This Day On The Street
Continue to site
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

Buffett the Enabler of 'Too Big to Fail'

BOSTON ( TheStreet) -- Warren Buffett's $5 billion deal to backstop Bank of America (BAC - Get Report) is a sure bet for the billionaire investor. But given his warnings about the dangers of too-big-to-fail banks, Buffett is displaying hypocrisy as an enabler.

Bank of America on Thursday announced an agreement to sell 50,000 preferred shares with an annual dividend of 6% to Buffett's Berkshire Hathaway (BRK-B), as well as warrants to purchase 700 million shares at an exercise price of $7.14 per share, exercisable at any time.

In exchange, Bank of America, which has fought allegations it is staring at a massive capital hole, gets $5 billion and the Buffett seal of approval. The stock, which was down nearly 50% this year through Wednesday, rallied today. However, the shares have pared gains. Investors are correctly beginning to realize that Buffett's grand endorsement does little to benefit them.

"Investors may see this and say they need to be in Bank of America since Buffett is in," says Paul Nolte, director of investments with Chicago-based Dearborn Partners. "Sure, Buffett's in, but he's in on Buffett terms. He does a really good job at structuring deals for Warren Buffett. If you buy the common stock of Bank of America, you're not in on Buffett terms. Hooray for Warren, but it doesn't help the individual investor or the bank."

This deal also shows that Buffett is doubling down on his belief that the government will backstop too-big-to-fail banks. During the height of the financial crisis in 2008, Buffett engineered similar sweetheart deals in which he received preferred stock in both Goldman Sachs (GS - Get Report) and General Electric (GE - Get Report). Both transactions gave Buffett hefty 10% dividends and favorably priced warrants without exposure to common stock.

It's ironic that Buffett has said too big to fail is a problem regulators can't stop, and yet he continues to plow money into the largest of U.S. banks with very favorable conditions for himself. Buffett told the Financial Crisis Inquiry Commission last year that too big to fail will never be resolved, and that taxpayers will always bail out the troubled. This is the same person who told CNBC in January 2010 that the government shouldn't have backstopped Goldman or Morgan Stanley (MS).
1 of 3

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Options Profits

Our options trading pros provide over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • Actionable options commentary and news
  • Real-time trading community
SYM TRADE IT LAST %CHG
BRK.A $205,923.00 0.00%
BRK.B $137.39 0.00%
BAC $17.03 0.00%
GS $209.20 0.00%
GE $26.78 0.00%

Markets

DOW 17,730.11 -27.80 -0.16%
S&P 500 2,076.78 -0.64 -0.03%
NASDAQ 5,009.2140 -3.9090 -0.08%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs