Buffett Rescues Bank of America

In a stunning development, Warren Buffett invested $5 billion of Berkshire Hathaway money, a publicly held company he controls to rescue America's biggest bank, Bank of America, previously rescued by the U.S. government as "too big to fail." Despite all the help it received, B of A needed another massive government bailout without which its troubles could have led to a replay of the 2008 global financial system meltdown for giant banks are dependent on one another. That's how serious this development is. Although it will disappear from the news, be aware of how fast our fragile financial system could collapse.

For the B of A, it isn't just Berkshire's money that matters but Mr. Buffett's outstanding reputation, which will now attract or retain investors, investors who no longer had confidence in B of A's top management and were aggressively selling its stock for various reasons but most notably for the B of A's mounting black hole of real estate exposure. But B of A will pay a heavy price for Berkshire's funds and for Mr. Buffett's reputation. In return, Berkshire is to receive a special dividend stream and the option of buying more shares at prices near the bank's two-year low, which would make Berkshire the bank's biggest shareholder. In 2008, using Berkshire funds, Mr. Buffett rescued General Electric and he rescued Goldman Sachs. Like B of A, Goldman had been deemed "too big to fail" by the U.S. government, which also bailed them out.

With bravado, B of A's Chairman and their CEO both claimed they didn't need the money but their Board of Directors immediately accepted it. While Mr. Buffett would not invest in anything he didn't believe in, I believe we will later find that he received strong secret encouragement from the U.S. Fed and the U.S. Treasury Department to make this investment, as they feared making a 2nd taxpayer bailout.

If you are a taxpayer, shareholder, bondholder, vendor or have money deposited in the B of A, Berkshire's investment is very good news. But if you are an employee, we'll see if this is good news for the bank is already laying off 3,500 people and preparing to lay off 10,000 more. If you are not one of those 13,500 people, that money may save your job, but likely, more layoffs are coming.

Dick
For more information, please see "Buffett to Invest $5 Billion in shaky Bank of America" http://www.nytimes.com/2011/08/26/business/buffett-to-invest-5-billion-in-shaky-bank-of-america.html?_r=1&nl=todaysheadlines&emc=tha2