Buffett's 'great time to be in banking' could be this quarter

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Warren Buffett lost billions for Berkshire Hathaway (BRK.A), making big bets with Goldman Sachs (GS), American Express (AXP) and Wells Fargo (WFC) just before financial stocks plummeted. But about a month ago, he told listeners on CNBC that "This is a great time to be in banking." Many scorned him when he said it.

Well, he could prove to be the sage of Omaha once again as banks report their first quarter earnings in the next few weeks. Wells Fargo, one of Buffett's holdings, announced yesterday that it would report a record $3 billion in earnings for the first quarter. It's stock shut up 31.7 percent in one day. That one announcement increased Buffett's portfolio by $1.4 billion in just 24 hours and his portfolio is now worth $3.2 billion more than a month ago.

Of course, investors in Berkshire Hathaway still have a long way to go before seeing their investment return to its once-lofty high. Berkshire Hathaway's profits fell 62 percent in 2008 and Buffett called his bank bets some of his dumbest oves ever. All in all, Berkshire Hathaway closed out '08 with its worst performance in 44 years. Berkshire's A stock closed yesterday at $92,400, down from it's 52-week high of $147,000.

Other banks that have hinted at good news when they report their first quarter earnings include Bank of America (BAC), JPMorgan Chase (JPM) and Citigroup (C). Banking stocks have rebounded from their lows, and some analysts believe banks are turning a corner thanks to massive federal bailout programs, significant restructuring and layoffs and an economy that's showing signs of stabilizing.

Another key factor in the banks' potentially coming back from the dead is the change in the mark-to-market rule, which affects how they value "toxic assets" on their books. The revised rule makes it easier for banks to avoid taking impairment charges on their investments against earnings.

Prior to this change banks had to value assets at prices reflecting market conditions. Since there is currently no market for the "toxic assets," banks valued them very low. Now they can attach a value to them reflecting what they would bring in an "orderly" sale as opposed to in a "distressed" sale. Unfortunately, some believe this will make it harder to compare apples to apples when reading banks' financial statements, because banks have a lot of leeway in setting such valuations.

Lita Epstein has written more than 25 books, including the Complete Idiot's Guide to Value Investing.

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