ProPublica

Journalism in the Public Interest

Cancel

Bank of America Gets Buffetted

Note: The Trade is not subject to our Creative Commons license.

Last week, our financial Superman, the mild-mannered Midwesterner Warren E. Buffett, swooped in again to save another bank, the financial markets, the American economy and just maybe our precious way of life.

Mr. Buffett's purchase of $5 billion worth of Bank of America preferred stock (on his usual generous terms, including long-lasting warrants to buy common stock at an attractive price) immediately stiffened the upper lips of chattering investors and pundits. Bank of America's chairman hailed it as a "vote of confidence" in the bank. It was also celebrated as a signal that the worst was over in the rout recently experienced by the American financial sector.

For the moment, that all seems right: Bank of America's stock is up 17 percent from the Aug. 25 announcement, and stocks of the other three major American banks—JPMorgan Chase, Citigroup and Wells Fargo—are also up.

But as the news is digested, it could set off the opposite effect. The Buffett investment just might turn out to erode, not increase, confidence. And not only for Bank of America, but for the banking sector as a whole.

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?

The more investors think about it, the more Mr. Buffett's announcement will intensify, not allay, their fears about Bank of America's capital position. Indeed, Mr. Buffett is making something more resembling a loan than an equity investment. His $5 billion doesn't fully count in the important measure of capital that regulators look at, called Tier 1.

That is perhaps why Bank of America's money-raising has not stopped with Mr. Buffett. On Monday, the bank sold about half of its stake in China Construction Bank for more than $8 billion. And over the last year, Bank of America has been jettisoning multiple businesses to raise cash and shore up its capital.

Prudent, yes, and we can hope the bank's management has learned a lesson about credibility. Last year, Mr. Moynihan suggested that the bank would be able to raise its dividend after it passed the Federal Reserve's second round of stress tests. No such luck. That plan was blocked, rightly, by the Fed, whose exams revealed, among other perils, Bank of America's overexposure to the sickly real estate sector.

Yet Mr. Moynihan and Bank of America persisted, with analysts expecting the bank to come back in the middle of the year to push the Fed to revisit the dividend issue. So much for that now.

Still, even with these moves, some investors and analysts do not think the bank's actions will be sufficient and that it will have to sell common shares to raise capital.

Bank of America disagrees. Yes, the stock has "an overhang" thanks to economic and legal uncertainty, but "we understand that and are working very aggressively to address that," said Jerome F. Dubrowski, a spokesman. "We have more than enough capital to run our business" based on current rules, he said.

The bank has clearly explained to investors and regulators how it will reach compliance with the new rules ahead of schedule, he added. The Buffett opportunity was too good to pass up, Mr. Dubrowski said: "There's only one Warren Buffett. We are very happy to have him, but it wasn't driven by capital."

Yet Bank of America investors had whipped themselves into a panic in August because of the giant legal liability faced by the bank. The Buffett investment does not remove that, let alone any of the bank's other millstones.

Not only does the bank still face billions in legal settlement costs from Countrywide Financial, but it also has to buy back billions in faulty mortgages. Bank of America's questionable foreclosure practices continue to drag it down, and in addition it faces Securities and Exchange Commission investigations into the actions of its subsidiary, Merrill Lynch, in the lead-up to the financial crisis. Bank of America acquired Merrill in 2008, under heavy pressure from the Federal Reserve and the Treasury Department.

The big problem, however, is not the unknown legal costs, but the exceedingly well-known exposure to real estate, both home mortgages and home-equity lines of credit.

The bears will return, armed with a soft economy and the declining housing market. As they do, what is to stop them from jumping from bank to bank?

Compared with Bank of America, Wells Fargo has more exposure to real estate and less capital. The bank classifies about 19 percent of its residential mortgage loans as either delinquent or nonperforming, a number similar to that of Bank of America. Wells Fargo says it's fine, but where have we heard that before?

Of all the big American banks, JPMorgan Chase, perhaps surprisingly, has the highest proportion of bad mortgages, at about 24 percent, according to Bankregdata.com. Citigroup is lowest at less than 14 percent. But JPMorgan's balance sheet is more solid than that of any of the country's other megabanks.

Even if the major banks do not experience additional capital crises, the Fed plans to keep interest rates low for years. That will almost certainly depress bank lending rates, squeezing profits.

That is, if the banks lend at all. In one of the most important business lines for Bank of America and the other Big Three banks, residential mortgages, the banks are pricing themselves out of the market, offering uncompetitive rates. The mortgage market remains shattered.

