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Buffett's Wall Street Blood Runs Dry as Banks Shake Off Default

NEW YORK (TheStreet) -- The U.S. government's debt crisis has passed without a default of the Treasury's debt or a panic in markets, leaving investors like Warren Buffett of Berkshire Hathaway (BRK.B) with little opportunity to make an attractively-priced investment in a troubled firm.

In the case of the government's most recent confidence-eroding and economy-crushing debt drama, a lack of investment activity from the Omaha, Neb.-based investing billionaire is a news item.

Buffett said at Berkshire Hathaway's shareholder meeting in May that the insurance conglomerate is "the 1-800 number when there's really sort of panic in markets."

During the 2008 financial crisis, Buffett's bat-phone fielded desperate calls from the likes of Lehman Brothers, General Electric (GE) and Goldman Sachs (GS). Eventually, Berkshire made multi-billion dollar preferred share investments in GE and Goldman. Amid a worsening of the sovereign debt crisis in Europe and the government's first debt ceiling drama in 2011, Berkshire also made a $5 billion preferred share investment in Bank of America  (BAC).

Berkshire now is in the process of harvesting attractive stock warrant contracts Buffett negotiated in his GE and Goldman stakes, and the firm is sitting on billions of dollars in yet-to-be realized Bank of America warrants.

As it turns out, Berkshire's 1-800 number is among the conglomerate's most profitable businesses. But not during Washington's latest debt standoff, which risked putting the government into a state of default and the U.S. financial sector in a panic that likely would have been worse than the aftermath of Lehman's 2008 collapse.

Banking sector shares held steady, even as the Treasury came within hours of breaching its borrowing authority and its ability to make payments on T-Bills coming due later in October.

Short-term funding markets and gauges of counterparty risk such as LIBOR/OIS and TED spreads showed little sign of an emerging panic or a credit crunch. Protection against the credit of the nation's largest banks didn't surge, nor did contracts ensuring against a U.S. government default.

It is probably safe to assume Buffett wasn't manning phone-lines as Wall Street CEO's begged for emergency funding.

Buffett, in fact, could be seen on CNBC in a joint-interview with the founder of a lingerie startup on Wednesday. He made predictable refrains about dysfunction in Washington and threw JPMorgan (JPM) CEO Jamie Dimon a bone as the firm tries to weather a spat of litigation. Buffett also had nothing but praise for Bank of America (BAC), which he continues to characterize as in increasingly sound financial health.

Some might take a lack of concern on Wall Street about the debt ceiling standoff as a sign of complacency.

For those who have followed the banking sector's emergence from the depths of the financial crisis, however, there may be a bigger story. Recovering firms such as Bank of America and Citigroup (C) have re-built their capital to a point where it would take an extremely severe policy mistake or economic change to undermine their financial health.

Had leverage not fallen dramatically since the crisis and capital and liquidity not risen significantly, it's hard to believe firms as large as Goldman, Morgan Stanley (MS), Citi and Bank of America wouldn't be ringing Buffett for some kind of investment. It wasn't so long ago, after all, that a rating agency downgrade or counterparty withdrawal might prompt a capital sinkhole for large lenders, as we saw in the crisis.

Large banks continue to face challenges such as new regulations, a weak economy, and a widespread perception among equity and credit holders that they remain "too big to fail." Still, manufactured crises like the recent debt standoff in Washington also give clear evidence of a new resilience taking hold across the financial sector.

Buffett is yet to convert the cheap Bank of America warrants he gleaned during the 2011 debt ceiling showdown. He is also hard pressed to find a next emergency investment. 

What a relief!

-- Written by Antoine Gara in New York.

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