Buffett says Fed avoided chaos in Bear bailout
OMAHA, Nebraska (Reuters) - Warren Buffett said on Saturday said the U.S. Federal Reserve avoided financial market "chaos" in coordinating the March bailout of Bear Stearns Cos BSC.N, which faced imminent bankruptcy before agreeing to be acquired by JPMorgan Chase & Co (JPM.N).
The central bank, led by Chairman Ben Bernanke, helped broker the buyout, after liquidity evaporated at Bear, which had been Wall Street's fifth-largest investment bank.
JPMorgan, the third-largest U.S. bank by assets, agreed to pay $10 per share for Bear, and the Fed agreed to guarantee $29 billion of Bear's assets.
"I think the Fed did the right thing in stepping in on Bear Stearns," Buffett said at the annual meeting of his Berkshire Hathaway Inc (BRKa.N) (BRKb.N) insurance and investment company. "Just imagine the thousands of counterparties around the world having to undo contracts."
Buffett said a record 31,000 shareholders attended the meeting in Omaha's Qwest Center, including an overflow crowd in halls outside the main arena.
He and Berkshire Vice Chairman Charlie Munger fielded questions for five hours, often humorously, on investing, the economy, politics and life.
Attendance has soared since Berkshire in 1996 created Class B shares worth 1/30th of a Class A share. These made it easier for ordinary investors to invest with Buffett, the world's richest person.
RISK AT ISSUE
Buffett said the Bear debacle illustrates how some investment banks and commercial banks may have grown too large to effectively manage risk.
"The big investment banks, a number of them, and big commercial banks, I think they're almost too big to manage effectively from a risk standpoint in the way they've elected to conduct their business," he said. "You need someone at the top whose DNA is very, very much programmed against risk."
Berkshire is, he said. "We want to run Berkshire where if the world isn't working tomorrow the way it is working today, or in a way that wasn't expected, we wouldn't have a problem," Buffett said. "If we can earn a decent return on capital, what's an extra percentage point?"
One area of concern is the estimated $60 trillion market for credit default swaps, an insurance contract that covers losses to banks and bondholders when companies don't pay their debts, and lets investors bet on credit markets.
Yet Buffett doesn't foresee a collapse. "I don't think it's going to happen, and I think the chances of it happening were reduced significantly by the fact the Fed stepped in at Bear Stearns," he said.
Berkshire, however, has benefited from market disruptions, including many triggered by the nation's housing crisis.
Buffett said his four-month-old bond insurer, Berkshire Hathaway Assurance Corp, wrote $400 million in business in the first quarter, more perhaps than other rivals combined. Continued...
