Saturday, May 5, 2012

Are American banks really a class apart from European banks as Warren Buffett claims?

Bloomberg reports that Warren Buffett said at his firm's annual meeting that US banks are 'a class apart from European rivals'.

Regular readers might ask how are these financial institutions different.

Current disclosure practices make the banks on both sides of the Atlantic resemble 'black boxes'.  No market participants other than the regulators know what exposures the banks have or what losses are hidden on or off their balance sheets.

Regulators on both sides of the Atlantic have suspended mark-to-market accounting and have adopted the policy of regulatory forbearance when it comes to recognizing non-performing loans.  The result of this has been to render both bank capital and bank capital ratios, in the words of the OECD, meaningless.

If there is any obvious advantage that US banks have over their European rivals it is the Fed is providing them with money at zero percent (good through at least 2014 according to Chairman Bernanke) while the ECB is charging one percent (good through 2015).

However, the need to provide the US banks funds at zero percent and guarantee they can make an above market return of 1/4 of one percent by keeping the funds at the Fed suggests that the losses hidden on their balance sheets are far worse than their European rivals.

Is this what Mr. Buffett really meant when he said the US banks are a class apart from European rivals?

Warren Buffett, whose Berkshire Hathaway Inc. (BRK/A) has more than $19 billion invested in U.S. banks, said the lenders have ample liquidity and are a class apart from European rivals. 
“I would put European banks and American banks in two very different categories,” Buffett, Berkshire’s chairman and chief executive officer, said today at the firm’s annual meeting in Omaha, Nebraska. “The American banking system is in fine shape. The European system was gasping for air a few months back” before getting assistance from the European Central Bank. 
Wells Fargo & Co. (WFC) and JPMorgan Chase & Co. posted record profits last year and their CEOs are contesting efforts by U.S. policy makers to strengthen banking regulations.
European banks, led by Deutsche Bank and its leadership of the Institute of International Finance, have also been aggressively contesting efforts by Eurozone policy makers to strengthen banking regulations.
European banks have struggled amid the continent’s sovereign debt crisis and turned to the ECB, starting in December, for extraordinary three-year loans at interest rates of 1 percent. 
“I’d like to have a lot of money for three years at 1 percent, but I’m not in trouble,” said Buffett, 81. U.S. banks have “liquidity coming out their ears.”
Perhaps Mr. Buffett didn't notice that his banks have access to virtually unlimited amounts of money at 0 percent for the last 2-3 years and have been promised by the Fed Chairman continued access at 0 percent for at least the next 2+ years.
Berkshire ... is the biggest shareholder of San Francisco-based Wells Fargo, with a more than $12 billion stake. Buffett injected $5 billion into Bank of America Corp. (BAC) last year in exchange for preferred stock and warrants. Berkshire’s shareholding of U.S. Bancorp (USB) was valued at $2.2 billion as of yesterday.
What is clear is that absent the information needed to assess the risk of the individual banks Mr. Buffett has made a significant bet that the US will continue to bailout the Too Big to Fail banks.

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