Why aren't the banks lending? They fear potential future litigation, for one. And they claim there is not enough demand from high-quality borrowers. But if they had conviction that the economy and housing markets were recovering, those concerns would ebb.

So, if bank leaders are not exhibiting confidence, why should the rest of us?

Correction (9/1): This column referred incorrectly to the investment's impact on the bank's capital. Of the $5 billion, $2 billion will count in the measure of capital called Tier 1, under the current capital standard known as Basel 1. The column erroneously said that none of the $5 billion would count as Tier 1 capital.

Barry Schmittou

Aug. 31, 2011, 3:06 p.m.

Jimmy Buffett once said :

“If we weren’t all crazy, we’d just go insane”

and he said that before the gangstas and bankstas stole even more of the worlds assets.

For those of us who believe in God, this could be looked at as good news proof that his return is soon. It sure looks like things will get much worse because the worlds leaders have no conscience;  God please help us all !!

LYNDA GRANDINETTI

Aug. 31, 2011, 3:35 p.m.

I have an important question.  This 5 billion that Buffett took out of his own pocket - is that 5 billions dollars less that we can tax Buffett for?  Is he going to slowly get rid of his billions before the tax man starts taxing the billionaires at a higher rate?

I’ve been worried about such a thing.  I envision the billionaires transferring their money to their kids and grand kids and any other tax-free way they can get rid of their money.  They’re not stupid and they know America is pretty sick of them not paying their fair share - so what are they doing?  Has anyone checked on them to see what they’re doing with their money?

Shouldn’t we know NOW what they’re doing with their billions?

Lynda, in regards to Buffett, he already committed to give away majority of his wealth to charity so that won’t ever be a concern.  But he consciously made the public statement about increasing taxes for the rich because he know it will never affect him.  A lot of billionaires will give it all away before given the US government an extra penny.  I remember one of billionaires said something about he rather pay the lawyers than government because government are just so wasteful its disgusting.

Hal Ashburner

Sep. 1, 2011, 1:21 a.m.

Why is credibility at issue at all?
We have published, independently audited financial statements.
A pencil, a calculator and a few hours thought and work is all we need to get a very sold appreciation of the risk.

Oh, that’s the credibility issue? Nobody believes GAAP, nobody trusts an independent audit. Yet nobody seems to care about this incredible piece of corruption of the financial system. Why is that? Because Accounting and accountants are so dull?

Well, thank goodness SOMEONE is looking out for big business so they can continue to shore up their corrupt business models…

As for trust?  I trust my bank implicitly.  I trust them to demand personal information of me to sell to the highest bidder while not providing me with any compensation for the loss of privacy.  I trust them to offer to lend me money they don’t have, which I have to pay back with interest higher than they need to stay in business.  I trust them to buy each other out so that I have no choices in the marketplace other than brand name.  I trust them to violate contracts because they decided it would get them more money to do so.  I trust them to throw a tantrum that threatens the entire country whenever they don’t get their way.  I trust them to demand we cover their failures while they reap all benefit for their successes.

What’s not to trust?

As for Buffet and other billionaires, I’d be willing to bet that there’s no such thing as an actual billionaire in this country.  Even someone with modest income can (and many do) build shell corporations, trusts, and charities to divide and confuse money for tax purposes.  It’s cheap and easy enough that anybody sitting on a billion dollars in personal assets would have to be a complete idiot not to do so.

All that talk about taxing the rich isn’t likely to actually accomplish anything other than give Washington the ammunition to tax the rest of us more.  After all, the rich are doing their parts…

Gandalf J. Randolph

Sep. 1, 2011, 3:54 p.m.

All of this has to be seen in the context of BofA taking on Countrywide during the 2008 debacle. The sense was that Paulson was foisting Countrywide on BofA in return for BofA being allowed to exist. It is Countrywde that brought in an ocean of toxicity to BofA. Not that BofA didn’t have enough of its own. So now Buffett comes in with fresh capital. Had to happen sooner or later. And it wasn’t coming from the government. Buffett is the US’s super-secret federal reserve. Hmm….

JESSE EISINGER—-not just “bad” mortgages—-NO MORTGAGES…giant illegal cover-up…kicking people out of their homes illegally…

I AM NOT A LAWYER, BUT THIS IS GOOD (as in true), STUFF:

“…The Depositor owns the Trust — and while the Trust was performing – the Depositor, on behalf of the Trust would be the party to bring the action. However, these Trusts have now been brought back on parent corp. (to Depositor) balance sheets because the Trusts as “off-balance sheet” SPVs — have been effectively dissolved. The only tranche holders to remnants of the Trusts is the US Government or the Depositor (parent) itself. You should be preparing to demonstrate that the loan was not validly conveyed to any Trust (which they were not). Do this by requesting the Mortgage Schedule which should accompany the Mortgage Loan Purchase Agreement (MLPA) — and the MLPA cannot be an “intent” to sell — it must be validly executed and notarized (we know about those notaries). And, importantly, if MLPA and Mortgage Schedule can be proven, servicer must prove that all default payments have been paid to the trust on borrower’s behalf. If not, loan has been removed from the Trust with collection rights sold/swapped to a Third Party. This is how you may win — they can not prove anything.”

