Late yesterday afternoon Warren Buffett’s trading conglomerate Berkshire Hathaway dissolved all of its Bank of America shares. Berkshire’s pull-out accounted for 5 million shares — not an enormous amount, but a 100 percent dump nonetheless sends a strong signal to the market.
Berkshire is up $4B this quarter over last — their formula is working. Along with Bank of America, Berkshire dumped shares in Comcast, Nike, Lowe’s, and a few other holdings.
In an interview released last week, the Financial Crisis Inquiry Commission quoted Buffett as criticizing Bank of America for paying a “crazy price” to acquire Merril Lynch in the midst of a financial crisis.
Until an audit subjects the Federal Reserve to transparent decisionmaking, private investments point a clearer path to what paths the public expects will be profitable in the years to come. The Fed may shift interest, but Berkshire Hathaway deals in real dollars.
Cross your fingers for Chevy’s Volt, kids, because BofA is one national investment looking dismal this week.
This is just one more way taxpayers will bear the burden of keeping banks afloat. When Congress first approved TARP last year, Treasury was slated to buy mortgage-backed securities from the banks.
The government ultimately deemed it impossible to assess securities’ values. Instead Treasury used TARP to inject free cash flow into banks by purchasing convertible bank shares — effectively bank stock options.
As banks’ losses mount and real estate prices continue to drop the banks have been unable to push these deadweight securities from their balance sheets. Banks have accepted government cash but have not been able to match that influx with equity.
Banks that do not react to investors’ cues do not adequately protect themselves from further government ownership. Last spring the three big American banks converted government-owned stock from preferred to common. Ostensibly this move protected public resources (tax dollars gov’t used to snatch up bank shares in the first place) by paying less per share but continued to “bail out” the banks stuck absorbing our securities failure.
Government holding isn’t about ownership; it’s about control. When government dollars go to preferred stock, banks monitor what Big G owns and how many dollars are going to and from this significant stockholder. When Big G pulls out of preferred and keeps instead to common, the banks are less attentive to exactly how much the gov’t owns.
The more government hands get involved, all of its influence falls victim to mission creep. When gov’t dollars go to common stock instead of preferred, it’s not like the gov’t pulled out some of its cash to match the lower equity it was purchasing. Instead, the same number of G dollars are still flowing to the banks, but holding many more shares.
The Federal Reserve was invented to counterbalance market shifts and dips. That’s the only enterprise big enough to control for inflation.
When taxpayers have to absorb yet another private investor’s signal that BofA is flailing, that’s not inflation, that’s government failure.