Buffett’s $5bn BoA play, Salomon error repeated or GS payday?
Posted on 25 August 2011 with 9 comments from readers
So Warren Buffett sat in his bathtub yesterday and suddenly thought a $5 billion investment in the beleagured Bank of America would be a good idea and deliver him six per cent of the group’s stock within a decade.
Shorts have been blasted to pieces and confidence has rallied in the financial sector. Warren Buffet after all made a huge profit on his preferred Goldman Sachs investment after the subprime crisis almost three years ago.
Wisdom of Salomon?
But those Buffettologists with an eye to history will also recall Buffett’s $700 million investment in Salomon Brothers in 1986 just before the 1987 Wall Street Crash. Salomon’s stock fell like a stone after the crash, leaving Buffett with massive losses.
In the event he had to move into Salomon for almost a year and sort the bank out himself. It was certainly a low-point of his career and he ended up regretting his investment decision and at best came out even.
With Salomon Buffett rushed into an investment without taking much care with his due diligence. He did not understand the Wall Street culture of the bank or like what he discovered about the way Salomon operated.
Has Buffett again stepped in to make a major acquisition in the financial sector just in advance of a stock market crash? Well, it would not be the first time.
The ominous clouds gathering over the eurozone banking sector with upward pressure on CDS spreads indicating a gradual failure of the inter-bank lending system (click here) ought to be enough to make anybody cautious. Betting that the Germans will ultimately bail Greece out does not look a good choice to many Europeans.
Eurozone banking crisis coming
Buffett is clearly reasoning that $5 billion in new equity capital will be enough to tip the balance in the case of Bank of America with its unquestionably big deposit base in the USA. The problem is surely that large banks can swallow up capital faster than a pelican can down a fish.
Bank of America is also most surely not Goldman Sachs. A European banking crisis would raise global interest rates, drive mortgage holders into default and require massive additional write-offs at BoA.
Warren Buffett might have mulled that over as he sat in his bathtub yesterday or was he just thinking of a world where US banks are sovereign?
9 Comments posted by readers:
Scott Minred, CEO of Guggenheim Partners, is now on CNBC TV telling David Faber that ALL the European banks are INSOLVENT if they mark their government debt holdings to market.
It’s difficult to comprehend Buffett’s objectives here.
Here’s a possible scenario:
It’s a certainty that Buffett understands the root of BAC’s problems, and the terrible shape that this bank is in. It’s also very possible that he’s thinking that BAC might go under and declare bankruptcy. With their huge debts, he knows creditors would have to take big haircuts . . . Buffett is a cagey fellow.
Buffett knows that the FED would then bail out BAC, as they have done several times over the past few years, and he could step in to take control of BAC, at an initial cost of $5 billion . . . not a bad deal, if BAC can then recover after a Chapter 11.
My experience of planning and making decisions whilst sitting in a bath is that 9 out of 10 of them are bad, and this becomes very clear once I’ve got away from the bath tub.
One loses calcium through the kidneys whilst being a little weightless in the water, and I often wonder if this is the reason why my bath tub thinking is usually rubbish.
Therefore, I would go with the Editor’s view that this is a mistake and a repeat of his Salomon experience. With all the credit default swaps in existence, this does appear to be a ridiculous decision.
I wonder whether Buffet is living in the wrong wealth cycle, namely that of stocks and shares of the past and not of gold and silver now. It’s the awful debt, particularly of banks, that has pushed the gold and silver wealth cycle to prominence, yet Buffet invests in a bank on the eve of the collapse of the global banking system!
Must have lost a lot of calcium in that bath tub!
John Mark:
One loses calcium through the kidneys by passing water. What you do in your bath tub is your personal concern but please do not share it with us. This is a financial forum.
Here’s an absolutely excellent assessment of Bank of America, performed by Weiss Research, which is a completely independent “rating agency”, that frequently gets high marks for their candor and thoroughness.
Link: http://www.moneyandmarkets.com/america%E2%80%99s-largest-candidate-for-bankruptcy-46993
Bottom Line: They believe that BAC will fail; I guess I’m in good company.
OK, guys, this is a good one!
On 23 Aug, before Buffett forked over a cool $5 B to BAC, he got a personal call from none other than Mr. Obama; ostensibly, the call was about jobs . . . conspiring minds can easily conceive that there might have been another agenda, namely to give a boost to BAC, since the government does not have the political will to come to BAC’s defense. Two days later, we learn that Buffett made the deal with BAC; he not only gets a 5% divvy on his $5B investment, but he also gets 700 million in stock warrants priced at $7.14. And as expected, Buffett’s action gave a much needed psychological boost to BAC.
Fast Forward to Today: So Buffett is Ahead Already?
Jon Najarian, co-founder of options trading firm optionMONSTER, said “the 700 million options are now worth $5.49 apiece, or $3.84 billion in total.” With today’s advance of over 8% in BAC stock, Buffett’s warrants are now worth even more.
Not bad for a day’s work.
No, you lose your calcium through your kidneys into the bladder. Where you empty your bladder has nothing to do with a financial website, Bernard!
It is the relative weightlessness of being in the water that causes the kidneys to function like this with regard to calcium, but makes no difference to bladder function. I was hypothesising that Buffett’s being in the bath had influenced his brain function to make such an odd decision.
But perhaps Obewon’s post shows that it wasn’t a bad decision after all, so that, after all, he didn’t lose any calcium into his bladder, which was with him in his bathtub.
John Mark:
The calcium stays in the body until excreted. I would suggest you avoid metaphors involving baths.
However, your earlier posts purporting to explain “counterparty risk” were truly entertaining. Please keep the gems rolling.
@ John Mark:
Please, PLAAAESE!
What does calcium, or kidneys, or weightlessness, or Buffett’s bath have to do with investments or financial matters? Methinks Mr. M.A. Doff was trying to make that same point.