Solar Flares, CME’s and sunlight, sun’s energy, radiation and substance added to Water, air, and food with God, His word, His Son, His Son’s Blood and Holy spirit, truth, purity and righteousness, is coming for Bank of America and all that exists in the universe, Earth , All heavens and beyond, Past present and future, Eternally and NO-ONE can remove Him from there in the name of Jesus Christ, Amen!
Solar Flares and CME’s Plus God, Jesus and the Holy Spirit in the Light and energy of the Sun is upon the wage earner exploiters of Bank Of America and other banks as the Lord being a swift witness against them and those who support them, as well as All others for a blessing or curse, to each his own reward for what they have done to others and continue doing so without repentance when asked to.
Matthew 3:11
I indeed baptize you with water unto repentance, but He who is coming after me is mightier than I, whose sandals I am not worthy to carry. He will baptize you with the Holy Spirit and fire.
The Reign and Indignation of God
Isaiah 66:14 When you see this, your heart shall rejoice, And your bones shall flourish like grass; The hand of the Lord shall be known to His servants, And His indignation to His enemies.
15 For behold, the Lord will come with fire And with His chariots, like a whirlwind, To render His anger with fury, And His rebuke with flames of fire.
16 For by fire and by His sword The Lord will judge all flesh; And the slain of the Lord shall be many.
17 “Those who sanctify themselves and purify themselves, To go to the gardens
After an idol in the midst, Eating swine’s flesh and the abomination and the mouse,
Shall be consumed together,” says the Lord.

Malachi 3
The Coming Messenger
1 “Behold, I send My messenger, And he will prepare the way before Me.
And the Lord, whom you seek, Will suddenly come to His temple, Even the Messenger of the covenant, In whom you delight. Behold, He is coming,”
Says the Lord of hosts.
2 “But who can endure the day of His coming? And who can stand when He appears?
For He is like a refiner’s fire And like launderers’ soap.
3 He will sit as a refiner and a purifier of silver; He will purify the sons of Levi, And purge them as gold and silver, That they may offer to the Lord An offering in righteousness.
4 “Then the offering of Judah and Jerusalem Will be pleasant to the Lord, As in the days of old, As in former years.
5 And I will come near you for judgment; I will be a swift witness Against sorcerers, Against adulterers, Against perjurers, Against those who exploit wage earners and widows and orphans, And against those who turn away an alien— Because they do not fear Me,” Says the Lord of hosts.
6 “For I am the Lord, I do not change; Therefore you are not consumed, O sons of Jacob.
7 Yet from the days of your fathers You have gone away from My ordinances And have not kept them. Return to Me, and I will return to you,” Says the Lord of hosts. “But you said, ‘In what way shall we return?’
Do Not Rob God
8 “Will a man rob God? Yet you have robbed Me! But you say, ‘In what way have we robbed You?’ In tithes and offerings.
9 You are cursed with a curse, For you have robbed Me, Even this whole nation.
10 Bring all the tithes into the storehouse, That there may be food in My house, And try Me now in this,” Says the Lord of hosts, “If I will not open for you the windows of heaven And pour out for you such blessing That there will not be room enough to receive it.
11 “And I will rebuke the devourer for your sakes, So that he will not destroy the fruit of your ground, Nor shall the vine fail to bear fruit for you in the field,” Says the Lord of hosts;
12 “And all nations will call you blessed, For you will be a delightful land,” Says the Lord of hosts.
The People Complain Harshly
13 “Your words have been harsh against Me,” Says the Lord, “Yet you say, ‘What have we spoken against You?’
14 You have said, ‘It is useless to serve God; What profit is it that we have kept His ordinance, And that we have walked as mourners Before the Lord of hosts?
15 So now we call the proud blessed, For those who do wickedness are raised up;
They even tempt God and go free.’”
A Book of Remembrance
16 Then those who feared the Lord spoke to one another, And the Lord listened and heard them; So a book of remembrance was written before Him For those who fear the Lord And who meditate on His name.
17 “They shall be Mine,” says the Lord of hosts, “On the day that I make them My jewels. And I will spare them As a man spares his own son who serves him.”
18 Then you shall again discern Between the righteous and the wicked, Between one who serves God And one who does not serve Him.
Malachi 4
The Great Day of God
1 “For behold, the day is coming, Burning like an oven, And all the proud, yes, all who do wickedly will be stubble. And the day which is coming shall burn them up,” Says the Lord of hosts, “That will leave them neither root nor branch.
2 But to you who fear My name The Sun of Righteousness shall arise With healing in His wings; And you shall go out And grow fat like stall-fed calves.
3 You shall trample the wicked, For they shall be ashes under the soles of your feet On the day that I do this,” Says the Lord of hosts.
4 “Remember the Law of Moses, My servant, Which I commanded him in Horeb for all Israel, With the statutes and judgments.
5 Behold, I will send you Elijah the prophet Before the coming of the great and dreadful day of the Lord.
6 And he will turn The hearts of the fathers to the children, And the hearts of the children to their fathers, Lest I come and strike the earth with a curse.”
Psalm 21:9
You shall make them as a fiery oven in the time of Your anger; The LORD shall swallow them up in His wrath, And the fire shall devour them.
Psalm 89:46
How long, LORD? Will You hide Yourself forever? Will Your wrath burn like fire?
Isaiah 9:19
Through the wrath of the LORD of hosts The land is burned up, And the people shall be as fuel for the fire; No man shall spare his brother.
Ezekiel 21:31
I will pour out My indignation on you; I will blow against you with the fire of My wrath, And deliver you into the hands of brutal men who are skillful to destroy.
Ezekiel 22:21
Yes, I will gather you and blow on you with the fire of My wrath, and you shall be melted in its midst.
Ezekiel 22:31
Therefore I have poured out My indignation on them; I have consumed them with the fire of My wrath; and I have recompensed their deeds on their own heads,” says the Lord GOD.
Ezekiel 38:19
For in My jealousy and in the fire of My wrath I have spoken: ‘Surely in that day there shall be a great earthquake in the land of Israel,

