dowfin1

Case Shiller through 11-08 shows LA and Miami among the hardest hit areas with peak to trough losses of 36% and 40% respectively. Another 50% down would make peak to trough losses of 68% and 70%. Not likely.

In 1990 Buffett used a 3% loss stress test, rather than a 10% for WFC. From the 1990 letter: Of course, ownership of a bank - or about any other business - is far from riskless. California banks face the specific risk of a major earthquake, which might wreak enough havoc on borrowers to in turn destroy the banks lending to them. A second risk is systemic - the possibility of a business contraction or financial panic so severe that it would endanger almost every highly-leveraged institution, no matter how intelligently run. Finally, the market's major fear of the moment is that West Coast real estate values will tumble because of overbuilding and deliver huge losses to banks that have financed the expansion. Because it is a leading real estate lender, Wells Fargo is thought to be particularly vulnerable. None of these eventualities can be ruled out. The probability of the first two occurring, however, is low and even a meaningful drop in real estate values is unlikely to cause major problems for well-managed institutions. Consider some mathematics: Wells Fargo currently earns well over $1 billion pre-tax annually after expensing more than $300 million for loan losses. If 10% of all $48 billion of the bank's loans - not just its real estate loans - were hit by problems in 1991, and these produced losses (including foregone interest) averaging 30% of principal, the company would roughly break even. A year like that - which we consider only a low-level possibility, not a likelihood - would not distress us. In fact, at Berkshire we would love to acquire businesses or invest in capital projects that produced no return for a year, but that could then be expected to earn 20% on growing equity. Nevertheless, fears of a California real estate disaster similar to that experienced in New England caused the price of Wells Fargo stock to fall almost 50% within a few months during 1990. Even though we had bought some shares at the prices prevailing before the fall, we welcomed the decline because it allowed us to pick up many more shares at the new, panic prices.

Here is the 10-03 follow-up interview: FRIDAY, 3 OCT 2008 CNBC BECKY: You know, we were all caught off guard this morning by the Wells Fargo bid to take over Wachovia. How did that come about? BUFFETT: Well, as I understand it, there was something in the tax bill, actually, that may have been passed Monday, which, in effect, made the deal more attractive. And the Wachovia shareholders are going to get the benefit of the fact that that tax situation changed. They're going to get a lot more money than they would have gotten if that tax bill hadn't passed. BECKY: Obviously though, Citigroup a little unhappy with how this all came out. Charlie Gasparino has been reporting today that Citigroup officials just found out about this last night at about two o'clock in the morning. They are claiming that they had the FDIC backing on some of this. Where do you see this coming down? BUFFETT: Well, I don't know the answer to that. I don't know all the technicalities. I know it's a better deal, obviously, for the Wachovia shareholders. And I know that there is no company, there's no banking institution, during the last six months, that has done a better job for its holders, for its depositors, and for its borrowers, than Wells. Wells has been lending more and more money. They've been pumping money into the economy during the last six months while other institutions have been contracting. So I think Wells is a wonderful home for Wachovia. BECKY: How dire of a situation do you think this was, though, for Wachovia shareholders last weekend when everyone seemed to be considering this deal at one time, Wells Fargo walked away. Did the idea that Citigroup came in that night keep the bank in operation the next day when the markets opened? BUFFETT: Well, I think the FDIC one way or another would have kept things open. But there's no question the Wachovia situation worsened dramatically over the last few weeks. Incidentally, I think (Wachovia CEO) Bob Steel has done a good job since he came in, but he got handed an impossible hand. And like I say, fortunately this tax bill makes Wachovia more valuable and Wells has stepped up with an offer that will provide considerably more money to the Wachovia shareholders. I also -- I really do think there's no, there's no banking institution that has done a better job during this tough period than Wells. I'll tell you one interesting fact, Becky. There are only two domestic stocks that I own personally. One is Berkshire Hathaway and the other is Wells Fargo. But I've got quite a bit more of Berkshire Hathaway. (Laughs.) BECKY: Now I know that when we talked to you about a month ago, you told us that when you were looking at the financials there was one stock you've been buying more of. People at the time -- we narrowed it down to two. We got you to admit that it was either Wells Fargo or American Express. Was it Wells Fargo? BUFFETT: Well, now you know. Yeah, it was Wells Fargo. (Laughs.) We've added quite a bit to our holdings since the start of the year. BECKY: Added quite a bit to Wells Fargo -- Have you added to your own personal holdings in Wells, too? BUFFETT: Yeah, I bought -- The first domestic stock that I can remember buying, I don't know, in a decade or two. But there was a time that Wells got down into the low 20s and so I couldn't resist. I bought some myself. I keep most of my money in Treasury bonds, except for Berkshire Hathaway, but I did buy some Wells.

Mungerish, Thanks. The Becky Quick interview was on Oct 3, 2008 and the op-ed peice was dated Oct 17 where WEB says he's starting to buy domestic shares. On Oct. 3 WEB says he bought WFC when it dropped around the low 20s which happened during a short window in mid-July 2008 according to the chart. My reading of the 13g/a is that as of 12-31-08 WEB personally owns 2,240,000 WFC shares based on his sole voting authority.

but I believe he sold it based upon the NYT Op Ed piece What piece is this? I must have missed it.

Thanks Sanj for all you efforts. My questions: With bank consolidation, will fee and transaction income account for a significantly larger part of bank revenues/margin especially at the retail level where the consumer may be limited to little choice in some areas? Or do you see govt. intervention to protect the customer on gouging? With the banking system weakened, do you think the FED/Treas. will manipulate rates so banks earn fat margins over an extended period, and can earn their way out of their troubled assets. If so, is this an extended golden era for the few healthy banks around? Thanks

On 11-20-08, the SPX hit 752 and the Wilshire 5000 hit 7471. Extrapolating a bit, I get the ratio at 67.24% based on 4Q 2008 nominal GDP of $14,265B per the BLS.