‘Too big to fail’ is alive and well
Warren Buffet is a savvy investor. The CEO of Berkshire Hathaway put $5 billion into Bank of America, which owns Countrywide and a large portfolio of troubled mortgaged-backed assets. The Obama administration wants us to believe this is a sign that the ailing U.S. financial sector is on the path to recovery. It’s not.
Mr. Buffett’s 50,000 preferred shares in the country’s largest bank will pay an amazing 6 percent annual dividend.
It’s a great deal for the billionaire investor, but not for everyone else.
Mr. Buffett will receive his money before any common stockholders get paid. With the rest of the market seeing interest rates that are effectively at zero percent, it’s worth asking why Bank of America was willing to pay Mr. Buffet such a handsome premium.
If it’s because no one else was willing to provide funds, that’s a sign the bank is in serous trouble, not that it’s turning the corner.
Mr. Buffett’s investment will yield at least $300 million in cash every year. In addition, the “Oracle of Omaha” secured the right to buy an additional 700 million shares over the next 10 years, which, if exercised immediately, could have yielded Mr. Buffett and his company another $1 billion in profit. Great returns for Berkshire Hathaway are bad news for Bank of America — and for American taxpayers.
Bank of America, like Citigroup, is considered “systemically important” as well as “too big to fail.” In deciding to wager his money on a financial giant that holds billions in toxic assets, it’s likely Mr. Buffett calculated the likelihood that taxpayers would kick in bailout funds, if needed. Similar thoughts were likely behind his investment of $5 billion in Goldman Sachs and $3 billion in General Electric in 2008.
The past three years of dumping billions in federal dollars into the banking sector has done little to address the industry’s most fundamental problems. There are still too many toxic assets on the books.
In fact, the new Dodd-Frank Wall Street regulations will make it harder for banks to clean up their act. Banks remain overleveraged, and the government continues to intervene in all the wrong ways.
That’s because the idea that some firms are “too big to fail” has not gone away, and neither has the implicit promise of bailouts.
Government bailouts mean hapless taxpayers get soaked, while the truly rich, like Mr. Buffett, reap the benefits. Bank of America still plans to shed some 10,000 jobs. UBS has announced 3,500 layoffs. Other big financial players such as Barclays, Goldman Sachs, HSBC, Lloyds and Wells Fargo are likely to do the same, despite an increase in this quarter’s profits. The bailout policies aren’t creating any new jobs. That’s because having taxpayers subsidize risk isn’t going to heal the banking sector. The true cure would be a return to the discipline of the market, where those who earn the rewards also bear the risk.