Kansas Bankers Surety (KBS), a subsidiary of Warren Buffett's Berkshire Hathaway, will cease to insure bank deposits above the amount covered by the FDIC. The Wall Street Journal reported yesterday that the move came on the orders of Buffett himself. While that isn't officially confirmed, it seems more likely than the executive running the 18-person subsidiary waking up one day and deciding to exit the business entirely.
Even though KBS is the second smallest Berkshire operating company, it's highly profitable, earning $10.9 million last year on policy sales of $19.5 million. The decision signals that Buffett -- who won't sell insurance unless he is adequately compensated -- believes that the risk of bank failures has increased.
Thirteen banks have failed since the beginning of the credit crisis, but I think we could see a large wave of bank failures, possibly numbering in the hundreds. Not megabanks like Citigroup (NYSE: C ) , Bank of America (NYSE: BAC ) , or JPMorgan Chase (NYSE: JPM ) , but small and mid-sized banks, particularly in areas that are experiencing the largest slump in real estate prices.
Depositors' risks, investors' opportunity
You can find out more about the risks you may be exposed to as a depositor by having a look at the FDIC website (the FDIC's basic insurance covers $100,000 in deposits per insured bank and $250,000 per owner of certain retirement accounts).
On the bright side, I think the current environment may be sowing the seeds of opportunity for investors. In "Time to Buy the Banks, but Which Banks to Buy?," I wrote that by focusing on the most conservative lenders -- think Wells Fargo (NYSE: WFC ) and US Bancorp (NYSE: USB ) , rather than Washington Mutual (NYSE: WM ) or Wachovia (NYSE; WB) -- investors may be able to take advantage of the negative sentiment that is tarring the entire sector.
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