Buffett’s Sweet Deal

By AddisonWiggin
  • 2008 Redux: Buffett sinks $5 billion into a bank we were told doesn’t need it
  • “With enough good lawyers…” Dan Amoss on the dangers of betting against aDead Bank Walking
  • The picture that says 1,000 words about gold’s tumble… and the real story thepicture doesn’t show
  • Ray Blanco on news from the tech world far bigger than Steve Jobs’ resignation
  • No, Paul Krugman didn’t wish the earthquake were worse… but he easily could have

  Who says it’s not 2008 all over again?
Warren Buffett’s Berkshire Hathaway is once again plowing $5 billion into a bank that, before the announcement, claimed it didn’t need any new capital to keep the lights on.

Then, it was Goldman Sachs. Today, it’s Bank of America.

“Berkshire will get cumulative perpetual preferred stock paying a 6% dividend,” Bloomberg reports.

“Berkshire also gets warrants to buy 700 million shares at $7.14 each.”

We assure you those are terms that you cannot secure — unless you have a spare $5 billion lying around. They guarantee Buffett will make money even if BAC’s share price goes down.

That’s how it worked with the Goldman deal. Ditto for Berkshire’s $3 billion investment in General Electric. Both companies trade at prices lower now than they did when he cut those deals.

It’s good to be the Oracle…

  With this acquisition, Buffett now owns a significant piece of two of the Big Four retail banks… Bank of America and Wells Fargo. His stake in the two now totals $18.5 billion.

   Buffett says he got the idea while in the bathtub yesterday morning. For all we know, the story is true — in the sense that he “got the idea” when he picked up the phone while in the tub and a panicked voice from the Treasury Department was on the other end of the line.

  Let’s assess where matters stood at the time of Mr. Buffett’s date with the rubber ducky yesterday…

  • BAC’s share price had cratered by 36% since Aug. 1. It hadn’t been this low since March 2009
  • Credit default swaps on Bank of America traded at spreads even higher than during the 2008-09 panic
  • Another bad batch of data from the housing market (i.e., new home sales at their worst in five years) made traders twitchy about BAC’s massive exposure to the housing market
  • The bank remains likewise exposed to European government debt
  • Henry Blodget, Internet analyst turned blogger, said Tuesday that write-downs on mortgages and European bonds would force BAC to raise $200 billion in new capital
  • BAC had become the subject of increasingly alarming headlines worldwide, with the U.K.
  • Guardian writing openly about it “fueling fears of a second banking crisis.”

  And that laundry list doesn’t even include the threat of lawsuits.

Unique among the banking sector, BAC has a habit of turning up in the headlines again and again for stunts like repossessing a house that turns out to be the wrong address… or repossessing a house that was paid for in cash.

This week, a new wrinkle: Two stories about BAC foreclosing on people who renegotiated their mortgages under the government’s Home Affordable Modification Program and dutifully kept up their payments:

  • A Florida couple sent in its payment a week early and got a notice saying, “If you are not able to make each payment in the month in which [it] is due, you will not be eligible for a modification.” BAC has since apologized
  • A New Jersey man applied for a modification, never got word back and continued to send in his full payment every month. Evidently, he was approved… because he got a notice saying he was in arrears on his (reduced) payments to the new account. So far in this case, the company admits no wrongdoing.

Those are micro illustrations of a macro picture. BAC faces massive litigation on two fronts resulting from securitized mortgages. First, there’s the massively tangled chain of title on potentially millions of properties: Title was never properly transferred, prompting many recipients of foreclosure notices to go to court demanding, “Who holds the note?”

That’s a problem for many banks, but BAC is alone in facing this one: the hangover from the Countrywide acquisition. BAC is contending with a host of lawsuits by investors who bought mortgage securities from Countrywide… and who believe Countrywide lied through its teeth about the quality of the underlying mortgages.

  So is BAC going down, Buffett’s sweetheart deal notwithstanding? Don’t bet on it.

“I’ve taken a look at recommending a BAC short several times over the past year,” says our short specialist Dan Amoss, “with the idea that ‘fraudclosuregate’ might transform it into a juicy target for class action lawyer piranhas.

