Wednesday, September 10, 2008

Is Buffett Bearish on Banks?

It appears that Warren Buffett and his Berkshire Hathaway, Inc. have become more than a little concerned about the health of banks. Reuters reported this morning that his insurance firm has "told one of its units to stop insuring bank deposits above the amount guaranteed by the U.S. federal government, the Wall Street Journal reported. The subsidiary, Kansas Bankers Surety Co, is notifying about 1,500 banks in more than 30 states that it will no longer offer a program called "bank deposit guaranty bonds."

This is a fairly far reaching move. After all, companies offer insurance products as a means of making profit. Furthermore, firms such as Hathaway are in the risk management and assessment business. This sends the message that this insurance company believes that the risks are greater than the profit potential, when it comes to this form of policy.

Typically before ending a product, insurance companies usually raise rates first. There is no word if Hathaway pursued such first. Also, there is no word yet if this is going to be an industry trend, since there is a small group of other companies who offer similar policies and no announcement from them on future plans or recent increases.

This policy was very important to banks that pursued wealthy customers who found insurance from the federal government of up to $100,000 in deposits inadequate. Much of the concern stems from the fact that the US has seen eleven banks fail in 2008 alone, the most since 2002 which some attributed to larger national financial problems following September 11th. More banks seem poised for failure, which only adds fuel to concerns.

This will force some of those wealthy depositors to do more research on where they bank, strengthen the positioning of smaller community banks (which tend to keep a closer eye on banking activities), and require customers to continue to pursue alternatives to banks for larger deposits (which often bring higher risks, costs, or both).

This policy change follows the federal government's bolstering of mortgage lenders Freddie Mac and Fannie Mae. This move by the government led to a huge rally on Wall Street, but appears to have done little for Buffett in placating his concerns.
Kevin Price articles frequently appear at ChicagoSunTimes.com, Reuters.com, USAToday.com, and other national media. Get his commentaries in your email box by contacting Info@HoustonBusinessShow.com.
Kevin Price is Host of the Price of Business (M-F at 11 AM on CNN 650) and Publisher of the Houston Business Review. Hear the show live and online at HoustonBusinessShow.com. Visit the archive of past shows here.

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