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Buffett's $16 Billion Bet on Financials

Thursday, September 11, 2008 | Marie Albin

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Following the government’s bailout of Fannie Mae (FNM) and Freddie Mac (FRE), investing titans Warren Buffett and Jim Rogers came out for (Buffett) and against (Rogers) the government’s move.

Buffett said the Treasury “did exactly the right thing.”

Rogers called it “socialism for the rich.”

You shouldn’t listen to either one of them.

It’s not a surprise that Buffett is happy with the government’s bailout plan. Berkshire Hathaway’s portfolio is loaded with financial stocks: American Express (AXP), Bank of America (BAC), M&T Bank Corp. (MTB), SunTrust Banks (STI), and Wells Fargo (WFC).

Buffett's Financial Stocks
Company Name Ticker #of Shares Berkshire Hathaway Owns
(as of 6/30/08)		 $ Value of Shares
(as of 9/10/08)
American Express AXP 151,610,700 $5,806,689,810.00
Bank of America BAC 9,100,000 $296,660,000.00
M & T Bank Corp. MTB 6,715,060 $505,845,469.80
SunTrust Bank STI 3,204,600 $145,713,162.00
Wells Fargo & Co. WFC 290,654,868 $9,251,544,448.44
Total $16,006,452,890.24


The financial sector as a whole stands to gain from the government bailout. The Bear Stearns bailout set the precedence that the government is ready to engineer a rescue if it looks like a major bank could fail. That makes it less risky for investors to buy stock in financial companies.

And many of these stocks in particular – Bank of America, Wells Fargo, SunTrust – have heavy exposure to the mortgage business (and the subprime mess). Without Fannie and Freddie there to buy up their mortgage loans, these companies would have very little ability to do business. Chris Rowe pointed out the relationship between banks and Fannie/Freddie in his article on Tuesday, so I won’t go into detail here.

Suffice it to say, Warren Buffett has a $16 billion stake in this government bailout. And I’m not surprised that he’s pleased as punch with the outcome.

And then there’s Jim Rogers. If you are not familiar with Jim Rogers, he made his fortune partnering with George Soros in the ‘70s. He’s also famous for correctly predicting the current bull market in commodities back in 1999. And he developed a commodities index and runs funds based on that index.

Rogers is still bullish on commodities, including oil. The problem is that commodities are priced in dollars. And when the government announced its bailout of Fannie and Freddie, the dollar jumped. Yesterday, the dollar climbed to nearly a one-year high against the euro. Whether good or bad in the long-run, foreign investors now know that they can rely on the U.S. government to step in and protect them.

More foreign investment coming into U.S. Treasury securities means a stronger dollar. A stronger dollar means lower commodity prices. That’s why oil prices dropped to $102.58 a barrel yesterday despite a bigger-than-expected drop in U.S. crude supplies and the announcement from OPEC that the oil cartel will cut production.

And that’s why Jim Rogers is whining to any news outlet that will listen that the government did a bad, bad thing.

What do you think? Are you ready to buy financial stocks like Buffett? Or are you buying up commodities like Rogers? Leave your comments below.



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Marie Albin
Managing Editor
The Tycoon Report


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42 Comments

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  1. brent (1 year ago) Is this Spam?

    ok

  2. GARTH (1 year ago) Is this Spam?

    Sorry to hear of your LEH bank but it seems that getting those other two FNM and FRE out of debt once more where do you go now.I think another bigger bank about to fall also,maybe a C or MERCK then somebody can step into take over the whole mess left after.Some bank like Bank of England or the greatest bank of us all-The bank of China,they must have a great financial status by now with a 12%growth rate.I think I may invest in yuan from now on as USD seems for a long and painful decline very soon.

  3. uhoothegossip (1 year ago) Is this Spam?

    seems that the commodity investment will stayat least even with inflation. Not so sure about US banks and government policies!

  4. Kenneth (1 year ago) Is this Spam?

    Not to sharpshoot, but "Buffett" is spelled with two ts at the end of his name, not one.

  5. David (1 year ago) Is this Spam?

    Financials had to be "bailed out," but it wasn't the companies (stockholders) but their creditors that were bailed out for the sake of the economy as a whole. With a crystal ball, I would selectively buy them before long. Meanwhile, I agree with the long-term trend up of commodities. Only industrial commodities risk being at least partly displaced by technological innovations: electric cars, etc. Yes, Buffet's been holding most of his portfolio for the long term, some very long term including financials.

  6. Dusty (1 year ago) Is this Spam?

    I have vested interest in Bank of America in my personal brokerage account; my 401K which is professionally managed as a group effort has a lot of Financials. Of course, just like Buffet, I am happy to see the continued survival of these companies and of the Market.

  7. brent (1 year ago) Is this Spam?

    I thought Warren Buffet was supposed to be so smart. Buying financials like bank of america and others is not a good move. We have not reached the bottom. I'm surprised he didn't buy Lehman brothers while he was at it. SHORT the financials gentlemen--I know very little about stocks but I know red from green and GS goldman sachs will be the next to go down. Thank you.

  8. bowman711 (1 year ago) Is this Spam?

    How is the Government going to pay for the Freddie and Fannie bailout? Either it raises taxes and the taxpayers pay for it directly, or it simply prints the money needed and the taxpayers pay for it indirectly.



    It seems pretty much universal opinion that since raising taxes would send the economy into recession (or even depression) the Government will print the money. That may be good for financials in the short run, but in the end it is highly inflationary, and that is good for commodities. Buy financials and get out of them in the short run, and buy gold, silver, etc. for the long run.

  9. Jon (1 year ago) Is this Spam?

    You should also include the 68,000,000+ shares that Berkshire Hathaway owns of US Bank (NYSE: USB) worth over $2 Billion.

  10. Jeremy T (1 year ago) Is this Spam?

    I'm actually holding many of my commodity related positions, and looking to add more. It's pretty easy to value many of these companies, they are still making money and have P/E ratios - many at historic lows. How do you value a financial company now-a-days?



    Although a high quality financial, like a JPM, I might be interested in if it falls back down hard again.

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