Warren Buffett, the billionaire chairman of Berkshire Hathaway Inc., said municipal bankruptcies are set to rise as there's less stigma attached after three California cities sought protection just weeks apart.
The city council of San Bernardino, a community of about 210,000 east of Los Angeles, decided Tuesday to seek court protection from its creditors. The move came just weeks after Stockton, a city of 292,000 east of San Francisco, became the biggest U.S. city to enter bankruptcy. Mammoth Lakes also sought the shelter this month.
“The stigma has probably been reduced when you get very sizeable cities like Stockton or San Bernardino to do it,” Buffett, 81, said in an interview Friday on Bloomberg Television. “The very fact they do it makes it more likely.”
Cities and towns across the U.S. have been strained by rising costs for labor, including pensions and retiree health benefits, while the longest recession since the 1930s crimped 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,' ” said Buffett, whose company is based in Omaha.
He said the nation isn't on the brink of hundreds of billions of dollars in defaults, as banking analyst Meredith Whitney predicted in 2010.
“I don't think we're at the precipice,” Buffett said. “People will use the threat of bankruptcy to try and negotiate, particularly pension contracts, with their employees.”
Among Buffett's other comments Friday:
>> JPMorgan Chase & Co.'s reputation is intact as far as the billionaire is concerned, despite a trading loss that has grown to $5.8 billion for the bank this year.
“I've had enough mistakes of my own that I'm very forgiving when something like that happens,” Buffett said.
Buffett, who has a personal stake of about 1 million JPMorgan shares, added, “If you do big things, you're going to get big swings” in earnings.
>> The health-care law upheld by the U.S. Supreme Court last month is a step toward addressing the rising health costs consuming American businesses.
Buffett said the court made the right decision in declaring the Affordable Care Act constitutional in its 5-4 ruling.
“The health-care problem is the No. 1 problem of America and of American business,” Buffett said. “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.”
Health costs now account for about 18 percent of the U.S. economy, compared with 10 percent in some countries, Buffett said.
“There's only 100 points in the dollar, and to have a seven or eight point disadvantage is huge,” he said. “In terms of cost, it's going to require a huge change.”
>> Wells Fargo & Co.'s dominance of U.S. home lending will pay off as the housing market 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.”
Wells Fargo, which counts Berkshire as its largest shareholder, created one of every three U.S. mortgages in the first quarter and may seek to boost market share to 40 percent.
>> The euro is destined for failure and must be reworked if the 17 countries that share the currency are to keep their monetary union.
“The system that they put in place had a fundamental fatal flaw,” Buffett said. “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 has invested in Phillips 66, the refining business that was spun off by ConocoPhillips this year.
Berskhire reduced its holding in ConocoPhillips and bought into “some of the refining operation,” Buffett said.
The Omaha World-Herald Co. is owned by Berkshire Hathaway Inc.