Buffett Believes More Cities Will File Bankruptcy Now That Stigma Is Reduced

Chairman and CEO of Berkshire Hathaway Inc., Warren Buffett, stated that municipal bankruptcies are definitely going to rise since there is a lot less stigma attached now that three California cities sought this protection just a few weeks apart from each other.

San Bernardino’s City Council, which represents a community of about 210,000 people, which is just east of Los Angeles, decided that it was finally time to receive court protection from its creditors about two weeks ago.

This move took place only a few weeks after Stockton, a city that is home to about 292,000 people and east of San Francisco, became the biggest city in the United States to ever enter into bankruptcy. Mammoth Lakes, another city in California, sought bankruptcy protection this month as well.

“The stigma has probably been reduced when you get very sizeable cities like Stockton or San Bernardino to do it,” Buffett, 81, stated during an interview this Friday on Bloomberg Television. “The very fact they do it makes it more likely.”

There are many cities and towns across the United States of America that have felt the strain of rising labor costs, which include the retiree health benefits and pensions of its employees. We’ve also experienced the longest recession that this country has been in since the 1930s, which has crippled sales and property tax revenue.

“Once people find that the city works the next day, it makes it easier for the city council next time they have a problem with pensions — or whatever it is — just to say, ‘Well, we’ll declare bankruptcy,’ ”stated Buffett, whose company Berkshire Hathaway is based out of Omaha.

He also made it a point to say that the US is not on the brink of having hundreds of billions of dollars in defaults. This is counter to what Meredith Whitney, a banking analyst, predicted back during the year of 2010.

“I don’t think we’re at the precipice,” said Buffett. “People will use the threat of bankruptcy to try and negotiate, particularly pension contracts, with their employees.”

Here are some of the other comments that Buffett made during his Friday interview:

  • the reputation of J.P. Morgan Chase and Company is still intact as far as the billionaire’s perspective is concerned, even though they suffered a large trading loss of $5.8 billion this year

“I’ve had enough mistakes of my own that I’m very forgiving when something like that happens,” said Buffett.

Buffett also has a stake of about 1 million shares in J.P. Morgan Chase, and he also added “If you do big things, you’re going to get big swings.” In this case he is talking about earnings.

  • He believes that the health-care law, which was recently upheld by the United States Supreme Court last month, is a step being made that will address the rising costs of healthcare which is currently consuming business in America

Buffett also claims that the court made the correct decision when it declared the Affordable Care Act constitutional in its 5 to 4 ruling.

“The health-care problem is the No. 1 problem of America and of American business,” stated Buffett. “It’s the tapeworm, essentially, of the American economy, and we have not dealt with that yet. Obamacare is a step in the right direction in many ways.”

The current US economy consists of about 18% health-care costs at this point in time, which is compared to 10% in many other countries according to Buffett.

“There’s only 100 points in the dollar, and to have a seven or eight point disadvantage is huge,” said Warren Buffett. “In terms of cost, it’s going to require a huge change.”

  • Wells Fargo and Co. is dominating the US in home lending, and this will pay large dividends once the housing market finally rebounds

“They’ve got a sensational mortgage operation,” Buffett said. “The total mortgage market was at the $3 trillion level not that long ago. If it goes back up to $3 trillion, I hope Wells is doing a third of those.”

Berkshire Hathaway is currently Wells Fargo’s largest shareholder, and they are creating one out of three mortgages in the United States of America during the first quarter of 2012, and they are planning on boosting their market share by 40% if all goes well.

  • Buffett believes that the euro is absolutely going to fail, and it needs to be reworked so that the 17 countries involved are capable of keeping their current monetary union

“The system that they put in place had a fundamental fatal flaw,” said Buffett. “It can’t survive with the present rules. That’s what they’re learning. The question is, can 17 countries get together in a way to essentially redo something.”

  • Berkshire Hathaway made an investment in Phillips 66, which is a refining business that Conoco Phillips spun off this year

It also should be noted that Berkshire reduced its Conoco Phillips holding and chose to buy into “some of the refining operation,” according to Buffett.

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