Warren Buffett, the billionaire investor who oversees stakes in some of the largest U.S. banks, said the nation’s lenders have rebuilt capital to the point where they no longer pose a threat to the economy.
“The banks will not get this country in trouble, I guarantee it,” Buffett, chairman and chief executive officer of Omaha, Nebraska-based Berkshire Hathaway Inc., said in a phone interview last week. “The capital ratios are huge, the excesses on the asset side have been largely cleared out.”
Lenders including Bank of America Corp. and Citigroup Inc. have sold assets, cut jobs and bolstered balance sheets after repaying taxpayer bailouts from 2008, when the companies were overwhelmed by losses on securities tied to the housing market. Those actions helped boost financial stocks last year and increased the value of Berkshire’s holdings.
Buffett’s firm has investments in at least four of the seven biggest U.S. lenders by assets, including a stake of more than $14 billion in San Francisco-based Wells Fargo & Co., $5 billion in Bank of America and warrants that allow it to buy $5 billion of Goldman Sachs Group Inc. shares. Berkshire also has a holding in U.S. Bancorp.
“Our banking system is in the best shape in recent memory,” Buffett said.
Former bank executives and regulators have said the largest lenders still pose risks to the economy four years after the bailouts and two-and-a-half years after lawmakers passed sweeping reforms to Wall Street regulation. Citigroup ex-CEO Sanford “Sandy” Weill said last year that deposit-taking and lending operations should be split from investment banking to prevent another financial crisis.
Banks have done little to address incentives that encourage excessive risk-taking even as balance sheets have improved, Michael Mayo, an analyst at CLSA Ltd. and author of “Exile on Wall Street,” said today. Compensation on Wall Street still favors short-term profit over long-term results that would benefit shareholders, he said.
“Twenty years of incentives that were out of whack have not been fixed,” Mayo said in an interview on Bloomberg Television. “You’re still going to have bank CEOs make a lot of money today, have their checks cashed, and be gone when the problems hit in the future.”
JPMorgan Chase & Co.’s trading loss of at least $6.2 billion last year rekindled concerns about the risks lurking on bank’s balance sheets. It also called into question whether CEOs could keep tabs on those risks, said Neil Barofsky, former inspector general of the Troubled Asset Relief Program, which administered the bank bailouts.
“There’s so much opacity with these institutions,” Barofsky said today on Bloomberg Television. “It’s really almost impossible to tell where those risks are.”
Investors, too, have signaled their doubts about banks’ accounting. Even after last year’s stock rally, Citigroup, Bank of America, Goldman Sachs and JPMorgan all trade at less than book value, a calculation of how much a lender’s assets would be worth minus liabilities.
Mergers during the financial crisis sparked criticism that too-big-to-fail companies became even larger. Buffett said that concentration shouldn’t worry investors. Canadian banks weathered the crisis better than counterparts in other nations, even as the biggest firms in that country held more market share than those in the U.S., he said.
“We do not have an unusually concentrated banking system compared to the rest of the world, and there are certain advantages in the largest capital market in the world to having banks that are somewhat consistent with the size of those markets,” he said.
The largest U.S. banks face another round of Federal Reserve stress tests to determine whether they have adequate capital to lift dividends and buy back stock. Bank of America CEO Brian T. Moynihan has said he’s confident his company will pass after failing in 2011 when he didn’t win approval for a dividend increase.
Buffett lent his credibility to the bank by providing capital in 2011 after the lender’s shares declined more than 45 percent over eight months. The wager followed bets the billionaire made on Goldman Sachs and General Electric Co. in the depths of the 2008 crisis. Both of those companies have bought back the preferred shares sold to Buffett. Bank of America may do the same, he said.
“Their condition has improved so significantly, and interest rates are so low, that they have the chance to do a number of things in that respect,” Buffett said. “I may like to keep it, but if it makes sense for them to call it, they’re going to call it.”
Berkshire’s preferred shares in the bank pay a 6 percent annual dividend and can be redeemed at any time for $5.25 billion, according to terms of the deal. Buffett also got 10-year warrants to buy 700 million common shares of the lender for $7.14 apiece.
Bank of America advanced 3.1 percent to $11.78 at 4:15 p.m. in New York. Exercising the options at that price would generate a profit of about $3.2 billion.
Buffett said Berkshire would probably wait until near the end of the contracts’ life to exercise the options.
“We’re in no hurry,” he said. “Nine years from now I would think that Bank of America as well as Wells Fargo and probably the other major banks will be worth considerably more money than they are now.”
Larry DiRita, a spokesman for Bank of America, declined to comment on Buffett’s investment.
Bank of America’s Tier 1 common capital ratio reached almost 9 percent at Sept. 30 under the newest international standards, up from about 8 percent three months earlier. Long-term debt fell to $286.5 billion at the end of the third quarter from $399 billion a year earlier.