Berkshire Tightens Insurance for Bank Deposits in Kansas

September 11, 2008

A Kansas company that is part of Warren Buffett’s Berkshire Hathaway Inc. stopped selling private bank deposit insurance above the amount guaranteed by the federal government, signaling that billionaire investor Buffett may be worried about future bank failures.

Kansas Bankers Surety Co. confirmed Wednesday it ceased soliciting new clients for their “bank deposit guaranty bonds,” a product that backs deposits above the $100,000 limit that is guaranteed by the Federal Deposit Insurance Corp. for many bank accounts.

It also plans to cancel existing policies in coming months.

“We still insure a lot of deposits in a lot of banks and that did not stop Monday,” said Chuck Towle, a senior vice president of the Topeka, Kan.-based company. “We are not offering the product any more.”

Towle said existing policies would be recalled and that, eventually, “We are going to withdraw from the market.”

Towle declined to comment on why his firm was leaving the business, and he wouldn’t confirm or deny Buffett’s involvement.

A spokeswoman for Omaha, Neb.-based Berkshire Hathaway said the company did not have an immediate response.

Kansas Bankers Surety’s decision to stop providing the coverages comes amid a rising number of bank failures nationally, including one in its backyard — Columbian Bank and Trust Co. of Topeka, Kan.

Eleven federally insured banks have failed this year.

Some of those failed banks were acquired by institutions that bought all deposits — insured and uninsured — and made them available immediately to customers. Other uninsured depositors were able to recover only part or none of their funds.

The FDIC backs deposits of as much as $100,000 on most accounts or $250,000 on some retirement accounts.

Companies such as Kansas Bankers Surety offer private bank deposit insurance to help banks attract and keep wealthy customers who may want to deposit more than $100,000 at their institution.

Banks buy coverage usually at the request of a large depositor, and then relay any fees associated with coverage to the customer.

“It’s a credit enhancement,” said Scott MacDonald, head of the Southwest Graduate School of Banking Foundation at Southern Methodist University in Dallas. “It’s a way of enhancing the credit quality of your investment.”

Whether or not a company continues to offer such a product, “I think it really comes down to whether or not the market’s perception of the value equals the cost of them doing it,” MacDonald added.

“It looks as if they made a business decision,” MacDonald said.

An examination this year of Kansas Bankers Surety by state regulators showed the company was strong and financially sound, Kansas Insurance Department spokeswoman Cynthia Price said.

The company, which has 18 employees according to Berkshire Hathaway’s 2007 annual report, also provides other insurance products, including director and officer, safe deposit, employment practices, check fraud and Internet coverage.

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