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Three Reasons Why The BAC-Buffet Deal Is A Bad Omen

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August 25, 2011 – Comments (2) | RELATED TICKERS: BAC , KBE , KBW

This morning, the stock market is in jubilee mode over the multi-billion dollar investment in Bank of America Corp.(NYSE:BAC) by Berkshire Hathaway's Warren Buffett. Once again, the man that has profited the most from government bailout's is coming to the rescue of another failing financial institution. This investment tells us that this economy is really in trouble and more government bailouts may be needed again.

Here are a few key reasons that tell us that this deal is forecasting problems ahead.

1. It was just a few day's ago that Bank of America stated that they did not need any capital, now we know that was not true. The second largest bank in the United States needed capital and they needed it bad. We can only wonder how long this deal will help to lift the market. Just look at 2008, this could be a repeat of things to come.

2. The Warren Buffett investment in BAC stock also tells us that the European banks are not the only banks in serious trouble. The leading banks in the United States are in serious trouble as well. If there is one cockroach there is usually a million.

3. Warren Buffett has made a career of investing in troubled companies for the sake of the economy. The last time he made an investment such as this one was back in 2008 with Goldman Sachs Group Inc.(NYSE:GS). It is important to remember that Goldman Sachs was bailed out by the tax payer in what was called the TARP program. Buffett knows that the U.S. taxpayer will bail him out if he is wrong and Bank of America stock does go belly up.

Nicholas Santiago
InTheMoneyStocks.com

2 Comments – Post Your Own

#1) On August 25, 2011 at 10:59 AM, davejh23 (< 20) wrote:

I agree.  This morning would have been a perfect time to buy BAC puts.  The stock is already significantly off this morning's highs.  You wonder if they really needed the money or if this is just a show to try to boost confidence.  To me, it looks like an act of desperation...I'm still staying away.  When Bernanke doesn't come through, BAC is going back to where it was a couple days ago. 

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#2) On August 25, 2011 at 11:57 AM, buffalonate (94.22) wrote:

This doesn't prove they needed money at all.  Their shares were crashing due to rumors and Buffett brings credibility to the company.  I think they were willing to let Buffett buy shares and pay him a big dividend because that will put to bed all of the rampant rumors.  If they were desperate for money they would have sold all of their China Construction holdings but they only sold half. 

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