Munger

This analysis is excellent -- consistent with assertions (but obviously much more expansive) I made in debate with some on this board over 1 year ago. For those of you who get turned off by his reference to a "long wave cycle," ignore the terminology and understand the dynamics. One can argue about whether the economy operates as precisely as he suggests (although Dalio admits he has simplified the analysis) but the dynamics he explains are very real. Investors who fail to understand the analysis are "like a one-legged man in an ass-kicking contest" (to borrow a favorite from the real Munger). Based Berkowitz public comments, I'm inclined to believe he is/was ignorant of the realities presented in this analysis. He'll never make as much money as he originally anticipated in BAC, with returns relative to alternative common stock opportunities not so good. Although at $6, maybe BAC is a great investment -- I personally don't know either way but I'm still cautious about investing in banks that are still heavily levered, even if "only" 10:1. And the only way Berkowitz will make meaningful money in his BAC investment is if the Fed induces significant inflation through money printing but even then the returns in real terms will be paltry relative to the alternatives. Buffett, on the other hand, stands to do quite well under almost any scenario except complete armageddon. On a positive note -- good to see preseason hockey games have begun. Will be tougher for the Canucks to get out of the West this year -- biggest team specific question mark is how much of a role Schneider will be asked to play? Will be interesting to see if the Kings take a big step forward this year -- lots of talent.

