his health.

“If I knew of any serious, (or) something that might be interpreted as serious, medical problems, Berkshire would disclose them. We wouldn’t want rumors flying around,” Buffett said.

He added that he would depend on his board to tell him when it is time to turn over Berkshire to a successor.

Noting his donation of much of his wealth to the Bill & Melinda Gates Foundation in the form of Berkshire stock, and that Bill Gates sits on Berkshire’s board, Buffett said: “He is not going to sit there and watch the future value of his holdings go down because he doesn’t have the guts to tell me.”

(Reporting by Jonathan Stempel and Lilla Zuill, editing by Maureen Bavdek, Leslie Gevirtz)

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