Buffett's $16 Billion Bet on Financials
Thursday, September 11, 2008 | Marie Albin
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).
| 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
Chief Investment Officer
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