Berkshire Hathaway Inc Chairman Warren Buffett dismissed the importance of the government’s stress tests of major US financial institutions in helping him assess banks he invested in.
“I think I know their future, frankly, better than somebody that comes in to take a look,” Buffett said before the start of Omaha, Nebraska-based Berkshire’s annual shareholder meeting today. “They may be using more of a checklist type approach.”
Berkshire’s second-largest holding by market value after Coca-Cola Co is Wells Fargo & Co, the biggest bank on the US 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 says he judges banks by their “dynamism” and their ability to gather deposits.
“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. “It’s what the product is.”
The 19 banks in the stress tests, designed to show whether they need more capital to withstand a deterioration of economic conditions, hold two-thirds of the assets and more than one-half of the loans in the US banking system, according to a Federal Reserve study released April 24.
The tests, originally scheduled for release on May 4, are set to be disclosed after US markets close on May 7, according to a government official who spoke on condition of anonymity.
PRELIMINARY RESULTS
The banks received preliminary results last week and have been debating the findings with regulators. Officials favor tangible common equity of about 4 per cent of a bank’s assets and so-called Tier 1 capital worth about 6 percent, people familiar with the tests say. Tangible common equity, or TCE, is a gauge of financial strength that excludes intangibles such as trademarks that can’t be used to make payments. Tier 1 capital is a broader measure monitored by regulators.
“With banking, low cost money is the key,” Buffett said. “My guess is that would not be weighted like a whole bunch of little ratios of this or that.”
“If you are producing your money currently at roughly 1 per cent, which the best of them is, and somebody else is producing it at 2 percent, that’s exactly like a copper line that has a $1 a pound cost versus a $2 a pound cost,” Buffett said. “That’s hugely important over time.”
