Warren Buffett has made his name, and his fortune, by profitably investing in troubled companies. In 2008, at the height of the financial crisis, he invested $5 billion in Goldman Sachs, a deal that reaped him $10 billion in dividends, interest, and fees just months later when the government bailed out Goldman. Now, in a déjà vu move, Buffett has pumped $5 billion into Bank of America — cutting a deal that's quite "favorable" to him — as the nation's largest bank struggles with lawsuits and repurchasing faulty mortgages. Is Buffett's big buy a "bad omen" for BofA and the U.S. economy?
This is a bad, bad sign: "This investment tells us that this economy is really in trouble," says Nicholas Santiago at InTheMoneyStocks.com. Just a few days ago, Bank of America insisted that it didn't have any capital problems, but now we know the truth: This is 2008 all over again. Buffett's investment proves that today's financial crisis isn't confined to Europe — "leading banks in the United States are in serious trouble as well." And it might not be just BofA. "If there is one cockroach there is usually a million."
"Three reasons why the BAC-Buffett deal is a bad omen"
A government bailout may be imminent: To many analysts, says William Alden at The Huffington Post, Buffett's investment underscores the idea that "the nation's biggest banks are still too big to fail, meaning they must be rescued by the government when they face potentially fatal trouble in order to prevent a broader collapse of the financial system." Buffett is counting on the likelihood that the government will again swoop in and rescue BofA. For him, it's a smart if cynical investment.
"Warren Buffett's Bank of America investment shows faith in government support, experts say"
C'mon. This isn't as bad as 2008: The terms here are favorable to Buffett, no doubt, but they're less favorable than they were with Goldman Sachs, says David Benoit at Dow Jones. The "banking world may be struggling," but it's still a lot better off than "it was during the financial crisis three years ago." Buffett may not even be betting on a government bailout. He might simply believe "the banking sector is a safer investment now" than it was in 2008.
"Buffett's BofA bet shows sector improvement from 2008"