10% to 25% ownership

[Guest longinvestor]

This could be a huge opportunity for Berkshire going forward. While answering a question about this at the agm, WEB and CM are excited about this but the 3 day disclosure requirement is still an obstacle for meaningful buys. Will the SEC change that regulation from 3 days to 3 months. As a shareholder I’d like 3 years

 

All that said, this could be huge pathway to deploy the $100’s of billions to be deployed in the coming years. If just the current holdings become 25% stakes, how many billions is that? Plus, buybacks by these companies were always welcome at Omaha, now they must be euphoric about buybacks.

 

[Dynamic]

I agree that the 3-day reporting rule would be a major impediment to buying more.

 

Are you mainly talking about the bank holding company regulation, where anything over 10% makes you a bank holding company and produces onerous restrictions on your banking relationships etc., as that's one I've read about plans to consult on loosening the restrictions? The need to continually trim WFC as they buy back their own stock is somewhat annoying, and the same restriction will probably limit the BAC exposure to the 900 million shares they currently own, as much more would be getting perilously close to 10% there too, forcing sales that have no economic rationale, purely a regulatory compliance rationale.

 

It could also be a major boon for non-financials if they loosened the 3-day reporting either by changing the threshold or extending the deadline in certain circumstances. That was the regulation that required Berkshire to file a 13D after Delta (DAL) revealed that they had bought back a lot of their own stock, pushing Berkshire over 10% unexpectedly. On realising the cat was out of the bag, Berkshire decided to buy a little more DAL in the 3 day window before it became pubilc, taking their position up to 10.44% at the time, filing a second 13D a few days after the first to disclose it, but then they haven't bought or sold another share of DAL (unless it was within the last 3 days!). Berkshire certainly doesn't like to make moves in open-market securities where public disclosure of their proprietary investment activity is required so soon.

 

A little more freedom in the reporting regulations would greatly help Berkshire in 'moving the needle', and could widen its potential pool of future US investments substantially. Various other market have much tighter rules, such as the UK, with a 3% limit, though that probably help limit losses from the Tesco plc position!

[John Hjorth]

longinvestor,

 

At least partially related to Dynamic's post - which stands for itself - what is this about? [Right now, I feel pretty ignorant, & out of synch with reality].

 

 

 

 

[gfp]

longinvestor is probably referring to the Fed's clarification of what will trigger Bank Holding Company oversight going forward.  Here is some material on the potential future clarifications / implications for Berkshire's forced selling and position sizing of banking investments ->

 

https://www.federalreserve.gov/newsevents/pressreleases/bcreg20190423a.htm

(links towards bottom, including a chart)

 

a commentary -

https://www.morganlewis.com/blogs/finreg/2019/04/gnostic-secrets-now-revealed-a-first-take-on-the-feds-bank-holding-company-act-control-proposal

[Guest longinvestor]

https://buffett.cnbc.com/video/2019/05/06/morning-session---2019-berkshire-hathaway-annual-meeting.html

 

I started the thread after (re)listening to the AGM archive video. Go to 2:01:00 marker and listen to their answer to Greg Warren’s question about Fed rules about bank holdings. They then weave back and forth about the 25% limit on all securities. Yes, for Berkshire the key limitation has to do with copycats as a result of short term disclosure requirements. They’d be buying more cheerfully otherwise.

 

Here's another piece on Barron's: https://www.barrons.com/articles/berkshire-could-lift-stakes-in-several-big-banks-under-proposed-fed-rule-change-51556217117

[John Hjorth]

Thank you gents for taking time to elaborate on this.

 

What I missed was the three days reporting rule and its interaction with expected future bank holding company regulation when buying more above the 10 percent holdings limit. That question #25 at the last Berkshire AGM from Greg Warren was actually a very good - and important - one. Assuming the proposed bank holding company regulation gets approved, it will certainly make life easier for Berkshire forward looking. I must admit, that I really missed the importance of the reactions from Mr. Buffet & Mr. Munger on this while being af internet-observer to the AGM.

 

Thank you for bringing it up to our attention, longinvestor.

[valueinvesting101]

Is Berkshire required to disclose if they sell any BAC shares going forward since they own more than 10%?

 

Since there has been no such filing about BAC holding since 07/25 when they disclosed > 10% stake, does this mean they got waiver from Fed or at least having discussion with Fed to hold more than 10% without being designated as bank holding company?

 

Wells Fargo has indicated that they will be spending 2/3 of the buyback amount by 12/31. So it is likely, Berkshire can hit 10% limit of WFC if they have stopped selling.

[gfp]

Is Berkshire required to disclose if they sell any BAC shares going forward since they own more than 10%?

 

Since there has been no such filing about BAC holding since 07/25 when they disclosed > 10% stake, does this mean they got waiver from Fed or at least having discussion with Fed to hold more than 10% without being designated as bank holding company?

 

Wells Fargo has indicated that they will be spending 2/3 of the buyback amount by 12/31. So it is likely, Berkshire can hit 10% limit of WFC if they have stopped selling.

 

Yes, Berkshire would have to file with the SEC if they sold any BAC shares.  They haven't.  I don't think they will be selling any WFC shares going forward either.  I believe what is happening is that they are in discussions with the Fed and will ultimately not be limited to the 10% level going forward as long as they are careful not to exert what looks like other types of influence over a bank.  No discussions with the board, arms length commercial relationships, etc..  They have to be seen as totally passive shareholders

[Dynamic]

Is Berkshire required to disclose if they sell any BAC shares going forward since they own more than 10%?

