Buffett slams Treasury stress tests of big banks

Warren Buffett. Photo / AP.

Warren Buffett, the billionaire investor who was a vocal supporter of Barack Obama's election, appears on a collision course with the President over the results of the Treasury's "stress tests" of the big US banks.

Buffett is a major shareholder in Wells Fargo, the country's fourth largest bank by assets, which was rumoured yesterday to have been ordered to shore up its balance sheet to help it survive a prolonged recession.

The news came after Buffett had spent a weekend declaring Wells Fargo was well-capitalised and didn't need to raise any new money. At his annual shareholder meeting in Omaha, and in media interviews, Buffett was critical of the stress tests which the Administration is conducting to try to restore confidence in the banking system.

The results of the stress tests were due for publication yesterday, but have been delayed until later this week to allow for more wrangling between the Treasury and the banks that have been ordered to raise more money based on their results. These are believed to include Citigroup and Bank of America, the two biggest banks in the US.

The Treasury, the Federal Reserve and other regulators have been trying to calculate the likely results that banks will have over the next three years under a range of economic and financial circumstances, when consumers and businesses could have difficulty keeping up with mortgage, credit card and loan payments.

Each bank will be told the size of the capital cushion it must have to survive a particularly stressful period, and will be given six months to raise new money to meet the requirement.

But many executives and lower-ranking participants from the banks are already privately complaining that the methodology is dangerously flawed, and those concerns were voiced by Buffett in Omaha over the weekend.

"A stress test should include more than just this ratio or that ratio, or lopping off a percentage of this loan or that loan," he said.

San Francisco-based Wells Fargo grew dramatically in size last year when it acquired troubled rival Wachovia, but it has already written down the value of the toxic mortgages it took on, and Buffett insisted that he would buy more shares, so confident is he it will make money in circumstances in which other banks will be unprofitable. Wells Fargo shares rose more than 9 per cent in lunchtime trading.

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