What Warren Buffett wants…

Sally Herships Aug 25, 2011

What Warren Buffett wants…

Sally Herships Aug 25, 2011

Bob Moon: Maybe it’s time to give the Oracle of Omaha a new nickname? Like, oh I don’t know — the 500-pound gorilla of the banking world? Consider that Warren Buffett just managed to do what Bank of America has been unable to do for most of the year: Reverse a seemingly relentless plunge in its stock value of nearly half since January.

Today, he announced Berkshire Hathaway is investing $5 billion in the battered bank. And share prices instantly jumped. In fact, at least on paper today, it’s estimated Buffett’s company made a cool $1.4 billion in just a few hours. So is this really a good deal for the bank — or for Buffett?

Sally Herships has more.

Sally Herships: When Warren Buffet approached Bank of America with a deal, the timing was right.

Anat Admati: They right now have all kinds of obligations. Having money for their depositors, they need to pay all their other liabilities, and they want to be able to invest in things.

Anat Admati teaches finance at Stanford. She says if Bank of America had tried to raise this kind of money elsewhere, it could have been tough. Investors might not have been willing to pay a lot for shares in such a battered bank. But then Buffett offered up $5 billion. Admati says it’s a better deal than the alternatives.

Admati: Well obviously, they’re giving up a piece of their company. They’re giving up 6 percent a year or whatever they promised him.

Preferred stock with a 6 percent annual dividend, and the right to buy more shares at the same price for the next 10 years. Admati says Buffett made a good deal — maybe even a great one.

Admati: He doesn’t give them $5 billion for nothing. Certainly when he invested in Goldman, he got a better deal than the government got.

Buffett has ridden to the rescue before, propping up Goldman Sachs and GE in 2008. But what will Bank of America get out of this deal? How much is $5 billion worth to a bank?

Paul Argenti: $5 billion is not, I’m not going to say it’s not a lot of money, but it’s nothing compared to the size of Bank of America or Goldman Sachs.

Paul Argenti teaches corporate communications at Dartmouth.

Argenti: There’s the physical asset, which is money, and then there’s the intangible asset, which is his name. That’s probably worth more than the money he put into the investment. But the money doesn’t hurt, does it?

Buffett’s reputation is so powerful that by linking his name to the banks, he’s insuring success in his own investment.

I’m Sally Herships for Marketplace.

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