Buffett's $5-billion bailout shows Bank of America is in big trouble
It's tempting to view Warren Buffett's planned $5-billion investment in Bank of America as good news for the troubled bank.
Certainly investors viewed it that way, sending Bank of America's basement-dwelling stock price up 15% to over $8 a share immediately after the deal was announced today.
But upon closer inspection, the move stands to benefit the Oracle of Omaha far more than the beleaguered, troubled Bank of America.
In a statement, bank CEO Brian Moynihan characterized Buffett's unsolicited infusion of capital as "a strong endorsement in our vision and our strategy."
In his equally cheery statement, Buffett called Bank of America "a strong, well-led company … I am impressed with the profit-generating abilities of this franchise."
And well he should be.
If you could sell high, as Buffett did in late 2010 by unloading at $12.24 a share nearly 10 million shares he'd purchased during the subprime crisis, and buy low, as he's doing by buying back 50,000 preferred shares with a 6% annual dividend, plus warrants for 700 million shares at a guaranteed price of $7.14 with an unusually long 10-year exercise period, the least you could do is compliment them on generating profit!
Sure, you could view this as both sides would like you to: Uncle Warren bailing out another worthy but downtrodden big guy.
You could take at face value Buffett's recent plea that Congress tax the wealthy, or Moynihan's recent announcement of 3,500 layoffs, as evidence of that strong leadership Buffett is so keen on. Sure. And there could be unicorns involved in this deal as well.
Or you could be somewhat skeptical.
Was Uncle Warren just posturing? Was Moynihan? Was this whole thing engineered to dupe the dopes on Wall Street?
If so, it succeeded. Buffett's warrants for the Bank of America shares have already earned him millions.
My take: Buffett's self-enriching vote of confidence actually indicates that Bank of America is in worse trouble than even shareholders are aware.
Buffett has become the lender of last resort (see also Goldman Sachs and GE), and he takes a pound of flesh and then some for his trouble.
The deal Buffett dangled before Bank of America is nearly identical to the deal he made with Goldman Sachs in the depths of the 2008 financial crisis.
That Bank of America was in no position to refuse it speaks volumes about the current desperation of America's biggest bank brand.
Buffett's billions won't undo the bank's losing streak of horrible acquisitions, including Merrill Lynch, MBNA, LaSalle and a crazy little thing called Countrywide, your subprime lender.
Those investments cost them $157 billion. Their market value today? Less than half that: $71 billion.
It's going to take more than Buffett's $5 billion to save this sinking ship.
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