Buffett: Never mis-price risk!

This is another classic about W. Buffett. He will never under-price risk, now cutting back insuring bank deposits in event of bankruptcy. He will cut back under-writing capacity when risk does not match with reward.

Funnily, after Freddie and Fannie bailed out, people are more nervous about the financial crisis. They should be nervous, it is perfectly legitimate to get nervous. Look at these big banks, risky assets are almost double of shareholder equity.



After Katrina, when everyone was so fearful, W Buffett insured super-cat aggressively by betting the lightning will never strike twice. He does think the lightning will continue to strike in this financial tsunami -- more small banks will fail -- banks are afraid to borrow and customers are afraid to deposit, liquidity crunch is not getting any better despite of three bail out so far.

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.

In some cases, companies that acquire failed banks will buy all the deposits, making the government insurance limits irrelevant.

But customers with large deposits can lose money if the acquiring bank doesn't take on the extra deposits. When Columbian Bank & Trust Co., of Topeka, Kan., failed Aug. 22, there were about 610 accounts with $46 million total that potentially exceeded government insurance limits, the FDIC said.

KBS insured some deposits at this bank and lost money in the failure, people familiar with the matter said. Mr. Towle declined to comment on whether the bank was a customer.

Rodney Sargent, CEO of BancInsure Inc., a KBS competitor, said many firms are expected to compete for KBS's customers because the company has a large network across the country.