Berkshire Hathaway to invest more in banks if Fed plan adopted, Buffett says

06 May 2019 12:39

Berkshire Hathaway Chief Executive Warren Buffett said the conglomerate will likely increase its stake in Wells Fargo and other banks if the US Federal Reserve finalizes a proposal to ease a current restriction on bank investors.

“It’s been a deterrent,” he said at the company’s annual meeting in Omaha, Nebraska, on Saturday. “It’ll be less of a deterrent in the future.”

The Fed plan, issued for comment last month, would let investors own a higher percentage of a bank’s shares without being designated a bank holding company subject to stricter oversight. The threshold is now 10 percent on a case-by-case basis.

“If the Federal Reserve changes its approach, we won’t have to trim down below that. We don’t want to become a bank holding company,” Buffett said.

The Fed proposal would allow an investor’s stake to be as high as 25 percent so long as other conditions are met.

— Wells Fargo stake —

Berkshire has sold shares in recent years in Wells Fargo, the fourth-largest US bank by assets, to keep its stake below 10 percent — at 9.8 percent as of Dec. 31, 2018, the corporation’s annual report said.

The Omaha-based company’s position in Wells Fargo has drifted upward due to the bank’s repurchases of its own stock. In 2017, Berkshire sold 9 million Wells Fargo shares to lower its stake below 10 percent.

“There were just a million questions that Wells got asked about us,” Buffett said referring to conversations with Fed officials.

Berkshire’s position in Bank of America, the second largest US bank, is 9.5 percent. Its share in US Bancorp, a large regional bank, is 9.1 percent. And in Bank of New York Mellon, a systemically important custodial bank, its stake is 8.8 percent.

Berkshire is the largest shareholder in all four of these banks.

“If we like 9.5 percent of a company, we’d like 15 percent better,” Buffett said.

Berkshire owns a broad array of businesses including auto insurer Geico, BNSF Railway and private-jet company NetJets, along with dozens of other subsidiaries.

Its stake in Bank of America is worth $28.2 billion, based on last Friday’s closing stock price; in Wells Fargo, $21.9 billion; in US Bancorp, $7.8 billion; and in BNY Mellon, $4.2 billion.

— Fed proposal —

The proposal would more explicitly outline how the Fed determines whether an investor controls a bank.

The rationale is to let institutional investors such as private-equity funds more easily plan when investing in banks. The proposal might also help spur investments in financial technology companies by clarifying what would cause the activities of a firm to be limited by the Fed.

“The complexity and relative lack of transparency of the Board's case-by-case approach to control can impose a substantial compliance and uncertainty burden on both banking organizations and investors in banking organizations,” Randal Quarles, the Fed vice chairman of supervision, has said.

“This proposal would improve the predictability and simplicity of the Board's control framework,” he said.

The Fed plan outlines explicit rules for how the central bank determines if an investor controls a company.

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