Economists can be an interesting group of people. Although they don’t like to be wrong, occasionally they will fess up when they’ve been way off the mark in the past. To an extent, that’s what happened at this year’s Capital Economics Annual Conference in Chicago. The conference kicked off with an admission from Capital Economics Managing Director Roger Bootle that they had been wrong in their forecast last year. Although they had said world economies would continue to be bad, reality was that economies were even worse than they had expected. (more…)
Two weeks ago we wrote about how Warren Buffett asked the government to “Stop Coddling the Rich,” in an op ed piece in the New York Times. While his piece angered some conservatives, the important point he made was that wealthy investors, like himsef, look for profitable investments and do not greatly alter their strategy due to tax policy. So those arguing against any increase in taxes for the top tier of earners or changes in the carried interest rules due to its impact on investment and job growth are making a false argument.
Recently he made news by investing in— or bailing out depending on your point of view — Bank of America. BofA stock had dropped significantly, to a low of $6.01, due to worries it still had a large exposure to mortgage backed securities and it lacked appropriate capital to back these positions.
Buffett’s firm Berkshire Hathaway, similar to deals he made with Goldman Sachs and GE in the heart of the credit crisis, pumped $5 billion into the struggling bank. Canaccord Genuity provided some details and based on what we have seen, we aren’t any more confident in BofA but we understand how Buffett got so rich.
If the details of the deal are correct it seems to underscore how desperate BofA is and also how Buffett has become so successful.
According to Canaccord Genuity, Buffett will receive a 6% annual dividend for the preferred stock, which BofA can buy back at any time by paying Buffett a 5% premium. Berkshire Hathaway will also receive warrants to purchase 700 million shares of BofA common stock at an exercise price of about $7.14 a share at any point over the 10 years following the closing date of the transaction.
That means if some time in the next 10 years BofA stock rises to say $27.50 per share, roughly half of its pre-crisis high of $55.08, Berkshire Hathaway and Buffet would profit roughly $14 billion. Heck the stock was above $15, more than double the exercise price, at the beginning of 2011.
The deal helped BofA stock rise 40% from its more than two-year low. Despite this BofA appears not to be in the clear as they continue sell off assets and others are seeing the details of Buffett’s investment and drawing similar conclusions.
A large majority of companies holding U.S. Treasuries had “no intention of changing their holdings as a result of the S&P move [to downgrade U.S. credit rating to AA+],” according to a survey of members by the Association for Financial Professionals (AFP) AFP Survey-Reaction to U.S. Credit Rating Downgrade[1]. The bigger impact, according to a quarter of respondents who are made up of senior level treasury and financial professionals, is the United States being viewed as a less desirable investment destination due to the downgrade. (more…)
The Federal Reserve’s Federal Open Markets Committee (FOMC) shook up the markets with its statement on Tuesday that it would likely keep rates exceptionally low through mid-2013. This prompted three dissenting votes, which may have had more to do with the volatile reaction than the actual announcement. However, the announcement is pretty remarkable.
The Fed is telling us that it will maintain a zero interest rate policy—the same emergency policy that has been with us since December 2008 — for nearly two more years. (more…)
The other day we pointed out how a market was developing for credit default swaps on U.S. government debt. The Bloomberg story which we referred to indicated that the market was pricing in a higher likelihood of a default and how volume had grown in the contract as more institutions looked to hedge their exposure to such an event.
While interesting, what perplexed us given the scope of government and Federal Reserve activity over recent years, is how the mechanics of such a transaction would play out. While minor fluctuations in this CDS could be hedged and traded, if a real default becomes likely it is doubtful the markets would be allowed to decide.
Bloomberg reported on Monday that trading in credit default swaps on U.S. Government debt had increased 57% in 2011 according to Depository Trust & Clearing Corp. (DTCC) data. According to the story the market priced in a 4.56% chance of a default by September 2016. The cost to hedge that risk climbed 17 basis points since the beginning of April to 53 bps. (more…)
Today is the one-year anniversary of the Dodd–Frank Wall Street Reform and Consumer Protection Act. Funny as it only seemed like yesterday that we were trying to understand the various components of the massive legislation as Congress debated it.
There hasn’t been a piece of legislation so debated, maligned and blamed for negative consequences prior to most of the underlying elements of it going into affect since, well since the Obama Heath Care reform, the 2010 Patient Protection and Affordable Care Act, or PPACA.