“But I kept coming back to the bull thesis… that with good enough lawyers, BAC can string along this legal settlement process and mortgage-related losses forever. With Tim Geithner at Treasury, BAC also essentially has a lobbyist on its behalf.

“The suspension of mark-to-market accounting, an army of lawyers and lobbyists to fight mortgage put backs, and a very friendly Treasury Department will probably keep the stock muddling along for the next few years. I wouldn’t buy it or sell it short. The Fed’s ‘zero rates through 2013’ policy is a guaranteed carry trade gift to BAC shareholders — or a tax, if you’re a depositor — that will be measured in the billions.”

In other words, in a fair and just world, BAC would have gone down in flames long ago. But it’s not a fair and just world… and you can’t invest on that assumption.

Still, at a time the market remains dicey, there’s a host of stocks due for a tumble… and it’s Dan’s job to sniff them out. Learn about some of the most likely candidates here.
   The Buffett news put a nice lift into stock futures this morning. But it didn’t last… All the major indexes are down about 2% as we write.

  First-time unemployment claims registered 417,000 last week — well above the “expert consensus” and also far above a number that indicates a healthy recovery.

This is the final piece of data Fed chief Ben Bernanke can chew on as he puts the finishing touches on his annual central bank love fest speech tomorrow in Jackson Hole, Wyo.

We don’t envy him. He can’t announce QE3 because of all the heat he took for QE2. But he has to throw a bone to Wall Street to avert another vicious sell-off.

Our guess: This year’s speech will turn out to be a nonevent. But given the market’s performance on Aug. 9 — when the Fed committed itself to near-zero interest rates for the next two years — look for some crazy swings between 10:00-10:30 a.m. EDT tomorrow while traders attempt to parse the transcript.

  Because it has worked so well… France, Italy, Spain, and Belgium are extending their ban on short selling financial shares.

The ban was imposed two weeks ago. Since then, France’s BNP Paribas is down 10%, Societe Generale is down 12%, Belgium’s Dexia is down 12and Italy’s UniCredit is down 16%.

One of the few beneficiaries is Spain’s Banco Santander — which trades on the NYSE with the unfortunate symbol STD. It’s flat over the last two weeks.

If you followed our tongue-in-cheek suggestion on Aug. 15 about shorting the European financials ETF, you’d be up nearly 8%.

If further proof of Einstein’s definition of insanity were necessary, there’s talk that Germany might follow suit with its own ban.

  On the theory that a picture is worth a thousand words, we present the following…

Nothing Goes Straight Up

As we anticipated yesterday, the Comex jacked up margin requirements after the close.

True, $9,450 to control a 100-ounce contract isn’t much… unless you were accustomed to putting up only $7,425. That’s a 27% increase.

“Having to spend more money per trade directly squeezes some of the weak hands out of the market,” adds Matt Insley at our sister publication Daily Resource Hunter. “But long term? The CME is most likely seeing the same trend we are here, so with gold prices on the rise, margins need to follow.”

It shouldn’t have come as a surprise, given this was what the Comex did with silver in late April and early May.

  Nothing wrong with shaking out the weak longs, though: Consider it a buying opportunity as we head into the heart of gift-buying season in the Middle East and India.

“We still have unprecedented demand,” says Ben Davies of Hinde Capital. “I see it all across Asia. If anything, this pullback just gives more firepower to those people, they will not be put off.”

  Traders are taking the resignation of Apple CEO Steve Jobs in stride. At $373, shares are still higher than they were two days ago. “The news wires are gushing,” says Ray Blanco of our tech team, “with speculation over the impact the change in leadership will have on the company.

“My personal suspicion? Very little.

“The innovative culture that propelled Apple to the highest capitalization on the U.S. stock market earlier this month isn’t going to disappear overnight. This is good news because Apple drives the entire industry. It makes everyone else have to bring their ‘A game’ just to be able to compete.

“Jobs’ management and technology teams are in place, and despite his resignation, I find it hard to believe he won’t stay involved with the company in some way.”

