Warren Buffett says the 'R' word

Business Times - 06 May 2008

Warren Buffett says the 'R' word

Housing woes seen hurting bank results for a couple of years

(OMAHA, Nebraska) Warren Buffett, the world's richest person, said on Sunday that the US economy is in recession, putting him at odds with a government report that showed weak growth.

Mr Buffett offered his assessment during a wide-ranging news conference, a day after a record 31,000 shareholders of Berkshire Hathaway Inc attended the insurance and investment company's annual meeting in Omaha.

Last Wednesday, the Commerce Department said that the US economy grew at a 0.6 per cent annual rate in the first quarter. But Mr Buffett said that the nation's population also grew, making the real growth rate lower.

He also said that even if the data did not show the economy retracting, people felt as though it was.

'The US is in recession as I define it,' he said. 'I would define that as a situation where people are doing less well than they were three months, six months or eight months earlier and most businesses find themselves in that position too.'

Housing remains a critical problem, he said, as hundreds of thousands of US homeowners find their mortgage payments heading higher, or that their homes are worth less than they owe.

While Mr Buffett said that the government could help borrowers who were misled on what they would owe, he opposed helping people simply because their home values had dropped, or investors who bought mortgage securities without understanding the risks.

Borrowers, he said, 'shouldn't be penalised for being misled, but shouldn't be protected against mistakes'. He estimated that more than 80 per cent of borrowers with 'option' or 'pick-a-payment' mortgages that let them pay less than the principal due, in fact did so, and that many now owe more than their homes' values.

Mr Buffett said that housing problems would weigh down bank results for 'a couple of years' and the industry's large losses and write-downs due to bad debts were not over 'by a long shot'.

'There's going to be more pain, sure,' he said.

Alluding to a large stock offering last week by Citigroup Inc, which lost close to US$15 billion over the last two quarters, he said: 'Citigroup is replenishing its stock at US$25 when it was buying it back not too long ago at US$50. Many institutions not only grew the Kool-Aid, but drank it ... They paid a price, but the price was really paid by shareholders.'

He said that banks needed better risk management.

He also said that he recently considered the prospects of a large investment bank, which he did not identify, by reading its 270-page annual report. He highlighted 25 pages where he did not understand what he had read.

'I decided not to pick that one,' he added. -- Reuters

Copyright © 2007 Singapore Press Holdings Ltd. All rights reserved.


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