Berkshire Hathaway Invests $ 5 Billion in Bank of America (BAC, BRKa, GS, GE)

From this Bank of America Press Release:

"Bank of America is a strong, well-led company, and I called Brian to tell him I wanted to invest in it," said Berkshire Hathaway Chairman and Chief Executive Officer Warren Buffett. "I am impressed with the profit-generating abilities of this franchise, and that they are acting aggressively to put their challenges behind them. Bank of America is focused on their customers and on serving them well. That's what customers want, and that's the company's strategy."

Buffett didn't buy Bank of America's (BAC) common stock.

Berkshire Hathaway (BRKa) is getting 50,000 preferred shares at $ 100,000 per share with a 6% dividend that is redeemable at a 5% premium.

Berkshire will also receive warrants to purchase 700 million shares at an exercise price of $7.1428 per share. These warrants can be exercised at any time over a 10-year period.

So Buffett is certainly getting a very nice deal but nothing like the deals he got from Goldman Sachs (GS) and General Electric (GE) during the 2008 crisis. He explained to CNBC why Bank of America is getting better terms.

Buffett Tells CNBC 'This Isn't 2008'

This endorsement by Buffett stands in stark contrast to some of the more vocal Bank of America critics (Henry Blodget, Yves Smith, and others) who are convinced that Bank of America has an enormous capital hole to fill.

Henry Blodget vs Bank of America: "Rotted to the Core"

"I'm sorry if BOA thinks the market is stupid," Henry says. "We went through this in 2008; all the banks said 'we're perfectly capitalized, we're in great shape'; three months later they were revealed to be rotted to the core. The concern is that's what's going on here."

So which view, Buffett's or the vocal critics, is likely to be correct?

Who knows.

Buffett is certainly capable as are many of the analysts but I wouldn't bet against Buffett's six decades of investing experience when he's putting $ 5 billion on the line.

What I do know is banks are vital utilities built on confidence. At a minimum, if a headline grabber like "Rotted to the Core" (or similar) is used to describe a bank some quality analysis and a high degree of certainty ought to be behind it. I don't think that's too much to ask. For someone to opine publicly that a bank is in the kind of extreme trouble that headline suggests it seems reasonable.

We all know that some of this can become self-fulfilling if the lack of confidence ends up feeding on itself.

If someone said "Rotted to the Core" about an oil company or most other businesses the effect is not the same. Most businesses are not built on the trust and confidence of the public and its counterparties in the same manner that a bank is. I mean, there's never risk that there will be the equivalent of a bank run on an oil company.

Obviously, critics are entitled to their opinion. It's true that many of these banks did stupid things and that much of their troubles are self-inflicted. I'm just saying thoughtful analysis and more carefully chosen words is very much in need when it comes to criticizing any bank versus another type of business.

The threshold of what can be said and how it gets communicated by a professional providing an opinion on something as vital as a bank ought to be higher. Some circumspection couldn't hurt.

To me, the negative coverage on banks seems, at least at times, a little cavalier at best.

Whether what seems to at times become a frenzied negative feedback loop in the blogosphere against a particular bank actually ends up putting that bank under even more real world pressure is the key question. I happen to think most bank CEOs already have a tough enough job.

Oh, and forgive me if I'm not convinced that the short-term price action of a stock has some kind wisdom in it. Something like American Express (AXP) went from $ 40 to $ 10 to $ 40/share in just over a year yet its intrinsic value barely changed at all during that time. Tech stocks that had P/Es of 100 or so a decade ago now have P/Es near 7. Wisdom?

Most sick patients are given the benefit of time to heal. The same is true of a bank but not if what I'll call the repair-the-balance-sheet window* is taken away from it.

Why would we want to risk accelerating the demise of a bank that otherwise might heal on its own? If a bank's financial situation is truly terminal that will become obvious in due time.

This seems lost on some in the business of opining on banks.

Adam

*Balance sheet repair comes from using things like pre-tax pre-provision earning power, capital raising, asset sales, and other balance sheet adjustments to absorb losses and build the necessary capital over time.