Interest Rate Roundup

Wednesday, September 10, 2008

Warren Buffett reportedly exiting the bank deposit insurance business

I've been pretty busy, so I didn't get a chance to blog on this story in the Wall Street Journal from earlier today. But it appears Warren Buffett isn't exactly bullish on the outlook for bank safety. I say that because he is reportedly getting out of the business of covering deposits that exceed the FDIC's insurance limit. More details:

"Warren Buffett's Berkshire Hathaway Inc. has told one of its subsidiaries to stop insuring bank deposits above the amount guaranteed by the federal government, dealing a fresh blow to the financial-services industry as it tries to assuage anxious customers.

"The subsidiary, Kansas Bankers Surety Co., is notifying about 1,500 banks in more than 30 states that it will no longer offer a program called "bank deposit guaranty bonds." KBS is an 18-employee subsidiary of Berkshire Hathaway, according to the parent firm's 2007 annual report. It is one of a handful of firms that offer such insurance, a big selling point for banks trying to attract wealthy customers.

"Two people briefed on the matter said the order was made Monday by Mr. Buffett, Berkshire Hathaway's chief executive. Chuck Towle, a senior vice president at KBS, declined to comment on why his firm was leaving the business. "We have decided to do so," he said. "We'll work with each individual bank and work it out with them."

"Mr. Towle wouldn't confirm or deny Mr. Buffett's involvement, calling it "strictly rumor." Mr. Buffett declined to comment.

"Eleven banks have failed this year. Seven have fallen since July 11, a concentration not seen since the savings-and-loan crisis of the late 1980s and early 1990s. The Federal Deposit Insurance Corp. backs deposits of as much as $100,000 on most accounts or $250,000 on some retirement accounts.

"That Mr. Buffett is withdrawing from this insurance market is an indicator of how many in the industry are worried about future bank failures."

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