Good insights from Maudlin this week -- long but for those interested in Europe, worth a read...no easy choices ahead for Europe. Not that easy for Greece or Germany or any other country to just leave the Euro. Buckle up. “I am sure the Euro will oblige us to introduce a new set of economic policy instruments. It is politically impossible to propose that now. But some day there will be a crisis and new instruments will be created.” - Romano Prodi, EU Commission President, December 2001 Prodi and the other leaders who forged the euro knew what they were doing. They knew a crisis would develop, as Milton Friedman and many others had predicted. They accepted that as the price of European unity. But now the payment is coming due, and it is far larger than they probably thought. This week we turn our eyes first to Europe and then the US, and ask about the possibility of a yet another credit crisis along the lines of late 2008. I then outline a few steps you might want to consider now rather than waiting until the middle of a crisis. It is possible we can avoid one but, as I admit, whether we do (and the extent of such a crisis) depends on the political leaders of the developed world (the US, Europe, and Japan) making the difficult choices and doing what is necessary. And in either case, there are some areas of investing you clearly want to avoid. Finally, I turn to that watering-hole favorite, the weather, and offer you a window into the coming seasons. Can we catch a break here? There is a lot to cover, so we will jump right in. The Consequences of Austerity The markets are pricing in an almost 100% certainty of a Greek default (OK, actually 91%), and the rumors in trading circles of a default this weekend by Greece are rampant. Bloomberg (and everyone else) reported that Germany is making contingency plans for the default. Of course, Greece has issued three denials today that I can count. I am reminded of that splendid quote from the British ’80s sitcom, Yes, Prime Minister: “Never believe anything until it’s been officially denied.” Germany is assuming a 50% loss for their banks and insurance companies. Sean Egan (head of very reliable bond-analyst firm Egan-Jones) thinks the ultimate haircut will be closer to 90%. And that is just for Greece. More on the contagion factor below. “The existence of a ‘Plan B’ underscores German concerns that Greece’s failure to stick to budget-cutting targets threatens European efforts to tame the debt crisis rattling the euro. German lawmakers stepped up their criticism of Greece this week, threatening to withhold aid unless it meets the terms of its austerity package, after an international mission to Athens suspended its report on the country’s progress. “ ‘Greece is “on a knife’s edge,”’ German Finance Minister Wolfgang Schaeuble told lawmakers at a closed-door meeting in Berlin on Sept. 7, a report in parliament’s bulletin showed yesterday. If the government can’t meet the aid terms, ‘it’s up to Greece to figure out how to get financing without the euro zone’s help,’ he later said in a speech to parliament. “Schaeuble travelled to a meeting of central bankers and finance ministers from the Group of Seven nations in Marseille, France, today as they face calls to boost growth amid increasing threats from Europe’s debt crisis and a slowing global recovery.” (Bloomberg: see http://www.bloomberg.com/news/2011-09-09/germany-said-to-prepare-plan-to-aid-country-s-banks-should-greece-default.html) (There is an over/under betting pool in Europe on whether Schaeuble remains as Finance Minister much longer after this weekend’s G-7 meeting, given his clear disagreement with Merkel. I think I take the under. Merkel is tough. Or maybe he decides to play nice. His press doesn’t make him sound like that type, though. They are playing high-level hardball in Germany.) Anyone reading my letter for the last three years cannot be surprised that Greece will default. It is elementary school arithmetic. The Greek debt-to-GDP is currently at 140%. It will be close to 180% by year’s end (assuming someone gives them the money). The deficit is north of 15%. They simply cannot afford to make the interest payments. True market (not Eurozone-subsidized) interest rates on Greek short-term debt are close to 100%, as I read the press. Their long-term debt simply cannot be refinanced without Eurozone bailouts. Was anyone surprised that the Greeks announced a state fiscal deficit of €15.5 billion for the first six months of 2011, vs. €12.5 billion during the same period last year? What else would you expect from increased austerity? If you reduce GDP by as much as Greece attempted to do, OF COURSE you get less GDP and thus lower tax revenues. You can’t do it at 5% a year, as I have pointed out time and time again. These are the consequences of allowing debt to get too high. It is the Endgame. [Quick sidebar: If (when) the US goes into recession, have you thought about what the result will be? A recession of course means lower GDP, which will mean higher unemployment. That will increase costs due to increased unemployment and other government aid, and of course lower revenues as tax receipts (revenues) go down. Given the projections and path we are currently on, that means even higher deficits than we have now. If Obama has his plan enacted, and if we go into a recession, we will see record-level deficits. Certainly over $1.5 trillion, and depending on the level of the recession, we could scare $2 trillion. Think the Tea Party will like that? Governments have less control than they think over these things. Ask Greece or any other country in a debt crisis how well they predicted their budgets.] The Greeks were off by over 25%. And they are being asked to further cut their deficit by 4% or so every year for the next 3-4 years. That guarantees a full-blown depression. And it also means lower revenues and higher deficits, even at the reduced budget levels, which means they get further away from their goal, no matter how fast they run. They are now in a debt death spiral. There is no way out, short of Europe simply bailing them out for nothing, which is not likely. Europe is going to deal with this Greek crisis. The problem is that this is the beginning of a string of crises and not the end. They do not appear, at least in public, to want to deal with the systemic problem of too much debt in all the peripheral countries. Without ECB support, the interest rates that Italy and Spain would be paying would not be sustainable. I can see a path for Italy (not a pretty one, but a path nonetheless) but Spain is more difficult, given the weakness of its banks and massive private debt. These are economies that matter. How do they get out of this without a debt crisis on the scale of 2008? By coming to grips with the problem. Germany is apparently doing that this weekend, by preparing to use the money it was going to pour into Greece to shore up its own banks. That is a much better plan. But as a well-researched report (by Stephane Deo, Paul Donovan, and Larry Hathaway in the London office – kudos, guys!) from UBS shows, solving the problem will be very costly. The next few paragraphs are from their introduction. Euro Break-Up – The Consequences “The Euro should not exist (like this) “Under the current structure and with the current membership, the Euro does not work. Either the current structure will have to change, or the current membership will have to change. “Fiscal confederation, not break-up “Our base case with an overwhelming probability is that the Euro moves slowly (and painfully) towards some kind of fiscal integration. The risk case, of break-up, is considerably more costly and close to zero probability. Countries cannot be expelled, but sovereign states could choose to secede. However, popular discussion of the break-up option considerably underestimates the consequences of such a move. “The economic cost (part 1) “The cost of a weak country leaving the Euro is significant. Consequences include sovereign default, corporate default, collapse of the banking system and collapse of international trade. There is little prospect of devaluation offering much assistance. We estimate that a weak Euro country leaving the Euro would incur a cost of around €9,500 to €11,500 per person in the exiting country during the first year. That cost would then probably amount to €3,000 to €4,000 per person per year over subsequent years. That equates to a range of 40% to 50% of GDP in the first year. “The economic cost (part 2) “Were a stronger country such as Germany to leave the Euro, the consequences would include corporate default, recapitalization of the banking system and collapse of international trade. If Germany were to leave, we believe the cost to be around €6,000 to €8,000 for every German adult and child in the first year, and a range of €3,500 to €4,500 per person per year thereafter. That is the equivalent of 20% to 25% of GDP in the first year. In comparison, the cost of bailing out Greece, Ireland and Portugal entirely in the wake of the default of those countries would be a little over €1,000 per person, in a single