Buffett Dismisses Government Stress Tests, Praises Wells Fargo
By - May 04, 2009

Berkshire Hathaway Inc. Chairman Warren Buffett dismissed the importance of the government stress tests in helping him assess banks, and said Wells Fargo & Co. will prosper no matter what the results show. "I think I know their future, frankly, better than somebody that comes in to take a look," Buffett said yesterday of the bank stocks that Omaha, Nebraska-based Berkshire owns. Regulators "may be using more of a checklist-type approach." The stress tests are designed to show whether 19 top financial firms need more capital to withstand a deterioration of economic conditions, and results are expected to be disclosed on May 7, according to a government official familiar with the plan. Buffett said he judges banks by their "dynamism" and their ability to attract deposits, and singled out San Francisco-based Wells Fargo as a "fabulous" company. – Bloomberg

Dominant Social Theme: Striking hard for common sense.

Free-Market Analysis: It would seem that Warren Buffet is speaking truth to power once again. But maybe not. Buffet, who is one of the richest men in the world, built his fortune through canny investing, using a "value" formula in which he has attempted, successfully it would seem, to invest in companies that had not achieved their full potential from an investment standpoint. Along the way, however, Buffet purchased insurance companies and re-invested profits – boosting his bottom line not by pure investing but from business dividends.

With Buffet nothing is quite as it seems. He lives in the same plain house that he has lived in for decades and speaks of investing as if it were a very simple matter. But he also cultivates the idea that he is one of the savviest readers of a balance sheet who ever lived. He is certainly a salesman as he runs a public company and on the public front he purveys the idea that his wealth is seemingly the product of a unique combination of practicality and brilliance.

Here he speaks, once again, in the article excerpted above, of his famous approach.

Buffett said he judges banks by their "dynamism" and their ability to attract deposits, and singled out San Francisco-based Wells Fargo as a "fabulous" company. "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 in a Bloomberg Television interview before Berkshire's annual meeting at Omaha's Qwest Center. "It's what the product is." Wells Fargo is Berkshire's second-largest holding by market value after Coca-Cola Co. and the biggest bank on the U.S. 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 has praised Wells Fargo for gathering funds at a low cost and taking fewer lending risks than competitors.

Is this truly what makes Buffet a great investor? It's been amply documented by now that the US banking system failed irredeemably last year (which means the Western financial system was basically insolvent), and only US$2 trillion from the Federal Reserve and US$700 billion from TARP funds salvaged the system – for the moment anyway. Buffet did not predict this startling collapse – in fact, his investment funds lost billions as a result. Even now he doesn't seem to have the intention of addressing the larger, underlying trends that brought the system down. Ever the optimist, apparently, he professes confidence in the current paper-money banking system and in certain banks themselves.

Wells Fargo stock closed at $19.61 May 1 after falling below $9 in March. Buffett said he was speaking to a class the day the shares dropped that low and told students that, at such a price, "If I had to put all of my net worth into stock, that would be the stock."

It is difficult to see Buffet these days in quite the same light as before. The greatest modern investor failed to see the collapse of the system within which he thrived for decades. Not only that, but after losing billions in the past year, Buffet seems to ascertain only further investment opportunities. Questioning the fundamentals of the system is not something that he apparently wants to involve himself in. Buffet attacks the stress tests, for instance, as something approaching an accounting gimmick (we agree), but he never deals with the issue of why banks need more capital so long as the Federal Reserve stands ready to invest whatever is needed.

Before the last financial collapse, it was perfectly possible to see Buffet as someone superbly equipped to navigate the stormy seas of modern investing. But now with all that has occurred in a single, short year, Buffet's lack of curiosity about what actually happened to the markets he professes to love and understand begins to smack of willful avoidance. Isn't he concerned that the system that has given him so much was was virtually ruined six months ago?

After Thoughts

Nope. It's business as usual for the world's greatest investor. Buffet is once again busy finding value that others don't seem to assess and reinvesting in the companies and brands that he thinks will provide the next big thing. The world's most brilliant investor is perfectly willing to investigate thousands of company balance sheets, but he seem disinclined to investigate the monetary system itself. Why?

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