In a long interview (it took three reporters) in the weekend edition of the Financial Times, Warren Buffett, the Sage of Omaha wasn’t asked about a significant change in policy from the US Federal Reserve which could allow his Berkshire Hathaway to substantially boost its already large stakes in some of America’s biggest banks.
Berkshire has an estimated 40% of its 2018 investment portfolio of $US173 billion invested in banking stock like banks and Amex (which is not affected by the new Fed proposal).
The Financial Times interview covered succession, investments, Buffett’s health, and investment policies – but didn’t mention the fact that the company is the largest shareholder in some of America’s biggest banks, the four largest airlines and Apple.
The interview was done ahead of the Berkshire Hathaway annual meeting in Omaha this Saturday and the release of third-quarter results at the same time. Nor did the interview mention the major accounting change that has forced Berkshire to include stock gains and losses in earnings results – a point Buffett has vigorously disagreed with.
In an announcement on April 23, the Fed proposed rule changes that would allow 25% ownership of a bank without triggering restrictive rules involving Fed oversight that now apply to investors at the 10% threshold.
Berkshire has large holdings and is close to the 10% limit in Wells Fargo (Buffett, in fact, has stopped buying shares in Wells because of the rule and another from the Securities and Exchange Commission and has been slowly selling down his Wells stake), Bank of America, Bank of New York and US Bancorp, and a smaller holding in Goldman Sachs. Berkshire also has a significant stake in the biggest US bank, JP Morgan Chase. the 35 million shares reported last November are currently worth $US4 billion.
In the statement the Fed said in part:
“the proposal lays out several factors and thresholds that the Board will use to determine if a company has control over a bank. The key factors include the company’s total voting and non-voting equity investment in the bank; director, officer, and employee overlaps between the company and the bank; and the scope of business relationships between the company and the bank. The proposal clearly describes what combination of those factors would and would not trigger control.
“As a result, the proposal would reduce complexity and burden for banking organizations and their investors, and provide clarity so that a wide range of stakeholders can better understand the control rules.”
The Fed rule has effectively put a cap of 10% on Berkshire’s holdings in individual banks through the usual central bank method of ‘winks and nods’, or what the Fed said in its statement was ‘a Delphic and hermetic process’ which has not involved public comment. That will now change with the new proposal.
But will Berkshire want to lift its bank shareholdings much higher than current levels if the new rule becomes fact?
Buffett has said repeatedly that he prefers to keep Berkshire’s equity stakes under 10%. That’s because other rules from the Securities and Exchange Commission require holders above 10% to disclose trades in the shares within two business days—something Buffett doesn’t like to do.
He likes to keep his share buying and selling secretly for as long as possible. Generally, they appear in the quarterly SEC filing from fund managers (which are issued 45 days after the end of the quarter – the next from Berkshire will be on May 15).
The SEC rule for 10% holders “also establishes mechanisms for a company to recover ‘short swing’ profits or profits an insider realises from a purchase and sale of the company’s security that occur within a six-month period,” according to the SEC website. A holder of 10% or more of a company can be classed as an ‘insider’ – which is something Buffett has been loath to do in the past.
There are also rules governing the disclosure of funding and other financial transactions between a company and the holders of 10% or more of a bank.
In the FT interview, Buffett indicated that Berkshire Hathaway could buy back up to $US100 billion of its shares over time. It bought back about $US1.3 billion of its own stock last year and some shareholders are looking for more news on further buybacks at the this weekend’s annual meeting.
