Eisinger on BAC and Buffett

http://www.futureofcapitalism.com/2011/09/eisinger-on-bac-and-buffett

ProPublica's Jesse Eisinger, whose work I have criticized in the past, makes a good point in writing about Warren Buffett's investment in Bank of America:

Mr. 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, Mr. 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, Mr. 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?

I'm not as sure as Mr. Alpert (or Mr. Eisinger) that this is an "industrywide" problem rather than one specific to Bank of America. I'd distinguish between capital problems (insolvency) and liquidity problems ("mark to market") in 2007-2008. And I'd add three related points or questions that the column does not get into: First, it's interesting that Mr. Buffett, who usually invests in companies in which he likes the management and who has a reputation (deserved or not) for straight talk, would invest in a bank that has been publicly telling investors that it doesn't need more capital, and then turns around and raises a lot of it. Second, do investors who believed BAC when it said it didn't need any more capital have any recourse now that Mr. Buffett has inserted himself in a preferred position between the bank's profits and and them? And third, how much is the market's assessment of a bank's capital needs either clouded or clarified by the existence of both deposit insurance and the extensive government rules and bureaucracy that regulate banks?

by Editor  |  Sep 1, 2011 at 8:27 am Related Topics:  Banking, Capital Markets Regulation, FDIC, Warren Buffett receive the latest by email: subscribe to the free futureofcapitalism.com mailing list