Buffett's vote of confidence in B of A, US economy

The Oracle Omaha says it himself: The bank and the country are going to make it. The world isn't going to end.

By RPrichard Aug 25, 2011 3:40PM

By Michael Brush, MSN Money

 

In my column a couple of days ago, I suggested that Bank of America (BAC) looked like a buy because fears about the stock -- and beaten-up bank stocks in general -- seemed overblown. This isn’t the financial meltdown of 2008 all over again.

 

Banks in general -- and Bank of America in particular -- have a lot better financial strength now than they did back then, with a much lower risk of failure. This, alone, suggests banks look like good buys.

 

Looks like Warren Buffett agrees.

 

There was a little 2008 déjà vu in the news that Warren Buffett stepped in to shore up the capital base -- and most importantly, the reputation -- of B of A. In the deal, Buffett will buy $5 billion worth of preferred stock, and collect a 6% annual yield. The Oracle of Omaha made a similar move during the depths of the financial crisis by arranging a deal to purchase preferred stock in Goldman Sachs (GS).

 

But  this isn't a case of a $5 billion capital infusion shoring up the balance sheet of a bank that might otherwise have failed. While it's a big chunk of change, $5 billion isn't really that much for a bank that has $400 billion in cash and $1 trillion in deposits.

 

Instead, this is more about Buffett examining Bank of America and concluding, as I and many other analysts did earlier this week, that the bank just isn't going to blow up and disappear -- despite what the nabobs of negativism are saying. Today's deal is more about Bank of America getting the Buffett seal of approval that the cash.

 

"Bank of America is essentially paying to get the endorsement of Warren Buffett to improve their reputation," says Michael Yoshikami of YCMNET Advisors, ranked among the top 100 independent financial advisors by Baron's. He estimates that one or two percentage points of the 6% yield on the preferred stock Buffet gets is for "the implicit endorsement that Buffett is making, and Bank of America needs a dose of credibility right now." Bank of America shares reacted strongly to the news, gaining 10% today, following a nice reversal Tuesday.

 

Banker of last resort

Make no mistake, Buffett's stamp of approval does not come cheap. It's a typical opportunistic Buffett deal. "He's really the bank of last resort, and he is using his brand name to leverage a better deal," says Yoshikami. That 6% yield is a great payoff in today's low interest rate environment. Buffett also has an option to buy 700 million shares at $7.14 over the next ten years.

 

There are two key investment lessons in this. First, you can take the deal as a bet by one of the smartest investors around that Bank of America shares will be trading for more than $7.14, going forward. Sure, there will be ups and downs, but this is a bet by Buffett that the stock will be significantly higher over the medium term.

 

Next, big picture, you can also take Buffett's Bank of America deal as an endorsement of the overall economy. After all, the disaster scenario for Bank of America was that it would not survive because a prolonged recession is on the way. The fear was that this would blow up the mortgage market, to which B of A remains greatly exposed.

 

Through his deal Thursday, Buffett is saying this won't happen.

 

And in case you're having trouble getting the message, he's also stating this straight out. "It's a vote of confidence not only in Bank of America, but also in the country," Buffett said in a CNBC interview today. "All those people who think the world is going to end, I think they're wrong."

 

At the time of publication, Michael Brush did not own any shares mentioned in this column. Brush is the editor of Brush Up on Stocks, an investment newsletter, where he has suggested readers consider buying Bank of America.

VIDEO ON MSN MONEY

27Comments
Aug 25, 2011 4:34PM
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Lets get one thing straight about Mr. Buffett. He is about making money! He doesn't believe he is paying enough taxes but also doesn't voluntarily send in more. Buffett will say whatever it takes to make money. The current govt already stated they were going to keep rates near zero for the next 18 months (well at least through the next election cycle). So 6% yield looks like a deal. The govt backed the banks with billions to prop up so what is Buffets risk? The govt will let the banks raise fees to payback to loans screwing the little people again. Had the banks been allowed to fail for their misdeeds it might be a different situation. Instead anyone living or hoping to make any money off of interest will continue to get screwed for another 18 months.

Good move Mr. Buffett, I wish I could get 6% on my money without risk.

Aug 25, 2011 11:09PM
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Buffet's making a deal for himself. 6% dividend, and, "his" shares get paid 1st. Who else gets that deal?
Aug 25, 2011 11:14PM
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I was so saddened to hear Buffet was investing in Bank of America.  I truly hope this bank goes under...push em to the brink and watch em sink!

