Thursday, August 25, 2011

What does Warren Buffett know?

When I first read this morning that Warren Buffett had invested $5 billion in Bank of America, I was puzzled.  I didn't know how Buffett could figure out the costs of likely mortgage repurchases from securities issued by Countrywide/Bank of America.

I thought perhaps that Buffett had hired an army of analysts to go through the securities and figure out their value.  But Nicholas Santiago (h/t Yves Smith) has the more likely explanation:

3. Warren Buffett has made a career of investing in troubled companies for the sake of the economy. The last time he made an investment such as this one was back in 2008 with Goldman Sachs Group Inc.(NYSE:GS). It is important to remember that Goldman Sachs was bailed out by the tax payer in what was called the TARP program. Buffett knows that the U.S. taxpayer will bail him out if he is wrong and Bank of America stock does go belly up. 
[Disclosure: I own a few shares of Berkshire-Hathaway B-shares]. 


Obi-Run Kenobi said...

I'm not sure I agree with that reasoning. He's getting a 6% yield on his BAC investment, or ~$300M in preferred dividends per year. While he drove a hard bargain with BAC, he extracted a 10% yield from Goldman in '08. So, essentially, he's saying (and said yesterday on CNBC as well) that the lower yield means he thinks there is a lower chance of BAC going belly up in 2011 than GS in 2008. He, and others, have pointed out that the volatility of 2011 is dissimilar in important ways to that of 2008, so comparisons are difficult.

I'm not saying Buffett is right or wrong to think BAC a.) won't need to raise capital and b.) will avoid a bail out. I'm just saying I don't think he's betting $5B and possibly $10B that the taxpayer will bail him out.

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