1 John 5
1 Whoever believes that Jesus is the Christ is born of God, and everyone who loves Him who begot also loves him who is begotten of Him. 2 By this we know that we love the children of God, when we love God and keep His commandments. 3 For this is the love of God, that we keep His commandments. And His commandments are not burdensome. 4 For whatever is born of God overcomes the world. And this is the victory that has overcome the world—our faith. 5 Who is he who overcomes the world, but he who believes that Jesus is the Son of God?
The Certainty of God’s Witness
6 This is He who came by water and blood—Jesus Christ; not only by water, but by water and blood. And it is the Spirit who bears witness, because the Spirit is truth. 7 For there are three that bear witness in heaven: the Father, the Word, and the Holy Spirit; and these three are one. 8 And there are three that bear witness on earth: the Spirit, the water, and the blood; and these three agree as one.
9 If we receive the witness of men, the witness of God is greater; for this is the witness of God which He has testified of His Son. 10 He who believes in the Son of God has the witness in himself; he who does not believe God has made Him a liar, because he has not believed the testimony that God has given of His Son. 11 And this is the testimony: that God has given us eternal life, and this life is in His Son. 12 He who has the Son has life; he who does not have the Son of God does not have life. 13 These things I have written to you who believe in the name of the Son of God, that you may know that you have eternal life, and that you may continue to believe in the name of the Son of God.
Confidence and Compassion in Prayer
14 Now this is the confidence that we have in Him, that if we ask anything according to His will, He hears us. 15 And if we know that He hears us, whatever we ask, we know that we have the petitions that we have asked of Him.
16 If anyone sees his brother sinning a sin which does not lead to death, he will ask, and He will give him life for those who commit sin not leading to death. There is sin leading to death. I do not say that he should pray about that. 17 All unrighteousness is sin, and there is sin not leading to death.
Knowing the True—Rejecting the False
18 We know that whoever is born of God does not sin; but he who has been born of God keeps himself, and the wicked one does not touch him.
19 We know that we are of God, and the whole world lies under the sway of the wicked one.
20 And we know that the Son of God has come and has given us an understanding, that we may know Him who is true; and we are in Him who is true, in His Son Jesus Christ. This is the true God and eternal life.
21 Little children, keep yourselves from idols. Amen.

Add a comment

Email me when someone responds to this article.
Jesse Eisinger

About The Trade

In this column, co-published with New York Times' DealBook, I monitor the financial markets to hold companies, executives and government officials accountable for their actions. Tips? Praise? Contact me at .(JavaScript must be enabled to view this email address)