From where Ray sits, the big news in tech this week is “the escalating patent war in the mobile technology space. A global patent arms buildup is taking place in the industry, with Apple, Google, Microsoft, Samsung, Qualcomm and others all facing each other down in a game of high-stakes poker.”

Ray breaks it all down in a briefing this week for readers of Technology Profits Confidential. The CliffsNotes version: It’s all good for his three most recent recommendations — smaller players, he says, “hold the patent keys for the mobile computing future.” Access here.

  For the pundit-weary 5 reader: New York Times columnist Paul Krugman got punked this week.

After the East Coast earthquake on Tuesday, a post showed up on Krugman’s account at Google+ — Google’s social media answer to Facebook and Twitter.

“People on twitter might be joking,” Krugman purportedly wrote, “but in all seriousness, we would see a bigger boost in spending and, hence, economic growth if the earthquake had done more damage.”

The post was quickly picked up and lampooned at the National Review and other sites, which, naturally, assumed it was real.


It wasn’t. Krugman didn’t write it. A guy named Carlos Graterol created the Google+ account and made the phony post:

Paul Krugman

“This is really cute,” an indignant Krugman whined later on his Times blog. “Apparently, some people can’t find enough things to attack in what I actually say, so they’re busy creating fake quotes.”

Unfortunately, Mr. Krugman lacks appreciation for the essence of good satire; the embedded ring of truth. What practical difference is there between the phony Krugman quote and the following real ones:

After the Fukushima quake: “Yes, this does mean that the nuclear catastrophe could end up being expansionary, if not for Japan then at least for the world as a whole. If this sounds crazy, well, liquidity-trap economics is like that — remember, World War II ended the Great Depression.”

After Sept. 11: “Nonetheless, we must ask about the economic aftershocks from Tuesday’s horror. These aftershocks need not be major. Ghastly as it may seem to say this, the terror attack — like the original day of infamy, which brought an end to the Great Depression — could even do some economic good.”

Or heck, last week: “If we discovered that space aliens were planning to attack and we needed a massive buildup to counter the space alien threat, and inflation and budget deficits took secondary place to that, this economic slump would be over in 18 months.”

Ah, sweet irony. Paul Krugman hoisted by his own petard… once again.

1 “I am always amazed at the comments by persons who think that Corporate America just got up and left for the sole reason of paying lower wages overseas,” writes a reader reacting to the “communitarian” utopia discussion that started Tuesday.

“I wonder if any of these people have ever tried to start up or run a business of their own. I won’t bore you with all the details, but people need to understand that while our country was taking a nap, the rest of the world grew up, and in some cases passed us, and offers a better opportunity for certain businesses.

“I was also amazed at the reference to a sort of hybrid business between the government and the people who work there. Hasn’t anyone watched what happened with Fannie Mae and Freddie Mac, two of the largest hybrid business partnerships in the history of the United States, which today exist at the expense of the taxpayers?

“Let’s not blame the free market for jobs being sent overseas; let’s acknowledge what role our government has played here, and our role for continuing to let them get away with it. We can all vote.”

1 “I would like to tell you about another example of communism,” writes another reader on the same theme, “or something close to it taking place here in America these days.

“The next-door neighbor of a friend recently came home from work to find a woman she never met stealing peaches by the shopping bag from her three peach trees. The trees are on a vacant lot that she owns next to her home. She confronted the woman and explained to her that these trees were on her property, that she cared for them, paid the taxes on the property and she owned them, not her.

“The woman started screaming at her that the trees were from God and that they were there for the benefit of anyone who wanted them. The woman then stormed off carrying the bags of peaches. The owner thought about trying to stop her, but decided that the hassle of police reports and so on was just not worth it.

“A few days later, she came home to find the trunk of the peach tree broken. It had been hit by a car and had been broken off next to the ground. I guess that is what passes for logic today. To each according to his needs, as long as the real owners get screwed by the people in need.”

The 5: We’re assuming the God-blessing peach thief also had a car then?


Addison Wiggin
The 5 Min. Forecast

P.S. Hmmn… apparently Col. Gaddafi’s whereabouts are still unknown:


Do you suppose it’s because they’re looking… in the wrong Tripoli?


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