 

Additional government bail outs are not an option.  The political costs in washington would be too steep.

Aug 26, 2011 6:52AM
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A vote of confidence?  Buffet didn't purchase shares.  He is the lender of last resort to a desperate bank.  He made a loan to a "too big to fail bank" after meeting with President Obama a week or so ago. 

 

 Furthermore, the interest rate is high.  The bank can not use that money to lend for mortgage loans because the mortgage rates are at least a point lower than Buffet's rates.   The bank has to be covering losses. 

 

A few days ago, the head of BOA said the bank did not need cash.  All of a sudden, it needs five billon dollars.  The U.S. is broke, China has already been burned once by the U.S. Financial institutions, so now the last lender is Buffet. 

Aug 25, 2011 9:30PM
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Buffett is just playing the risk/reward game, and assuming BAC doesn't go down the tubes in the next few years Buffett stands to make a lot of money.  Odds have it he will make a lot more than any ordinary investor who buys the stock. 

BAC remains risky, and Buffett's purchase doesn't change anything.  The only difference is that he has more of a shield against that risk than the rest of us have.  Even if the stock goes to $1.00 per share, he makes money.  Basically, if you wouldn't buy the stock a week or two ago, you shouldn't buy it now. 
Aug 25, 2011 10:56PM
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Bank of Un-America is the WORST financial institution in this country, and that is saying a lot. Their employees are ignorant, un-sympathetic, and I wonder if anyone there can do basic math. They have so many issues, they should not have been bailed out, they should be CLOSED! This is just another example of Buffet being a bottom feeder.
Aug 26, 2011 7:43AM
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Buffett made his money and reputation by buying good companies when they were in the tank and holding them until Ronald Reagan had restored the economy.  He did nothing that Peter Lynch and hundreds of others weren't doing.....................except he never retired.  Even after he had billions, it still wasn't enough.   Now, he can no longer count on a return to solid (or even sane) fiscal policy by our government.  So he has resorted to being a wall street loan shark.  He is literally  a 'money mafia' that gets special access to company information and can, through the use of the immense capital held by berkshire hathaway, manipulate the economy and businesses while getting outrageous special treatment that isn't given to the shareholders of the companies he extorts.

I despise B of A for how they've started treating their customers and I hope they go under............taking buffett with them.

Aug 25, 2011 5:12PM
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Stamp of approval costs?  Maybe the US Postal Service should start printing "approval" stamps instead of those universal stamps that never seem to get delivered.  Now that Warren Buffett owns the banking system in the United States, maybe he will cut out some of the CEO bonuses and start lending money to make BAC and other get into the business of what they were first chartered to do.
Aug 25, 2011 7:35PM
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Bank of America is not the Bank for America !!!  Let it fail.  Everyone should take their money out of the bank, cancel credit cards, and do whatever else it takes to take a stand against BoA.  Buffett's money will not save the bank.  It's reputation has been ruined by the inept management and lack of customer service. 
Aug 26, 2011 8:34AM
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I hope all you shareholders of BAC stock paid close attention to what just happened. I hope you analyzed the details and likely outcomes of this deal. If you did, you might see that your management at BAC just handed Mr. Buffett and Berkshire Hathaway a deal which guarantees them a higher yield and lower risk than what you have going forward. That’s right, no matter what happens, Buffett's investment will fair better than your shares. In other words, your parents just helped Uncle Warren steal a piece of your pie. Why did they do that? Well, supposedly it’s going to make what’s left of your pie bigger, or better, or…you know what, they didn’t really say for sure. There is one thing they know for sure but didn’t say. Uncle Warren has a reputation in the financial industry for feeding on all sorts of companies that are spoiling and rotten; even road kill in some instances. And don’t kid yourself. In this case Uncle Warren knows that if things go too far south, Uncle Sam will have his back. As Leona Helmsley might have put it if she were still alive, “Risk is for the little investor”.

Aug 26, 2011 9:35AM
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Buffet is quite correct. However, with the way the finance reform was finally enacted, banks still have enough loopholes to go right back to where they were before the Meltdown in 2008. Using the excuse that "it's too much paperwork" to insure that they hold a specific amount of money in reserve, they managed to get Republicans to do their bidding and put enough loopholes into finance reform to make it useless.

