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Monday, May 04, 2009 4:53 AM


Let Warren Buffett Buy Wells Fargo


Warren Buffet is the largest shareholder in Wells Fargo. He claims it is a "Fabulous Bank" and would like to buy it all. Is he serious or is he just talking up his shares?

Let's investigate staring with a look at Berkshire’s Buffett Calls Wells Fargo ‘Fabulous’ Bank.

Billionaire Warren Buffett, whose Berkshire Hathaway Inc. is the largest shareholder in Wells Fargo & Co., said the lender is a “fabulous” company.

“All banks aren’t alike by a long shot, and in our view Wells Fargo, among the large banks, has some advantages the others do not,” Buffett said today at Berkshire’s annual meeting in Omaha, Nebraska.

Buffett, who has said he values lenders partly on their ability to acquire funds from depositors, told shareholders today that he’d “love” to buy the entire bank and is unable to do so because Berkshire wouldn’t get permission from regulators.
Buffett Dismisses Stress Tests for Assessing Banks

Bloomberg is reporting Buffett Dismisses Stress Tests for Assessing Banks.
Berkshire Hathaway Inc. Chairman Warren Buffett dismissed the importance of the government’s stress tests of major U.S. 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.”
If Buffet knew the future he sure would not have been shorting PUTS on the S&P when he did. He would have done it in March.

OK, so Buffett admits he is not concerned about the short term, nor is he particularly adept at timing it. However, shorting puts headed into a consumer led recession was an ill-conceived idea at best, regardless of how that bet eventually pans out.

In regards to Wells Fargo, it remains to be seen how their takeover of Wachovia turns out. Here is a quick recap of the chain of events that led to the demise of Wachovia.

  • On May 7, 2006 Wachovia purchased of Golden West Financial for a cash offer of $25 billion. Under the weight of Golden West's mortgage portfolio (including massive exposure to Pay Option ARMs), Wachovia collapsed.
  • On September 29, 2008 Wachovia announced its intention to sell its banking operations to Citigroup for $2.2 billion in an open bank transaction facilitated by the Federal Deposit Insurance Corporation; according to the FDIC, Wachovia "did not fail."
  • The FDIC sponsored shotgun marriage in turn fell through when Wells Fargo made a better offer.
  • Citigroup is still pursuing its $60 billion claims, $20 billion in compensatory and $40 billion in punitive damages, against Wachovia and Wells Fargo for alleged violations of the exclusivity agreement (i.e. the shotgun marriage arranged by the FDIC that subsequently collapsed).

The Pay Option ARM portfolio that Wells Fargo is sitting on via the above chain of events is still a ticking time bomb.

Buffett Supports Bailouts; Sees ‘No Signs’ of Recovery in Housing, Retail

Even though he is thrilled with the prospects of Wells Fargo, Buffett Says He Sees ‘No Signs’ of Recovery in Housing, Retail.
“There’s no signs of any real bounce at all in anything to do with housing, retailing, all that sort of thing,” said Buffett, 78, in a Bloomberg Television interview before the Omaha, Nebraska-based company’s annual shareholder meeting today. “You never know for sure, even if there’s a leveling off, which way the next move will be.”

Buffett, in his most recent letter to shareholders in February, said he supported the U.S. government actions, while predicting bailouts will cause “unwelcome aftereffects” including inflation.
Of course Buffet supports the bailouts. So does PIMCO and so does anyone holding corporate bonds of financial institutions in general. They stand to benefit from these taxpayer sponsored bailouts. It's as simple as that.

More Bank Losses On The Way

JPMorgan says $400 Billion More In Bank Losses On The Way. I think it's more like $1 trillion minimum. And if housing has not bottomed (I agree with Buffett that it has not), then some massive losses are coming up from Wells Fargo over Mortgage Backed Securities in general and Pay Option Arms specifically.

In my opinion, the only way it makes sense to own Wells Fargo, Citigroup, Bank of America, etc, is if taxpayers are forced to keep shelling out more money to keep the banks solvent. Otherwise massive shareholder dilutions will be right around the corner as banks scramble to raise still more capital.

Unfortunately, Geithner has every intention of protecting banks and corporate bondholders regardless of the cost to taxpayers. Please see Geithner's Plan Can Succeed as well as More Ugly Details Emerge On "Geithner's Heist America Plan" for details.

Let Buffett Buy Wells Fargo

To not let a well capitalized company like Berkshire Hathaway to acquire a bank when banks are clearly struggling to raise more capital makes no sense. Since Buffet claims he would “love” to buy the entire bank I suggest he should be allowed to do so. Then we would get to see if he really wants it or if he is just talking his book.

One thing's for sure: It's far better for shareholders to to take the hit when this mess blows the second time than taxpayers in general. Yet, if Buffet is indeed right about the prospects of Wells Fargo, then by all means, Berkshire Hathaway shareholders should be allowed to profit from that position.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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