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 today, 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.
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.
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.
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.
Funny, I thought he wanted to pay more taxes. Why didn't he give his $5 bil. to the IRS, instead? Maybe he thought in the end it would have gone to BofA anyway but, of course, without him being able to make any money that way.
vote of confidence?
Bought and paid for by BAC management at the expense of the shareholders. It's a disgrace.
I would trade any deal on my books right now for this one that Buffett and Berkshire just got. But alas, such deals are only available to the chosen few. Risky, I don’t think so. If only Leona Helmsley were still alive she would tell us the truth with all the vulgarity it deserves; “Risk is for the little investor”.
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.
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