Buffett criticizes bank stress tests

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2:44p ET May 4, 2009 (MarketWatch)
OMAHA, Nebraska (MarketWatch) -- Berkshire Hathaway Chairman Warren Buffett criticized the government's stress tests of the nation's largest banks Sunday, telling a press conference that the health of large lenders can't be judged by calculating ratios and adjusting loss expectations on broad asset classes such as home equity loans and credit card loans.

Berkshire owns large stakes in Wells Fargo & Co. , US Bancorp and M&T Bank Corp. . Wells and US Bancorp are involved in the stress tests, the results of which are scheduled to be released this week.

Buffett said those three banks don't need more equity. Wells Fargo has a dramatically different business model than the other largest banks in the U.S. , he added.

Marking down the value of broad types of assets like credit card loans based on different economic scenarios doesn't work, Buffett explained.

'Percentage whacks'

Still, Buffett expressed concern that the people conducting the government stress test may take "percentage whacks" on certain assets, while not taking account of the different business models and holdings of individual banks.

He cited two home equity loan portfolios held by Wells. One portfolio was originated by mortgage brokers and the other was originated by Wells. The broker originated portfolio is experiencing a lot higher losses than the in-house one, Buffett explained, suggesting the stress test may not take account of such differences.

"The bank stress test is very likely to be done poorly," Berkshire Vice Chairman Charlie Munger said Sunday. "Maybe the whole idea was not such a good idea."
So far this year, more than 30 banks have failed in the U.S. as slumping house prices and turmoil in the commercial real estate market cuts into the industry's capital.

The government recently conducted so-called stress tests of the nation's 19 largest bank holding companies, including Citigroup Inc. , Bank of America Corp. and J.P. Morgan Chase . The results, due next week, may force some banks to raise new capital.

Banks that are unable to raise money from private investors could be forced to get more government support. The government already owns large chunks of preferred shares in the nation's biggest banks. Some of those stakes could be converted to common stock as a way of boosting banks' financial strength. But that would dilute existing shareholders.

Citigroup may need to raise as much as $10 billion in new capital, while several other banks, including Bank of America, may be directed to raise new capital too, the Wall Street Journal reported Saturday, citing unidentified people familiar with the matter.

FDIC 'for sure would find a home'

In addition to owning stock in Wells and US Bancorp, Berkshire is a big shareholder in American Express Co. and owns $5 billion of preferred securities in Goldman Sachs Group Inc. , both of which are also undergoing stress tests.

Buffett said Sunday that 15 of the 19 banks involved in the stress tests are not too big to fail.

"Those banks could fail and be transferred to other lenders without it costing the taxpayer anything," Buffett added. "Those 15 for sure would find a home if the FDIC decided to move on them next weekend."

"The top four are more special cases," he added. He didn't identify those companies, but the four largest US banks by assets are J.P. Morgan Chase, Citigroup, Bank of American and Wells Fargo.

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