hit. “The political cost “The economic cost is, in many ways, the least of the concerns investors should have about a break-up. Fragmentation of the Euro would incur political costs. Europe’s ‘soft power’ influence internationally would cease (as the concept of ‘Europe’ as an integrated polity becomes meaningless). It is also worth observing that almost no modern fiat currency monetary unions have broken up without some form of authoritarian or military government, or civil war.” Welcome to the Hotel California Welcome to the Hotel California Such a lovely place Such a lovely face They livin’ it up at the Hotel California What a nice surprise, bring your alibis Last thing I remember, I was running for the door I had to find the passage back to the place I was before “Relax,” said the night man, “We are programmed to receive. You can check out any time you like, but you can never leave!” - The Eagles, 1977 You can disagree with the UBS analysis in various particulars, but what it shows is that there is no free lunch. It is not a matter of pain or no pain, but of how much pain and how is it shared. And to make it more difficult, breaking up may cost more than to stay and suffer, for both weak and strong countries. There are no easy choices, no simple answers. Like the Hotel California, you can check in but you can’t leave! There are simply no provisions for doing so, or even for expelling a member. The costs of leaving for Greece would be horrendous. But then so are the costs of staying. Choose wisely. Quoting again from the UBS report: “… the only way for a country to leave the EMU in a legal manner is to negotiate an amendment of the treaty that creates an opt-out clause. Having negotiated the right to exit, the Member State could then, and only then, exercise its newly granted right. While this superficially seems a viable exit process, there are in fact some major obstacles. “Negotiating an exit is likely to take an extended period of time. Bear in mind the exiting country is not negotiating with the Euro area, but with the entire European Union. All of the legislation and treaties governing the Euro are European Union treaties (and, indeed, form the constitution of the European Union). Several of the 27 countries that make up the European Union require referenda to be held on treaty changes, and several others may choose to hold a referendum. While enduring the protracted process of negotiation, which may be vetoed by any single government or electorate, the potential secessionist will experience most or all of the problems we highlight in the next section (bank runs, sovereign default, corporate default, and what may be euphemistically termed ‘civil unrest’).” Leaving abruptly would result in a lengthy bank holiday and massive lawsuits and require the willingness to simply thumb your nose in the face of any European court, as contracts of all sorts would have to be voided. The Greek government would have to “conveniently” pass a law that would require all Greek businesses to pay back euro contracts in the “new drachma,” giving cover to their businesses, who simply could not find the euros to repay. But then, what about business going forward? Medical supplies? Food? – the basics? You have to find hard currencies for what you don’t produce in the country. Greece is not energy self-sufficient, importing more than 70% of its energy needs. They have a massive trade deficit, which would almost disappear, as who outside of Greece would want the “new drachma?” Banking? Parts for boats and business equipment? The list goes on and on. Commerce would slump dramatically, transportation would suffer, and unemployment would skyrocket. If Germany were to leave, its export-driven economy would be hit very hard. It is likely that the “new mark” would appreciate in value, much like the Swiss Franc, making exports from Germany even more costly. Not to mention potential trade barriers and the serious (and probably lengthy) recession that many of their export and remaining Eurozone trade partners would be thrown into. And German banks, which have loaned money in euros, would have depreciating assets and would need massive government support. (Just as they do now!) Can a crisis be avoided? Yes. But that does not mean there will be no pain. We can avoid a debt debacle in the US, but doing so will mean reducing debt every year for 5-6 years in the teeth of a slow-growth economy and high unemployment. It will require enormous political will and mean many people will be unemployed longer and companies will be lost. Ray Dalio and his brilliant economics team at Bridgewater have done a series of reports on a plan for Europe. Basically, it involves deciding which institutions must be saved (and at what cost) and letting the rest simply go their own way. If they are bankrupt, then so be it. Use the capital of Europe to save the important institutions (not shareholders or bondholders). Will they do it? Maybe. The extraordinarily insightful and brilliant John Hussman recently wrote on a similar theme. He is a must-read for me. Quoting: “The global economy is at a crossroad that demands a decision – whom will our leaders defend? One choice is to defend bondholders – existing owners of mismanaged banks, unserviceable peripheral European debt, and lenders who misallocated capital by reaching for yield and fees by making mortgage loans to anyone with a pulse. Defending bondholders will require forced austerity in government spending of already depressed economies, continued monetary distortions, and the use of public funds to recapitalize poor stewards of capital. It will do nothing for job creation, foreclosure reduction, or economic recovery. “The alternative is to defend the public by focusing on the reduction of unserviceable debt burdens by restructuring mortgages and peripheral sovereign debt, recognizing that most financial institutions have more than enough shareholder capital and debt to their own bondholders to absorb losses without hurting customers or counterparties – but also recognizing that properly restructuring debt will wipe out many existing holders of mismanaged financials and will require a transfer of ownership and recapitalization by better stewards. That alternative also requires fiscal policy that couples the willingness to accept larger deficits in the near term with significant changes in the trajectory of long-term spending. “In game theory, there is a concept known as ‘Nash equilibrium’ (following the work of John Nash). The key feature is that the strategy of each player is optimal, given the strategy chosen by the other players. For example, ‘I drive on the right / you drive on the right’ is a Nash equilibrium, and so is ‘I drive on the left / you drive on the left.’ Other choices are fatal. “Presently, the global economy is in a low-level Nash equilibrium where consumers are reluctant to spend because corporations are reluctant to hire; while corporations are reluctant to hire because consumers are reluctant to spend. Unfortunately, simply offering consumers some tax relief, or trying to create hiring incentives in a vacuum, will not change this equilibrium because it does not address the underlying problem. Consumers are reluctant to spend because they continue to be overburdened by debt, with a significant proportion of mortgages underwater, fiscal policy that leans toward austerity, and monetary policy that distorts financial markets in a way that encourages further misallocation of capital while at the same time starving savers of any interest earnings at all. “We cannot simply shift to a high-level equilibrium (consumers spend because employers hire, employers hire because consumers spend) until the balance sheet problem is addressed. This requires debt restructuring and mortgage restructuring. While there are certainly strategies (such as property appreciation rights) that can coordinate restructuring without public subsidies, large-scale restructuring will not be painless, and may result in market turbulence and self-serving cries from the financial sector about ‘global financial meltdown.’ But keep in mind that the global equity markets can lose $4-8 trillion of market value during a normal bear market. To believe that bondholders simply cannot be allowed to sustain losses is an absurdity. Debt restructuring is the best remaining option to treat a spreading cancer. Other choices are fatal.” See ( http://hussmanfunds.com/wmc/wmc110905.htm for the rest of the article.) You think the world’s central banks and main institutions are not worried? They are pulling back from bank debt in Europe, as are US money-market funds. (Note: I would check and see what your money-market funds are holding – how much European bank debt and to whom? While they are reportedly reducing their exposure, there is some $1.2 trillion still in euro-area institutions that have PIIGS exposure.) Look at the following graph from the St. Louis Fed. It is the amount of deposits at the US Fed from foreign official and international accounts, at rates that are next to nothing. It is higher now than in 2008. What do they know that you don’t?

