Read the full transcript of the March 2 Squawk Box Interview with Warren Buffett
Last week, our financial Superman, mild-mannered Midwesterner Warren E Buffett, swooped in again to save another bank, the financial markets, the US economy and just maybe our precious way of life.
Buffett's purchase of $5 billion worth of Bank of America preferred stock (on his usual generous terms, including long-lasting warrants to buy common stock at an attractive price) immediately stiffened the upper lips of chattering investors and pundits. Bank of America's chairman hailed it as a "vote of confidence" in the bank. It was also celebrated as a signal that the worst was over in the rout recently experienced by the US financial sector.
For the moment, that all seems right: Bank of America's stock is up 17 percent from the Aug. 25 announcement, and stocks of the other three major US banks - JPMorgan Chase, Citigroup and Wells Fargo - are also up.
But as the news is digested, it could set off the opposite effect. The Buffett investment just might turn out to erode, not increase, confidence. And not only for Bank of America, but for the banking sector as a whole.
Buffett's investment reveals something both infuriating and scary. Bank of America has not been talking straight about its need for capital.
"You cannot have the largest bank in the country saying, 'We don't need the money,' and then paying this kind of price to Warren Buffett for capital they say they don't need," said Daniel Alpert, who runs the investment firm Westwood Capital. '`Industrywide, it's a potential boomerang because we think, 'Why should we believe any of these guys when they say they don't need the money?'
"We've been through a massive crisis in 2007 and '08 where executives of major financial institutions tried to hide their insolvency," he added. "They said, 'No, no, a thousand times no, we're fine.' And then they were gone."
Sure, Buffett reportedly approached Brian T. Moynihan, Bank of America's chief executive, who initially rebuffed the investment offer - suggesting that Bank of America didn't really need capital. Even so, Moynihan's reticence didn't last long. And if the bank truly didn't need capital, why make such an expensive deal that could dilute other shareholders?
The more investors think about it, the more Buffett's announcement will intensify, not allay, their fears about Bank of America's capital position. Indeed, Buffett is making something more resembling a loan than an equity investment. His $5 billion doesn't count in the important measure of capital that regulators look at, called Tier 1.
That is perhaps why Bank of America's money-raising has not stopped with Buffett. On Monday, the bank sold about half of its stake in China Construction Bank for more than $8 billion. And over the past year, Bank of America has been jettisoning businesses to raise cash and shore up its capital.
Prudent, yes, and we can hope the bank's management has learned a lesson about credibility. Last year, Moynihan suggested that the bank would be able to raise its dividend after it passed the Federal Reserve's second round of stress tests. No such luck. That plan was blocked, rightly, by the Fed, whose exams revealed, among other perils, Bank of America's overexposure to the sickly real estate sector.
Yet Moynihan and Bank of America persisted, with analysts expecting the bank to come back in the middle of the year to push the Fed to revisit the dividend issue. So much for that now.
Still, even with these moves, some investors and analysts do not think the bank's actions will be sufficient, and that it will have to sell common shares to raise capital.
Bank of America disagrees. Yes, the stock has "an overhang" thanks to economic and legal uncertainty, but "we understand that and are working very aggressively to address that," said Jerome F. Dubrowski, a spokesman. "We have more than enough capital to run our business" based on current rules, he said.
The bank has clearly explained to investors and regulators how it will reach compliance with the new rules ahead of schedule, he added. The Buffett opportunity was too good to pass up, Dubrowski said: "There's only one Warren Buffett. We are very happy to have him, but it wasn't driven by capital."
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