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Warren Buffett comes to the rescue, again.
On Thursday, Berkshire Hathaway, run by Mr. Buffett, announced plans to invest $5 billion in Bank of America, a vote of confidence for the beleaguered financial firm.
The conglomerate has agreed to buy 50,000 preferred shares that will pay a 6 percent annual dividend. Bank of America has the option to buy back the shares at any time for a 5 percent premium. According to CNBC, Mr. Buffett approached Bank of America early Wednesday about a potential deal.
Bank of America CEO Brian Moynihan has a new BFF. His name is Warren Buffett. Heard of him? Shares of the bewitched, bothered and bewildered bank were up 9% in early afternoon trading Thursday after Buffett's Berkshire Hathaway announced it was investing $5 billion in preferred shares of Bank of America. The news helped lift shares of other bruised financials as well. Shares of Citigroup and Morgan Stanley each rose more than 3%. But BofA's stock is still down more than 40% year-to-date. And the initial Buffett bump was much bigger and faded quickly. BofA was up as much as 26% shortly after the market opened Thursday.
So is the Berkshire investment -- an Omaha stake if you will -- in BofA really the bottom for the stock and the rest of the banking sector? Probably not. Buffett is not making a call on the near-term for BofA or other big banks. What's clear from this investment -- which is similar to ones Berkshire made in Goldman Sachs (GS, Fortune 500) and General Electric during the 2008 financial crisis -- is that he thinks the bank will eventually recover. And he's happy to get paid handsomely to wait while it happens. Berkshire is buying preferred stock that pays a 6% annual dividend. The common shares that average schlubs like you and I are more likely to own pays a paltry penny per quarter share dividend. That works out to a yield of 0.5%.
"BofA may be a good value here but that doesn't mean it's a great stock for average investors," said Keith Springer, president of Springer Financial Advisors in Sacramento, Calif. "Buffett knows that the government is not going to let BofA fail. So he's got a quasi-government insured CD with a 6% yield and upside potential," Springer added. Other money managers said they also wouldn't rush back into BofA just yet simply because of Berkshire's blessing. While BofA now has $5 billion it didn't have before, it still has legal risks tied to bad mortgage assets that not even Buffett can magically wipe away. "This move by Buffett does show a lot of confidence in BofA. He's drawing a line in the sand on the stock. But at the same time, I still feel uncomfortable with bank stocks," said Craig Hodges, president of Hodges Capital on Dallas.
"I just don't know what the banks have on their balance sheets." Hodges added. His firm sold shares of BofA earlier this year and Hodges said he's still wary of most major banks. Even fund managers who still own shares of BofA said that investors need to be cautious. The problems facing BofA may be surmountable, but that doesn't mean they will be solved quickly. BofA will likely be a slow-growth stock for a long time. "Buffett sees value for three to five years, not three to five weeks or months," said Dan Genter, CEO of RNC Genter Capital, a Los Angeles-based investment firm that does own BofA shares. "BofA is not back on a solid track for double-digit earnings increases."
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Deposits in FDIC-insured banks climbed $343 billion in the first half of the year to an all-time high of $9.8 trillion, according to Market Rates Insight, which tracks bank pricing. Despite meager interest rates "consumers are very fearful about the economy, and are fleeing to the safety and security of insured and liquid deposits," said Dan Geller, executive vice president at Market Rates Insight.
The research firm found that consumers pulled their money out of financial products like CDs and stashed it in checking, savings and money market accounts where their money would be more readily accessible. Funds stored in CDs, which holders don't have access to until a specific date, fell $94 billion to $1.9 trillion in the six months ended June. Meanwhile, balances of liquid accounts, like money markets and savings accounts, jumped by $446 billion to $6.3 trillion.
More businesses have also been shifting to retail consumer deposit accounts, with consumer balances making up 90.1% of total deposits as of June, Market Insights reported. While retail consumer deposits rose by $382 billion in the first half of the year, business deposit balances slipped $29 billion.
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