I certainly like Prem's answers to these questions: 1) Your equity position is 100% hedged -- why? 2) What makes this a once in 50 years event? Always good when someone as smart as Prem shares your views. Although based on Prem's comments, I may not prove patient enough given that I hold only a 40-45% cash position. Not sure what I'm going to do but will strongly consider paring back any positions that don't offer extreme margin of safety. One thing is certain -- it is crazy/reckless to be fully invested at this point, especially with any meaningful concentration in bank stocks. Deflation is armageddon for banks. While deflation is not certain, it is a not insignificant risk as Prem notes. Thanks for posting this interview.

Here are a couple of interesting data points, courtesy of Desmond Lachman in today's WSJ. Fitch Ratings highlighted that as of the end of July, the US money-market industry still had over $1 trillion of direct exposure to European banks -- roughly 45% of money markets' overall assets. The Bank for International Settlement reports that American banks have loan exposure to German and French banks of more than $1.2 trillion.

"Our job is to protect capital first and get a return second" - Steven Romick, First Pacific Advisors And I think this is a good quote as well -- appropriate for all investment approaches: "There are only two losses one can experience: capital and opportunity. If we can protect the capital, there will always be another opportunity." And no doubt the time to buy is when there is blood in the streets but demand a high MARGIN OF SAFETY from Mr. Market.

Seems we may find out soon enough. Margin of safety = 3 most important words in investing as Buffett and Graham have emphatically stated.

Well that would be the kicker Munger. We're waiting for you to invest, so that we know we made the right decision. I hope you buy common! I'm sure you're waiting with bated breadth!;) I'm sitting tight for now re BAC. Wishing you the best as well.

He mitigated his own risk, but that does not change his sentiment around the business. Let me get this straight. Buffett refused to risk a single penny of capital on the common stock. He demanded 600 bps over the 2 year and 400bps over the 10 year as well as large chunk of FREE equity expsure in return fo his capital. And Moynihan apparently didn't waste a second of time to say DONE!!! Soooo...what does this tell us about sentiment around the business?

