Wizards And Lizards

The Wizard of Omaha, Warren Buffett, felt the need to personally save Bank of America by fronting the hemorrhaging bank $5 billion in cash...and the stock recovered more than half of its losses since the S and P downgrade, turning the Wiz a tidy profit.

Warren Buffett may have earned $1.3 billion in one day on his $5 billion investment in Bank of America Corp. (BAC)

The preferred shares Buffett’s Berkshire Hathaway Inc. (BRK/A) bought are worth about $3.53 billion, Phil Jacoby, chief investment officer at Spectrum Asset Management Inc. in Stamford, Connecticut, estimated. Warrants included in the deal are worth about $2.73 billion, based on Bank of America’s share price of $7.65 as of 4:15 p.m. in New York trading, said Clay Struve, a partner with Chicago-based CSS LLC.

The 25 percent first-day return -- more than 9,000 percent on an annualized basis -- shows the premium Bank of America Chief Executive Officer Brian T. Moynihan was willing to pay to attract Buffett as an investor. As Berkshire’s CEO, Buffett has garnered a reputation as one of the world’s best investors, with shareholder returns over the past decade that are more than double those of the Standard & Poor’s 500 Index.

“I’m sure Warren cut a pretty good deal,” said Linus Wilson, assistant professor of finance at the University of Louisiana at Lafayette. “For Bank of America, you get the endorsement of Warren Buffett, and it’s going to make it a lot easier if Bank of America wants to raise more capital from other investors.”

The bigger question of course is "Why did BofA need $5 billion in liquid cash badly enough to approach Warren Buffett?" Even bigger, does this mean that the Fed discount window is now permanently closed to the Too Big To Fail banks?  If the Fed's closed, and we're to the point where Warren Buffett has to step in, then something is fundamentally broken.

The exposure of US banks to European debt counterparties means that leverage and liquidity are the keys to the kingdom.  Small losses in Euro banks means big losses in the people that are leveraging the debts of these banks, and BofA is leveraged to the hilt again, expecting the Feed to bail them out again.

Only this time the Fed said "no".

Warren Buffett stepped in out of enlightened self-interest.  How long this capital will keep BofA afloat, I have no idea.  With Greek bonds crashing and taking German banks with them, and by proxy BofA, the dominoes are being held up by force of will alone at this point.

It's all going to come down very soon folks.  Very, very soon.  And when it does, look out.