Morning Update (Aug 25, 2011): Bank of America is Hungry for Capital. Heads for Buffet
“Never believe in anything until it has been officially denied” – unknown.
After days of denying speculation that Bank of America needs more capital, Bank of America did the expected – it raised capital. No ala carte. They went straight to Buffet and gave him a sweet deal. Uncle Buffet knows that sooner or later BAC will be bailed out by the US Government with no strings attached. Why not step ahead of the gravy train? After all, that’s what he did with Goldman Sachs back in Oct 2008. Look at what BAC gave away to Buffet. A 6% accruable interest for the next several years and warrants at $7.x share. Today BAC stock traded as high as 25% and now back under %8 (up only 11%).
If anything, this deal signifies serious underlying problems in the banking sector. The relief rally in the stocks following the deal is akin to throwing a party after knowing the person who is “supposedly” healthy has just received cancer medication.
Like in 2008, Buffet’s deal exposed the weakness in banking sector and how desperate they are for capital. In the mean time, stocks resumed their steep slide in Europe.
Fasten your seatbelts. This is going to be a one heck of a bumpy ride in the next 3-4 weeks.
If I had any doubts about my analysis of the deal, they are gone after reading this quote from the clown, Jim Cramer. “this is a turning point, Buffett’s bailout marks the beginning of a massive multiday short-covering rally in the financials”
In case you don’t know who Cramer is and what his record is… check these out.