Remember when Warren Buffett anecdotally "took a bath" when he decided to effectively rescue Bank of America with a $5 bilion equity injection in 2011? He may be due for another bath any minute.
Warren Buffett, already the largest shareholder in recently disgraced Wells Fargo, could soon become the largest shareholder in another US megabank after Bank of America said it would raise its dividend by 60%, from 30 cents to 48 cents, moments after the Federal Reserve gave it and 32 other SIFI-designated US lenders the greenlight to pursue plans to return capital to shareholders (though it did ask Capital One to resubmit its plan). BAC also announced a buyback plan worth $12 billion.
Buffett said in February’s letter to shareholders that an increase in BAC’s dividend above 44 cents would likely prompt him to swap Berkshire's preferred shares in the second-largest bank into common shares now worth about $16.7 billion, according to Reuters. Doing so would make Buffett the largest shareholder in the US’s second and third largest banks – and more than triple a $5 billion investment made fewer than six years ago.
It would also signal Buffett's confidence in Brian Moynihan, Bank of America's chief executive, who has worked to restore investors' confidence in his Charlotte, North Carolina-based bank after it spent more than $70 billion since the global financial crisis to resolve legal and regulatory matters, largely from its purchases of Countrywide Financial Corp and Merrill Lynch & Co.
"Buffett has said he is very happy with what Moynihan's doing, and it's easy work for him to get more dividends," said Bill Smead, whose $1.16 billion Smead Value fund includes shares in BAC and Wells. "For Bank of America, it would mean a further endorsement by the most spectacular large-cap stock picker of all time."
Buffett, the world’s fourth-richest man with a net worth of $76.1 billion, according to Forbes, bought $5 billion of Bank of America preferred stock with a 6 percent dividend, or $300 million annually, during a fire sale in August 2011 as the bank worried about its capital needs. The purchase included warrants to acquire 700 million common shares at $7.14 each, less than one-third Wednesday's closing price of $23.88.
As Dow Jones Newswires points out, the preferred shares have little downside, so long as Bank of America stays solvent. But they have no upside either. With a change in Berkshire's shares, Mr. Buffett effectively would be saying that he would like to take part in possible gains on Bank of America's stock as well as enjoy a steady dividend. After the exchange, Buffett's firm, Berkshire Hathaway, would own about 7% of BAC's common shares, giving it a significant role in corporate governance issues from compensation to the election of new directors. Bank of America's largest shareholder is Vanguard Group, whose 652.4 million shares give it a 6.6 percent stake, according to Reuters data.
Buffett – America’s de facto private sector “lender of last resort” during the financial crisis – made more than $25 billion of high-yielding investments between 2008 and 2011, in financially troubled lenders like General Electric Co. and Goldman Sachs Group, none of which would have paid out had the Fed not stepped in with a multi-trillion taxpayer funded rescue of the US financial sector.
Buffett’s hard-fought reputation as a benevolent, homespun billionaire would seem to be at odds with the behavior of some of the banks that he effectively controls. Wells Fargo retail bank opened millions of fraudulent customer accounts to try and meet unrealistic sales goals and during a hard fought proxy battle Buffett remained on the side of existing management to the surprise of many. Bank of America has been repeatedly fined and criticized for its treatment of some borrowers in its loan servicing business – believing it easier to kick them out of their homes than to work with customers and adjust the terms of their mortgages.
Still, Buffett is beloved for his folsky ways and his enlightened, liberal outlook, which allows him a softball interview on PBS or any other American media show any time he wants it. It goes without saying that contrary to some contrived views Buffett is far from a socialist, and remains a ruthless capitalist. Maybe he should not so easily be given a pass.