The exposures of various insurance companies to the economic devastation of the Tsunami may be dominating the financial discussions in the tragedy's wake – but Japanese banks may be at the most risk.
And that risk may become a tragic test case for an economic conundrum described by Warren Buffett.
Here's the background.
An Australian hedge fund manager named John Hempton has done analysis on a Japanese financial institution called 77 Bank.
The bank is located in Sendai, which is the Japanese city most affected by the tsunami.
Not only is the bank located in the city that sustained the most damage, it also has a near 50 percent market share in that metropolitan area.
Here's the rub. Hempton writes:
"Warren Buffett once said that Fannie Mae had more supercatastrophe risk in it than Berkshire Hathaway. He figured the really really big hurricane or earthquake could do more damage to Fannie than Berkshire even though Berkshire is the largest supercat insurer in the world.
Buffett was – I suspect – right.
We now unfortunately have a gruesome test of Buffett statement on finance and supercatastrophe. There is probably more uninsured damage in the destruction of North East Japan than in any other event in history – and uninsured damage falls sharply on banks.
77 Bank – deeply concentrated in the disaster zone – is the test. It is not a test I would want to repeat. But I think we will – at the end of this – be able to confirm Buffett’s observation that banks don’t like supercats."