 

Just once, I'd love to see Republicans working on issues that matter to the people of this country and stop their campaign addictions. Republicans have taken campaigning to new heights...It never ends for them. They can't stay focused on major issues long enough to actually resolve them. Or maybe, that's just another Republican ploy to keep these issues unresolved long enough until American taxpayers go into crisis mode and rebel?

 

The Republicans are taking the biggest hit in nearly all national polls. No one wants an end to the Republican party. We want them to do their jobs. And not use that corporate slash and burn technique on legislation that helps the working poor and Middle Class while overstuffing the 1% with trickle up economic plans that keep Big Money the sole control of government.

Aug 25, 2011 6:10PM
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this is one time when buffet is going to take it in the shorts b of a will be out of bus in a year. they are the most hated bank going
Aug 26, 2011 10:17AM
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He must not have a mortgage with them.  That would have made him think twice.
Aug 26, 2011 6:34AM
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Hold on and weep for those who think they can manipulate by trying to sway others.
Aug 26, 2011 5:32AM
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@Deniece Webber - $1 million for each person in America? Considering the population is roughly 300 million (give or take) that would amount to over $300 trillion. That amount of money doesn't exist.

 

Though I hardly see the point in such an article, the response has been nothing more than a classic case of apparent jealousy where the self-righteous attempt to dictate how another person should spend their money.

Aug 26, 2011 1:46AM
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Buffett is instilling HOPE....belief in America's economy. What happens if B of A sinks....things get worse...and America can't afford it. This is a step in the right direction...a sign of hope....of

better things to come. We need that and I hope it works. Only thing is...most of us despise the

big banks...cutting off credit...that's what's killing the economy. Destruction of credit. After the

foreclosure fiasco...which still continues...no one trusts the big banks, what they've done to American families.....to our economy.  5 billion would save alot of family's homes....I'd rather see the money go into a mortgage fund....but....the consequences of B of A failing...too big.

We need to build now....we need to move the economy forward now.  Consumer Credit has to be restored to fuel the economy, there's no other way. The big banks can do it...they aren't right now...they're still cutting people's credit off. Business's close because of lack  of consumer credit.....businesses close and people lose jobs. Restore credit.

Aug 25, 2011 5:16PM
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Who said the world is coming to an end? Talk about spin. Of course Buffet is going to sugar coat the current situation. He isn't short. So stocks will go up? When? The dow is still where it was in 1999. Wall Street seems to be doing OK. How about Main Street? And Trump bought B of A last week or the week before. Something tells me he knew Buffet was going to buy it.
Aug 25, 2011 8:05PM
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It seems Buffet can't lose. He knows this is one of the to big to fail banks. He is guaranteed 6% return on his money. If he had that much confidence in America, the Oracle of Omaha wouldn't need this preferential treatment. He appears to be this down home character but in reality he  cares about himself and how much money he can make. The real problem is that the too big to fail problem has never been addressed. People should be working with their community banks. I know that is who I have always been with and I am actually treated like a person. At work I have to deal with these BIG banks and they are a pain in the you know what.
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The funny part of this sad story is that Bank (Robbers) of America (BrOA) isn't trying too hard to hide the fact that they are essentially "buying" a vote of confidence. Buffet isn't taking much of a risk with the guaranteed yield and options, and can stand to reap OMG profits if BrOA pulls out of their tailspin. Big IF right now if you poll BrOA's past and current indentured servants.

 

What BrOA really needs is a wholesale image makeover that even the best Wallstreet spinsters would have to work overtime on. Just like slapping lipstick on a pig, the only difference is that the pig is already bacon in my opinion!

 

The only saving grace would be for them to actually start valuing their customers' business, instead of making it like they are doing consumers a favor by accepting their business.

 

Aug 25, 2011 9:02PM
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hmmm...seems like a smart move but I don't think It's for the reasons the rest of you believe.

$5 billion now in shares, 700 million more in the next 10 years...as we all know Buffet is one of the TPTB as well as Soros and others, and if BOF fails, Buffet will probably be in a position to take control or nearly so, and start bringing his own people in....He will own most of us lock stock and barrel..welcome to the NWO.

Amazing, making his move right in the open...wonder how many more deals from others getting in position for the grand takeover that we don't hear about.

I hope someone with a voice catches this and helps expose it.

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