Correct Munger. Our platitudes were enough. Cheers! Enough for what? I actually like my patience. If I chose, I could now invest in BAC at a minimum 30-40% lower price than you or your hero Berkowitz, with full knowledge that I now have Buffett at my back. Let's just say, I like my position. So much for those platitudes!

SO ANOTHERWARDS YOU DON'T THINK BUFFETT PUT ANY THOUGHT INTO THIS. HE'S JUST GUESSING! Maybe he should call you more often to get your thoughts and insights so he doesn't make a huge mistep! I do get a kick out of this...so let's try again. Buffett risked $0 capital on the common equity unlike every owner of the stock today. Buffett is being paid 400bps over the 10 year and 600 bps over the 2 year. In addition, Buffett has been given a large chunk FREE equity exposure. Of course I think Buffett thought it through!!!!!!

We told him that there was value in the business. That management seemed to be doing the correct things. That there was significant over-reaction by the market and nonsensical innuendo. That the business had enough cash flow to cover it's legal liabilities going forward and enough non-core assets available for sale to bolster Tier 1 Capital. That many of the analyst reports were making far-fetched guesses without actually examining the company's loan portfolio. I guess you are correct. We didn't tell him anything. Cheers! Huh??? This is funny. All of my posts in relation to you Parsad simply asserted the reality that your bullish opinion was based on the platitudes you so eloquently express above and not any independent fact based analysis of the perceived risks driving the stock price lower 1) the quality of the assets underlying reported book value and the corresponding assumptions 2) the risk to BV and solvency in a recession 3) put back risk 4) the risk to the company from a Euro implosion. You and others were/are just guessing. Nothing about today gave you any greater insight into these risks.

moore_capital54 -- we are good my man. We simply have a different margin of safety requirement. And this board is a forum for debate. I enjoy the dialogue with you and honestly hope you make a lot of money with your investments.

Sure you do. And just like people are going to be doing the same thing with Prem in the future. If you are a fully capitalized bank (in fact some bulls have argued overcapitalized) with nothing but massive free cash flows on the horizon -- YOU SURE AS HELL DON'T. You tell Buffett to buy as much common stock in the open market if he thinks it is such a good idea. Why would you ever give Buffett a sweetheart deal if it is not needed??? Silly and potentially criminal. Now if you are uncertain about your capitalization and future cash flows, you sure do take Buffett's capital. But note, Moynihan just told investors and the world 2 weeks ago that BAC was swimming in liquidity, future cash flows would be massive, and the company did not need to raise capital. The bull thesis at $11-12 was complete NONSENSE.

The recent downturn in the markets has presented many opportunities for WEB. Furthermore, he is still looking for elephant acquisitions. Why put money into a 10-year instrument at a yield of only 6% when he is almost sure to get superior opportunities during the next 10 years by just waiting patiently and then deploying cash opportunistically. The reason is because he was giving up these other opportunities for equity exposure to BAC. Huh??? Repeat after me -- he has more cash than opportunities and will have more cash next year and every year thereafter. Listen man -- you bougth too high. Don't let that cloud your thinking with such nonsense. Funny how wishful thinking can impede the ability to process simple facts. Here is reality -- Buffett is getting paid 400 bps over the 10 year and 600 bps over the 2 year. In addition, BAC gave him FREE equity exposure. In other words, unlike you, Buffett risked $0 capital on the common stock. And I repeat another simple, common sense fact... If you are running a fully capitalized bank with nothing but massive free cash flow on the horizon, the CEO of BAC tells Warren Buffett "thanks for your interest, we share your opinion but you can capitalize on the upside by buying common stock just like everyone else." -- ESPECIALLY SINCE YOU TOLD THE WORLD YOU DIDN"T NEED CAPITAL JUST TWO WEEKS AGO. You don't give WEB a sweetheart deal (FREE equity exposure and 400 bps over the 10 year) because he is a nice guy with a good reputation. Are you kidding me?

The point is that the warrants are not free when you think about the opportunity cost. Think about it. Berkshire could buy a great business for $5 billion that would return economic value far greater than a fixed 6% yield for ten years. Total and utter nonsense. Completely delusional. You write as if Buffett is not already swimming in too much cash and won't have massive amounts of cash coming in next year and every year thereafter that needs to be put to work. He as more cash than opportunities.

