Buffett’s influence at banks adds to succession risks

Warren Buffett’s Berkshire Hathaway is the leading shareholder in three of the top five largest US banks © FT montage / Reuters

A few years ago staff at US Bancorp began to wonder if they could not do away with printing thousands of copies of the annual report. Everyone was reading it online, if they were reading it at all, so the cost of a big print run seemed an easy saving.

But then a senior delegation dropped by the offices of Warren Buffett, one of the bank’s biggest shareholders, and found a copy of the report on the table by his chair. The initiative died there and then.

It is measure of the influence that Mr Buffett wields over the US banking sector. Through his conglomerate, Berkshire Hathaway, the 87-year-old “Oracle of Omaha” is a towering figure: the biggest shareholder in Bank of America and Wells Fargo, the number two and three banks by assets, as well as Minneapolis-based US Bancorp, the number five. Berkshire also has a big stake in Goldman Sachs, acquired at a perilous point in the financial crisis, and chunks of BNY Mellon, American Express, Synchrony and Visa.

That is why news of a potential reshuffle at the top of the company this week was not just a big deal for shareholders in Berkshire. Questions of succession are a vital boardroom matter for institutions with a combined market capitalisation of hundreds of billions of dollars. 

Talk about “key man risk”, says Peter Atwater, president of Financial Insyghts in Delaware, who notes that the big banks have come through the crisis much larger than they entered it. “You have Jamie Dimon, Warren Buffett, Brian Moynihan; throw in the head of Vanguard and Larry Fink, and you essentially have the American financial system concentrated at a very small table of individuals.” 

Neither of Berkshire’s heirs apparent — Greg Abel, the chief executive of the energy division, nor Ajit Jain, the reinsurance chief — has anything like the banking experience of Mr Buffett, who once stepped in to oversee Salomon Brothers for a nine-month spell in the early 1990s. And it is doubtful whether either would have a calming effect quite like Berkshire’s current chief executive and chairman.

In 2012 Mr Buffett seemed to steady the shares of BofA with a vote of confidence in Mr Moynihan, the then-beleaguered chief executive. And last June he threw a C$2.4bn (US$1.9bn) lifeline to Home Capital Group, a Canadian subprime mortgage lender that had been battling to stem an outflow of deposits amid broad concern over the country’s bubbly housing market.

At the time, many wondered whether this was a backdoor bailout brokered by the Canadian government — a suspicion reinforced by Bill Morneau, the country’s finance minister, who later said that it was “probably not a coincidence” that he and prime minister Justin Trudeau had dined with Mr Buffett in Seattle a few weeks before he put pen to paper. 

Nancy Bush, analyst at Georgia-based NAB Research, draws a parallel between Mr Buffett and John Pierpont Morgan Sr, the financier who assembled a room full of bankers in 1907 to head off a market crisis. These men are “financial wizards”, she says, figures “who had the wherewithal, the foresight and the moral instincts to ‘do the right thing’”. 

But some say that the banks could have used a sterner voice in the boardroom along the way. Mr Buffett has been an outspoken critic of banks’ use of derivatives, for example, calling them “financial weapons of mass destruction”. Yet he has apparently done little to rein them in. 

Berkshire epitomises the extraordinary financialised economy that exists today, where half a dozen key men determine the fate of the world

During scandals, too, Mr Buffett has seemed to keep his counsel. He failed to publicly rebuke John Stumpf, then chief executive and chairman of Wells, in the aftermath of the fake accounts fiasco that ultimately cost Mr Stumpf his job. He apparently did not insist on the ousting of Stephen Sanger, a former long-time board member at Wells who stepped up to executive chairman, before he was deposed last August.

In May 2010 he said he saw “nothing wrong” with the Abacus affair at Goldman, over which the bank paid a record $550m fine to the Securities and Exchange Commission. Goldman was accused of misleading investors in a subprime mortgage product, just as the US housing market was starting to buckle.

That is part of the problem, says Mr Atwater, noting that Berkshire’s stakes are so large that Mr Buffett would struggle to exit them even if he wanted to. The 9.92 per cent position in Wells, for example — just under the maximum 10 per cent ownership allowed by a non-bank — is worth about $31bn at today’s prices.

“I think they’re almost an index fund owner, a holder in perpetuity,” he says. “Berkshire epitomises the extraordinary financialised economy that exists today, where half a dozen key men determine the fate of the world.”

This post originally appeared on Financial Times

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