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 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.
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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.
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.
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.
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.
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.
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”.
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.
@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.
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.
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.
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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