 

Since there has been no such filing about BAC holding since 07/25 when they disclosed > 10% stake, does this mean they got waiver from Fed or at least having discussion with Fed to hold more than 10% without being designated as bank holding company?

 

Wells Fargo has indicated that they will be spending 2/3 of the buyback amount by 12/31. So it is likely, Berkshire can hit 10% limit of WFC if they have stopped selling.

 

I agree with gfp's interpretation of this.

 

The top equity positions listed in the latest Berkshire 10-Q filing (coupled with the quarter-end closing price of BAC and a lucky break on how this affected rounding to the nearest $0.1bn) and then the 13F-HR filings from Berkshire and New England Asset Management, confirmed that the BAC purchases had all been made by 30th June 2019. Various well regarded news sites get this wrong because they forget to include NEAM's 13F-HR and have reported, in error, that Berkshire must have continued buying BAC in July to hit 950,000,000 shares.

 

The reduction in share count revealed in July caused Berkshire to issue the Form 3 filing later amended to also mention the 354 shares of Series T 6% Non-Cumulative Perpetual Preferred Stock that Berkshire still holds but accidentally omitted on the original Form 3 filing.

 

As to Wells Fargo, the WFC holdings at 30th June 2019 was known to be 432,383,973 shares, so if the total WFC share count drops to 4,323,839,730 they'll hold 10% of the class. It will be interesting to see if they're permitted to let this happen passively as they did with BAC, following that precedent.

 

At 24th July per its 10-Q cover page, WFC had 4,406,107,022 shares of common stock outstanding, so only a 1.867% buyback is required for Berkshire to reach 10% assuming it doesn't sell. With over 8% of WFC's shares retired in 12 months, rather more than the rate in most years, it might only be October or November before a new filing tips Berkshire over the 10% threshold if they have continued to retire shares rather aggressively, so we might soon have our answer.

 

I guess it's even plausible, though perhaps unlikely, that Berkshire could have bought more WFC on recent dips to nudge up against the 10% limit already such that any subsequently published reduction in WFC share count would trigger a Form 3 from Berkshire.

 

A permanent change to 25% regarding the bank holding company status would potentially allow Berkshire to own a lot more of these banks, perhaps by way of private transactions rather than open market trades. As we are aware, the SEC rules on owning 10%+ of any listed company require rather prompt filing, and once Berkshire crosses that threshold, as with Delta Airlines, they tend to stop buying more in the public markets within a few days as the rapid reporting requirement is likely to thwart their attempts to keep buying at good prices without moving the market. So I'd imagine that increases in ownership of these banks much above 10% would almost certainly only come as a result of continual buybacks, so it might take decades to approach 25% and then face the need to sell some of their shares (and presumably to report these sales within a few days).

[redskin]

https://www.federalreserve.gov/newsevents/pressreleases/bcreg20200130a.htm

[Guest longinvestor]

https://www.federalreserve.gov/newsevents/pressreleases/bcreg20200130a.htm

 

Does it also imply that the SEC reporting requirements of once-a-quarter still hold? For 10 to 25% ownership? Instead of the current 3 day reporting

[Dynamic]

I don't think the Fed had jurisdiction to change that, so I think 13D and 13G filings would still be necessary, thwarting large open market purchases of BAC or WFC after exceeding 10%. After 1st April Berkshire might consider purchasing more WFC until a few days after exceeding the 10% threshold, but then I'd imagine they would stop.

[mcliu]

It's still nice that BRK has to option to hold WFC instead of selling it to maintain the threshold (due to buybacks). Especially at these prices.

[Guest longinvestor]

As Munger put it, if it wasn’t for these damn rules, we’d be cheerfully buying more, wouldn’t we?

 

Plan B, where our ownership trickles up via share buybacks by the investee is an adequate plan to grow the per share earnings stable without lifting a finger.

[Dynamic]

I would imagine that Berkshire would be very keen to be a very passive investor in banks, with the exception of Todd Combs' Directorship of JPM, which might still permit Berkshire to hold more than 10%, though only a ~2% stake at present.

 

https://www.federalreserve.gov/newsevents/pressreleases/bcreg20200130a.htm

 

The second link presented at the above URL, is to Visual (PDF), a one-page table which is quite useful in summarizing under what circumstances a company will be deemed to become a Bank Holding Company after 1st April 2020.

 

Between 10% and 14.99% voting rights, there are slightly lighter restrictions than between 15% and 24.99%. It does seem that once we exceed 10% ownership, the terms of business that Berkshire must have with such companies as Wells Fargo or Bank of America should be on Market Terms. I have something in the back of my mind that Berkshire had a significant banking relationship as a client of Wells Fargo, so it may yet be the case that Berkshire decides to remain below 10% if it has negotiated advantageous terms of business that are sufficiently valuable to Berkshire. I dare say it will be more than a quarter before Berkshire's stake in WFC might exceed 10% again through buybacks anyway.

 

Also, the rule states that even in the case of non-voting equity, once one-third of the company's total equity is held, that is considered sufficient influence to become a Bank Holding Company. Berkshire might be able to exchange voting equity for non-voting equity at some point in the future to increase its stake to 33.32% at most. Likewise there is a look-through provision regarding the potential to convert options or warrants etc. into voting securities or non-voting securities and then to apply the rules to the potential stake if exercised. It may be that if a future preferred stock investment with attached warrants like the BAC deal were to be made, the warrants might be exercisable into a voting or non-voting class of stock or a combination, allowing Berkshire to eventually hold a fairly substantial economic interest in a major bank without becoming a Bank Holding Company. It would be unlikely that they could make such purchases in the open market due to the SEC reporting rules for stakes over 10%.