At age 86 there is no one else in the financial markets around the world whose health is systemically important as Warren Buffett’s.
Sentiment in shares, bonds, banks, insurance companies, finance, airlines, railroads, oil, energy distribution, manufacturing, car dealerships depends on him living out his remaining years in good health.
The results this week of the US Federal Reserve’s stress tests on 34 of America’s biggest banks and finance groups underline Buffett’s importance as an investor and as a reinforcement for sentiment.
He and his companies are already a globally systemically important group in insurance and especially reinsurance. It is America’s second biggest car insurer, a major insurer of business risks and a top five global re-insurer through companies like National Indemnity and General Re.
And in Australia Berkshire Hathaway has 3.7% of Insurance Australia Group (our biggest general insurer) and a 20% quota share insurance deal that makes Berkshire the major underwriter of IAG’s risks and he got a nice boost this. Berkshire also owns billions of dollars of Australian government bonds.
Buffett is already the most significant global investor in banks – now following the results overnight Wednesday of the annual stress tests he stands on the verge of being the only globally systemically important individual investor in banking.
‘Systemically important” is the way financial regulators around the world classify banks into those whose financial health is vital to the health of a country (say our big four bans here) and the world (the likes of Goldman Sachs, Bank of America, Deutsche Bank, Citigroup and others).
Regulators base on whether they think the bank or insurer is ‘too big to fail’ and if any failure of one of these giants would damage the economy and financial systems of the country involved and globally (as the collapse of Lehman Brothers did in September 2008).
Buffett and Berkshire have resisted attempts by US regulators to classify his insurance companies as systemically important and has said on numerous occasions they are “not to big to fail’.
Berkshire has more than $US140 billion worth of shares, including the biggest holdings in Apple, the four big American airlines and the equal top holding in the KraftHeinz food group. It has interests in shares in Canada, the UK, Australia, Asia and Europe.
Berkshire is a big investor in Israel, in real estate, US energy, US real state agencies, food and grocery distribution, manufacturing and controls one of America’s biggest railroads.
In fact in financial and markets’ terms, Buffett’s continuing health is more important than that of Donald Trump and perhaps the Fed’s own stress tests.
While he is alive Buffett’s own ’stress tests’ his annual health checks could become as important as the Fed’s tests and the tweets from Trump and comments from the rest of his administration.
While there is no classification for individuals because up to now no one has managed to dominate a big global bank’s share register, Buffett Berkshire already dominates the share register of Wells Fargo, which is a systemically important bank in the US, and is the largest shareholder in American Express which is one of the world’s biggest purely consumer finance companies.
Overnight Wednesday Wells Fargo and Amex were among the 34 US banks and finance groups that passed the Federal Reserve’s latest stress tests and they responded with higher dividends (which means more income for Berkshire) and share buybacks, which will see Buffett and his companies tighten control of both Wells and Amex by not accepting the buybacks
But the move by Bank America Merrill Lynch to boost dividend and a buyback could see Buffett and Berkshire become the largest shareholder via a holding of preferred shares that it took up in the GFC that helped steady a wobbly bank.
Berkshire and Buffett also did similar deals with Goldman Sachs and General Electric and with Swiss Re, the big global rival of his own huge reinsurance business.
Buffett has said in the past that a higher dividend from BA is one factor that could prompt Berkshire to swap its preferred shares in the bank into about $US16 billion worth of ordinary shares – which would be the single biggest holding in the bank.
In February Buffett said in his annual letter to shareholders that Berkshire planned to make the switch in its Bank of America stake if the bank boosted its annual dividend to 44 cents a share from the recent level of 30 cents a share. That is because a common-stock dividend of 44 cents would pay Berkshire more than the $US300 million that the preferred stake gives the firm annually. Bank of America announced after the stress test results were released, that it would boost annual dividend to 48 cents a share or 16 cents a quarter. That’s $US336 million a year.
Berkshire bought its preferred shares in the bank in 2011, when the lender needed to shore up investor sentiment. Buffett and his reputation was the one to provide that, just as he had provided it to Goldman Sachs, GE and others in the wake of the GFC. The $US5 billion deal also included warrants to buy 700 million shares of Bank of America common stock for $US7.14 each, against the current price of $US23.88. If exercised now that would give Buffett an immediate profit of more than $US11 billion on those shares. That would also give him the top billing in America’s second and third largest banks and one of the largest consumer finance groups (and globally). And this is all on top of his legendary status in sharemarkets.
