William Alden, writing in the Huffington Post, makes an important point regarding Warren Buffett’s $5 billion purchase of preferred shares in Bank of America — the value of which will not be diluted if Bank of America has to raise more capital:
Although government regulators insist the era of bank bailouts is over, many who study the financial industry say the nation’s biggest banks are still too big to fail, meaning they must be rescued by the government when they face potentially fatal trouble in order to prevent a broader collapse of the financial system. Bank of America, the country’s largest bank by assets, is thought to rank high on this list — a perception seemingly underscored by Buffett’s willingness to put a significant sum into the company.
“This is the taxpayer giving Warren Buffett a great return,” said Amar Bhide, a professor of international business at the Fletcher School of Law and Diplomacy at Tufts University. “He knows that Bank of America is too big to fail. If it is too big to fail, then why not?”
“It’s not quite like buying Treasuries,” Bhide continued, referring to U.S. government securities, “but it’s not far from buying Treasuries at a really attractive rate of return.”
Buffett has engaged in similarly shrewd transactions in the recent post:
The investment had many drawing comparisons to September 2008, when Buffett invested $5 billion in Goldman Sachs during the height of the financial crisis and secured a lucrative deal for his company. That was right before the government passed a bailout package known as the Troubled Asset Relief Program, rescuing a range of financial firms and confirming the wisdom of Buffett’s bet.
Indeed, experts have argued that Buffett’s company profited handsomely off the government’s largess. Last fall, the investor penned an op-ed in the New York Times, thanking the federal government for propping up the financial system. “Uncle Sam, you delivered,” Buffett wrote.
Now, at a time when investors fear for the health of the nation’s banks, Buffett is again placing a large bet on a large financial institution.
Buffett is under no illusions about the role of a taxpayer backstop:
“You will always have institutions that are too big to fail, and sometimes they will fail,” Buffett told the Financial Crisis Inquiry Commission in May 2010, in remarks that were made public this February.
“I do think that if you ran into a similar situation today the government would guarantee commercial paper again. They’d have to,” Buffett said, according to a report from Bloomberg News at the time. “You have to believe the government, the federal government, will act and they will act promptly and decisively.”
The crisis-era investment in Goldman Sachs, Buffett said, “was a bet essentially on the fact that the government would not really shirk its responsibility at a time like that.”
Warren Buffett has a sterling reputation. The nickname “Bailout Buffett” hasn’t caught on, at least not yet.