Warren Buffett Bets on a Bailout: The Ticker

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By Jonathan Weil

One of the critical judgments Warren Buffett made before investing $5 billion in Goldman Sachs Group Inc. in September 2008 was that the government would do whatever was necessary to rescue the financial system. It would seem he hasn't wavered in that view, judging from today's news that Berkshire Hathaway Inc. agreed to invest $5 billion in Bank of America Corp. As was the case with the Goldman investment, Berkshire will receive preferred stock and warrants.

Shortly after the Goldman deal, Berkshire also invested $3 billion in General Electric Co. in exchange for preferred stock and warrants. Here's what Buffett said about those decisions, in a May 2010 interview with staff members from the Financial Crisis Inquiry Commission.

"The important thing was the American public would come to believe that our government would do whatever it took. And I felt it would. It would have been suicide not to," Buffett said. "It was a bet, essentially, on the fact that the government would not really shirk its responsibility at a time like that to leverage up when the rest of the world was trying to de-leverage and panicked."

A couple of other takeaways on today's news: Bank of America executives for months have been insisting the company doesn't need to raise capital. Oh well. Berkshire will receive $300 million a year in interest payments on its preferred shares -- a hybrid instrument that has characteristics of both equity and debt. Such is the cost for renting an oracle's reputation.

Additionally, the deal might pressure other large U.S. banks trading for steep discounts to book value to raise fresh capital quickly -- that is, if they can. Regions Financial Corp. was trading this afternoon for 38 percent of book, the same ratio as Bank of America. SunTrust Banks Inc. was trading at 51 percent of book. Citigroup Inc. was trading for 49 percent of book.

 (Jonathan Weil is a Bloomberg View columnist)

-0- Aug/25/2011 18:14 GMT