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Warning: Why You Shouldn't Follow Buffett Into BofA's Stock
The big news this morning was that Buffett gives Bank of America (BAC) $5 billion and will get preferred stock yielding 6%, plus warrants. The bullish hype around the move was astounding.
Banking stocks soared in the first 10 minutes of trading on the news. BAC stock was up 25%. But that was the end of the “vote of confidence” response. The Dow plunged from a triple-digit gain to a triple digit loss in a short time.
Is it safe to second-guess an investor like Warren Buffett? Let’s look at the facts.
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Gallery: Billionaire Investors Reveal Their Stock Pics 72 images
Gallery: Warren Buffett If it were that simple to end a developing financial crisis, then the Fed should give Buffett $100 billion to invest in big firms, thus stopping the bear market. Actually, the Fed has injected more than $3 trillion into the system over the past three years. It may have saved the system from a serious “readjustment,” but didn’t get the country out of a recession.
I ask, why would a large bank, which is currently getting money from the Federal Reserve at an interest of less than 0.25%, pay 6% to Buffett? Of course, it strengthens the balance sheet, but what is $5 billion when the tangible common equity is $128 billion? The bank just had to settle for over $8 billion a mortgage pushback situation, which is still not resolved. Buffett’s $5 billion will be used up quickly.
I asked similar questions in late 2008 when Buffett tried to instill confidence in similar moves. To me, his actions were additional clues that a very serious credit crisis was in progress even while Wall Street CEO’s of doomed firms assured investors that “all was well.” Let’s look back.
On September 24, 2008, Buffett helped Goldman Sachs (GS) by buying GS preferred stock with a 10% coupon and warrants for $5 billion. The warrants can be exercised at $115. The stock was around $110 last week. So, the warrants are underwater.
How was the timing on that? It was just 20 days into the financial crisis, which didn’t end until five months later, on March 6, 2009.
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One week later, on October 1, 2008 he invested $3 billion in General Electric (GE), which needed the cash because the commercial paper market was frozen. The GE stock had a coupon of 10% interest, the same as for the GS investment. He got warrants to buy $3 billion of stock at $22.50. The stock was trading at $15 one week ago. The warrants are underwater.
What do we learn from this: Two very large firms, which had departments or subsidiaries in the business of financing businesses, were willing to pay 10% interest to get cash from Buffett. Wasn’t that enough of a warning about the crisis? The warrants are now basically worthless. So, it looks like Mr. Buffett has made a good rate of interest, but otherwise no gain on the investments. Furthermore, he still had to sweat out the deepening financial crisis in 2008-2009 that brought us to “within 10 minutes of shutting down the entire banking system,” according to Senator Chris Dodd.
The lesson: The “spinmeisters” will not like this, but in my view, such “confidence building moves” are signs of crisis. Just one week ago the CEO of BAC said the firm didn’t need to raise any capital. This is so reminiscent of 2008. Buffett’s investment is to support the markets. History shows that such actions usually fail. The current problems are much bigger than that. Do you really think that Buffett can bail out all the European banks, or European countries such as Greece, Portugal, Spain, Italy, etc?
If he likes the 6% yield on BAC, he can get 46% on Greek 2-year government bonds.
Buffett’s move once again signals that a serious crisis is approaching, similar to the signals his moves sent in 2008. Of course, that is opposite to the intent of the investment.
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发表于 2011-8-25 03:08 PM
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发表于 2011-8-25 03:18 PM
发表于 2011-8-25 03:36 PM
