The End of the Bank of America Death Spiral? Warren Buffett Bails Out BoA
Fresh from the New York Times Op-Ed heard round the world, calling for higher taxes on the rich, multibillionaire investor and "Oracle of Omaha" Warren Buffett is giving a capital--and reputation--boost to the struggling Bank of America.
“Bank of America is a strong, well-led company, and I called Brian to tell him I wanted to invest in it,” Buffett said in the statement. “I am impressed with the profit- generating abilities of this franchise, and that they are acting aggressively to put their challenges behind them.”
Berkshire Hathaway, Buffett's company, will invest $5 billion in the faltering bank, buying preferred stock that pays a dividend of 6 percent. B of A's stock surged on the news; its credit default swaps dropped.
But Bank of America was just saying it didn't need to raise capital. So what gives?
Marcy Wheeler speculated: "Or maybe this is like Buffett's "bet" on Goldman: it's a sign US will soon give BoA $$ on much less lucrative terms."
Back in 2008, Buffett put a good chunk of change into Goldman Sachs and got a pretty good deal in return. On the other hand, when the U.S. government (represented at the time by Bush treasury secretary and former Goldman Sachs exec Henry Paulson) gave money to Goldman:
While he invested $10 billion in Goldman Sachs in October, twice as much as Buffett did the month before, Paulson gained certificates worth one-fourth as much as the billionaire, according to data compiled by Bloomberg. The Goldman Sachs terms were repeated in most of the other bank bailouts.
Of course, now we're supposedly in a post-bailout society; so Buffett probably doesn't know anything we don't know about a coming handout to B of A, right? But Barry Ritholtz noted, "Buffett met with Obama a few days ago; I wonder what was discussed in THAT meeting."
Finally, he warned:
"Investors are cautioned that unless you are buying on the same terms as the billionaire, you are making a very different bet than he is."