We were not too surprised to see stories pop up over the weekend about Warren Buffett, CEO of Berkshire Hathaway, being in conversations with the Biden administration about the banking crisis, as well as reports from the major news outlets that a large number of private jets have made their way to Omaha this weekend.
In just the past 10 days, we’ve seen the U.S. regulators step in and backstop depositors at two failing banks, Silicon Valley Bank and Signature Bank. The Swiss government stepped in to shore up Credit Suisse, and the U.S. regulators are working with 11 banks (including JPMorgan Chase) to shore up First Republic Bank by placing $30 billion of their own funds in deposits at the struggling institution.
Looking for the Buffett Seal of Approval
On multiple occasions over the past two decades we have seen firms seek out capital from Berkshire on the belief that the “Buffett Seal of Approval” that came with that capital injection would reduce the pressure on their shares.
This was most evident during the 2008−09 financial crisis, when Berkshire tapped into the strength of its balance sheet, its large excess cash balances, and the value that struggling firms (and their investors) placed on having Buffett’s approval attached to their businesses and/or actions to extract large rents from those that lined up at the Bank of Berkshire.
In particular, on the financial services side of things, we saw Goldman Sachs, two days after it became a bank holding company in September 2008, announce a private offering to Berkshire Hathaway whereby the insurer would purchase $5 billion worth of 10% perpetual preferred stock issued by Goldman (with the investment bank retaining the option to buy back the preferred shares for $5 billion plus a one-time dividend of $500 million). As part of the deal, Berkshire also received warrants (expiring in 2013) to purchase 43.5 million of Goldman’s common shares for $5 billion (or $115 per share). This became a strong show of support for Goldman at a time when the markets were in chaos primarily because Buffett has shunned investments in the investment banks following his own experience with scandal-ridden Salomon Brothers in the early 1990s.
Berkshire stepped up again in early September 2011 when Bank of America reached out for a lifeline that had the insurer investing $5 billion in 6% Perpetual Preferred Stock, as well as receiving warrants to purchase 700 million common shares for $5 billion (or $7.14 per Share). The investment was seen as a huge vote of confidence in Bank of America, which has been plagued by mounting legal costs stemming from the 2008-09 financial crisis, as well as doubts about the strength of its capital base, sending the company’s shares soaring off their recent lows. Buffett’s seal of approval also helped other banks, which had been weighed down by weakness in the overall stock market, fears of a slowing U.S. economy, and concerns about their exposure to Europe’s sovereign debt crisis, see a recovery in their share prices.
Any Berkshire action would likely be capital injection, not acquisition
With all of that in mind, we would expect any action on the part of Berkshire-Buffett in the near term, with regards to the U.S. regional banks, to involve the same kind of capital injection (and Buffett seal of approval). This would be in exchange for high-coupon preferred stock (which is more tax efficient for an insurer) and warrants to buy common stock if anything happens at all. As such, that lifeline will not come cheap for those interested in going that route.
What we do not expect to see is Berkshire stepping in and buying a bank. The firm has shown no interest in holding more than a 10%-15% stake in a U.S. bank primarily because ownership above that threshold comes with reporting requirements and oversight from the regulators that Berkshire is not all that interested in adhering to.
UBS should benefit from Credit Suisse takeover
