May 2, 2009, 3:38 PM ET

Buffett: Wells, US Bancorp, Goldman Have Equity, Earning Power

Senior creditors and holders of preferred securities in Wells Fargo, US Bancorp and Goldman Sachs shouldn’t be diluted in the wake of the government’s stress test because all three banks have lots of equity and earnings power, Berkshire Hathaway Chairman Warren Buffett said Saturday.

Buffett told shareholders at Berkshire’s annual meeting that there is “no reason” why holders of more senior securities of these banks should “give up anything.”

The government recently conducted a so-called stress test of the nation’s 19 largest bank holding companies, including Citigroup, Bank of America and J.P. Morgan Chase Co.

The results, due next week, may force some banks to raise new capital. 

Citigroup may need to raise as much as $10 billion in new capital, while several other banks, including Bank of America, may be directed to raise new
capital too, the Wall Street Journal reported, citing people familiar with the matter.

Banks that are unable to raise money from private investors could be forced to get more government support.

The government already owns large chunks of preferred shares in the nation’s biggest banks. Some of those stakes could be converted to common stock as a way of boosting banks’ financial strength.

But that would dilute existing shareholders. 

Berkshire is a big shareholder in several bank holding companies undergoing the stress test, including Wells Fargo, American Express and US Bancorp.

Buffett also invested $5 billion in preferred securities of Goldman Sachs Group earlier this year. 

“There’s lots of equity there,” Buffett said. “There’s lots of earning power.”

Buffett compared this to privately held Chrysler, which filed to bankruptcy protection from creditors earlier this week.

“They’re losing money all the time. There isn’t any common equity there. No
one would pay a dollar to take on Chrysler’s debts,” Buffett said. In contrast, “people would pay billions for businesses like Wells and US Bancorp,” he added.