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Subprime crisis not big threat: Buffett
But housing slowdown hurting some Berkshire businesses, chairman says
By Alistair Barr, MarketWatch
Last Update: 4:09 PM ET May 5, 2007
OMAHA, Neb. (MarketWatch) - Rising delinquencies and defaults in the subprime mortgage business probably won't be a big threat to the U.S. economy, Warren Buffett said on Saturday.
Still, the Berkshire Hathaway chairman said some of the company's construction-related businesses are being hit by the slowdown in home building, and that could continue "for quite a while."
House prices fell at their fastest pace in 13 years in February, according to the S&P/Case-Shiller home price index, which was released in late April. The slowdown, combined
with an increase in interest rates in recent years, has triggered turmoil in the subprime mortgage business, which lends to poorer home buyers with blemished credit records.
Borrowers and lenders in the subprime mortgage business were betting that house prices would go up in future, Buffett said. Now that delinquencies and foreclosures are increasing there's
extra supply of homes for sale, which changes the dynamics of the real estate market, he explained.
"You'll see plenty of misery in that field. You've already seen some," Buffett said. "I don't seen a big impact on the economy though."
The situation has been exacerbated by securitization, in which the loans are packaged up and sold on again to investors as mortgage-backed securities, he added.
"Once you package those things and sell them through major investment banks, discipline leaves the system," Buffett said.
Subprime borrowers have been missing their first and second monthly payments recently, he noted. "That shouldn't happen.
Securitization has made the problem worse," he added.
Legislators have been discussing possible new regulations to deal with the crisis, including making investors in mortgage-backed securities more responsible for future delinquencies.
The subprime shakeout probably isn't going to cause big trouble for the economy, but in certain areas of the country, the real estate market will take longer to recover, Buffett said.
Buffett also said Berkshire's residential construction businesses may be pressured amid the U.S. housing downturn, though problems in U.S. subprime lending will not likely drag down the overall economy.
Berkshire owns one of the largest networks of real estate agencies in the U.S. and several construction-related businesses, including carpet maker Shaw Industries and building products companies Acme Building Brands, Benjamin Moore, Johns Manville and MiTek.
Shaw revenue fell 11% in the first quarter. Sales and profit are likely to be "significantly" lower for the rest of 2007, Berkshire warned on Friday. End of Story
Alistair Barr is a reporter for MarketWatch in San Francisco
Reuters :
PRIVATE EQUITY
Berkshire ended March with $46.03 billion of cash, leaving it with much firepower to make large purchases that Buffett covets.
Many may be international. Berkshire last year took a controlling stake in Israel's Iscar Metalworking Cos., and bought stock in British retailer Tesco Plc and South Korean steelmaker Posco .
"The entire world is definitely on our radar screen, and we hope to be on its," Buffet said. Buffett said the recent "frenzied activity" in private equity takeovers is unlikely to end soon, especially given the "compulsion" to raise more cash and generate higher fees.
"It will be quite some time before ... disillusionment sets in and the money quits flowing," he said. "What could slow down the activity is if yields on junk bonds became much higher than yields on high-grade bonds."
Buffett, whose net worth Forbes magazine estimated in March at $52 billion, takes a $100,000 salary to run Berkshire.
"Compensation sins are generally of minor importance compared to the sin of having someone mediocre running a huge company," Buffett said.
Now this is something. This guy takes $100K as compensation. MODEST..huh
But housing slowdown hurting some Berkshire businesses, chairman says
By Alistair Barr, MarketWatch
Last Update: 4:09 PM ET May 5, 2007
OMAHA, Neb. (MarketWatch) - Rising delinquencies and defaults in the subprime mortgage business probably won't be a big threat to the U.S. economy, Warren Buffett said on Saturday.
Still, the Berkshire Hathaway chairman said some of the company's construction-related businesses are being hit by the slowdown in home building, and that could continue "for quite a while."
House prices fell at their fastest pace in 13 years in February, according to the S&P/Case-Shiller home price index, which was released in late April. The slowdown, combined
with an increase in interest rates in recent years, has triggered turmoil in the subprime mortgage business, which lends to poorer home buyers with blemished credit records.
Borrowers and lenders in the subprime mortgage business were betting that house prices would go up in future, Buffett said. Now that delinquencies and foreclosures are increasing there's
extra supply of homes for sale, which changes the dynamics of the real estate market, he explained.
"You'll see plenty of misery in that field. You've already seen some," Buffett said. "I don't seen a big impact on the economy though."
The situation has been exacerbated by securitization, in which the loans are packaged up and sold on again to investors as mortgage-backed securities, he added.
"Once you package those things and sell them through major investment banks, discipline leaves the system," Buffett said.
Subprime borrowers have been missing their first and second monthly payments recently, he noted. "That shouldn't happen.
Securitization has made the problem worse," he added.
Legislators have been discussing possible new regulations to deal with the crisis, including making investors in mortgage-backed securities more responsible for future delinquencies.
The subprime shakeout probably isn't going to cause big trouble for the economy, but in certain areas of the country, the real estate market will take longer to recover, Buffett said.
Buffett also said Berkshire's residential construction businesses may be pressured amid the U.S. housing downturn, though problems in U.S. subprime lending will not likely drag down the overall economy.
Berkshire owns one of the largest networks of real estate agencies in the U.S. and several construction-related businesses, including carpet maker Shaw Industries and building products companies Acme Building Brands, Benjamin Moore, Johns Manville and MiTek.
Shaw revenue fell 11% in the first quarter. Sales and profit are likely to be "significantly" lower for the rest of 2007, Berkshire warned on Friday. End of Story
Alistair Barr is a reporter for MarketWatch in San Francisco
Reuters :
PRIVATE EQUITY
Berkshire ended March with $46.03 billion of cash, leaving it with much firepower to make large purchases that Buffett covets.
Many may be international. Berkshire last year took a controlling stake in Israel's Iscar Metalworking Cos., and bought stock in British retailer Tesco Plc and South Korean steelmaker Posco .
"The entire world is definitely on our radar screen, and we hope to be on its," Buffet said. Buffett said the recent "frenzied activity" in private equity takeovers is unlikely to end soon, especially given the "compulsion" to raise more cash and generate higher fees.
"It will be quite some time before ... disillusionment sets in and the money quits flowing," he said. "What could slow down the activity is if yields on junk bonds became much higher than yields on high-grade bonds."
Buffett, whose net worth Forbes magazine estimated in March at $52 billion, takes a $100,000 salary to run Berkshire.
"Compensation sins are generally of minor importance compared to the sin of having someone mediocre running a huge company," Buffett said.
Now this is something. This guy takes $100K as compensation. MODEST..huh