Buffett on Bank Stress Tests

This is a short follow-up to last week’s article regarding the bank stress tests (What Is All The Stress With The Bank Stress Test?), and what it means to investors.  In statements to media over the weekend at the Berkshire 2009 annual shareholder meeting, Buffett’s statements confirm what we have discussed in the previous article.  He makes it clear that he does not agree with the standardized approach the government is using in these stress tests, because they aren’t taking into account the different operating models each bank has. He also reiterates doing his own analysis, as well as looking at other criteria than just the numbers that the government is.

“I think I know their future, frankly, better than somebody that comes in to take a look.  They may be using more of a checklist type approach.” “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.  It’s what the product is.”

“The question is whether the people conducting tests have a bunch of markers” (to write down a variety of assets, requiring new capital).  “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.”

Berkshire’s vice-chairman Charles Munger (a great investor in his own right) also notes that standardized testing does not work in this case:

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

Buffett continues to praise both Wells Fargo and US Bancorp:

“I would love to buy all of US Bancorp or I would love to buy all of Wells Fargo, if we were allowed to do it.”

He also showed his confidence in Wells Fargo and recalled when it had it the price lows of around $8 a share back in March 2009 (when he also made a rare endorsement type statement of the bank):

“If I had put all my net worth in one stock, that would be the stock.”

Buffett was also asked by CNBC’s Becky Quick about the stress test and Wells Fargo.  Here is a section from the interview:

BQ: “Do you know how Wells Fargo fared in the stress test?”
WB: “No, I don’t.”
BQ:  “OK.  If you take a look at the stock prices”
WB:  “I can tell you, I apply my own stress test and they passed it with flying colors.”
BQ: “You apply your own stress test to Wells Fargo?  How do you do that?”
WB: “Sure.  Well, I do it by looking at the details of their operation.  Wells Fargo obtains their money, which is the raw material, they obtain their money cheaper than anybody else.  You can look at the figures for every bank and you would be startled at the trillion dollars, roughly, that Wells Fargo gets from depositors, and to some extent from debt — how much more cheap, how cheap that is compared to most of the other big banks.  If you’re a copper producer, and copper is selling for two dollars a pound, and you want to measure the stress of copper going to $1.30, for a guy whose production cost is $1.50, you know, he’s got problems.  If his cost is a dollar, he doesn’t have problems.   And Wells, in terms of its raw material costs, is better situated than any large bank, by some margin.   So, it’s built to sustain a lot.”

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Feel free to post questions, comments, or topic suggestions.

Thanks & Happy Investing!

The Investment Blogger

Sources: Bloomberg, Reuters, AP, CNBC

Author: The Investment Blogger

I’m a private investor, who developed the “function-centric investing” paradigm. I am an investor who blogs a little here and there, rather than a blogger who invests a little here and there. I'm passionate about investing and sharing investment knowledge!

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