Bank of America and Buffett

David Weidner’s commentary on Berkshire Hathaway’s investment into BOA is misleading. This is a great investment by Berkshire since they are getting a 6% annual return and receive options which are already in-the-money. Furthermore, Berkshire protected their investment by getting preferred stock.

The only thing surprising about this rush to slaughter is that Buffett has played this game before. His investments in bailout babies General Electric Co. and Goldman Sachs Group Inc. have played out terribly for mini-Buffetts who love to follow the oracle.

This is misleading, since the people who bought into GE and Goldman Sachs bought common shares. Obviously, the common shares did not do as well, since the companies were forced to cut dividends to their common shareholders.

The upside for the shareholders is that GE and Goldman Sachs still exist today. Berkshire isn’t an ordinary investor. In each of these deals, Berkshire stepped in to provide “last resort” financing to stabilize the enterprises. Other firms have paid back Berkshire’s loans, so it is entirely possible that this bank will do the same.

It would be folly to follow Berkshire into Bank of America since you are not getting the same deal terms as Berkshire. On this point, David Weidner is right. If you want to be a “mini-Buffett”, it’s better to buy Berkshire than to follow Berkshire.

(Disclosure: I own Berkshire B shares.)