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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).
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BAC $14.37 -2.70%
BRK.A $217,210.00 -1.40%
BRK.B $144.71 -1.50%
GS $163.50 -1.60%
GE $30.56 -1.10%


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