Which brings us to the discussing you are having with txlaw. If you want to believe BRK is in it for that 6% return that can be withdrawn any moment by BAC... Fine, I am not going to start that kind of discussing. The lack of common sense is stunning. He was given large equity exposure for FREE -- of course Buffett will take it... In addition, he is being PAID 6% on $5B of capital. Awesome deal. Unlike you an other bulls, Buffett risked $0 capital on the equity, which some humorously proclaimed as a rare "asymmetric risk/reward" opportunity. And if you are running a fully capitalized bank with nothing but massive free cash flow on the horizon, the CEO of BAC tells Warren Buffett "thanks for your interest, we share your opinion but you can capitalize on the upside by buying common stock just like everyone else." -- ESPECIALLY SINCE YOU TOLD THE WORLD YOU DIDN"T NEED CAPITAL JUST TWO WEEKS AGO. You don't give WEB a sweetheart deal (FREE equity exposure and 400 bps over the 10 year) because he is a nice guy with a good reputation. Are you kidding me? And now all of sudden, we hearing leaks that normalized earning aren't likely to materialize any time soon. Sh#$ show.

He can certainly do better than that with less risk (if you believe that BAC is risky) in many common stocks or debt instruments. Are you now claiming to have insight into Buffett's opportunity set and his judgement about that opportunity set?

that the "asymmetric risk/reward opportunity" is present. Helllooooo -- he didn't pay a single penny for equity exposure and this so called "asymmetric risk/reward" opportunity. He was given a FREE option on any equity upside that may or may not materialize and is being PAID 400bps over the 10 year on $5B of capital. Nothing about this deal relates to an "asymmetric risk/reward" in the common stock. And so much for BAC being a fully capitalized great investment opportunity at $11-12...BAC raising capital after the stock has been cut in half renders that thesis completely wrong -- you don't raise capital at $6-7 if you are fully capitalized and have nothing but massive free cash flow on the horizon.

Uccmal -- I'm just asking re a LT investment in the common. Congrats re the leaps -- nice work.

Berkshire's in it for the long-term. They haven't done well with the common of those yet. It'll take a bit longer than this to determine how good that deal was for BRK. Liberty -- I agree. The deals are great for Buffett. He gets paid to make the invetment at close to 400bp over the 10 year and gets a free option on any upside in the equity. He is not going anywhere. He would have held the GS pfd as long as he could. Simply reminding that GS and GE didn't create any sustainable riches for the average joe common long term shareholder to this date -- for the long term shareholder, capital could have been better deployed than by holding the common following Buffett's pfd investments in these companies. The opportunity cost for simply holding GE and GS common since the Buffett PFD investment has been relatively high.

"If he tried to buy a slug of $5 billion of shares on the open market, what do you think would have happened to the price of the stock?" C'mon...silly. He doesn't have to buy $5B common in a single day or even a single week...BRK makes $5B investments in a common stock year in year out. I don't claim to have any personal insight into Warren's thinking, but he's not making this investment because he's trying to earn 6% on his cash. He's buying into this for the warrants/common. Not true. Very few opportunities to put that amount cash to work at 6% while also getting the option for free upside. Expensive for a company that supposedly was financially sound but nice deal for Buffett, especially since a "Buffett investment" creates confidence. Buffett did well on his GS and GE investments but the common shareholder has not done so great in eithe company.

Here is the deal regarding my thinking. You can own BAC or a risk free alternative. No recession, BAC is probably a triple in 3 years. Mild recession, maybe they struggle to meet the new stricter capital rules and have to raise some equity. Very severe recession, worst case is 100% loss. So, in the benign scenario and no recession... if one stays with cash and stocks head higher from here, then one may stay with cash all throughout that period sticking to one's guns. Kept your dollar, but lost $2 relative to the alternative outcome of getting $3 from owning BAC. Given that I believe severe outcome is unlikely, I'm happier risking the $1 to get the $4 (I figure if it triples the warrants will be at least 4x current levels). Maybe the warrants would be 5x. I don't know. I'm saying that the price of preserving $1 in the "unlikely" scenario of BAC going to zero... is that one is paying a more likely opportunity cost of $2 - $4. I guess it depends on what you see as more likely. The last time home construction fell off a cliff, we had huge layoffs. But after firing the office secretary and never bringing her back, she won't be fired again. Whatever the next recession, it won't be quite as bad for the banks all other things being equal simply due to the fact that a lot of the easy fat has been trimmed, and the loan book is healthier given the quality of loans beginning in 2009. Plus loan loss reserves are at much higher levels today than before 2008. On top of that you have lower mortgage exposure. The remaining pre-2009 loans are seasoned by a rough recession. Probably missing many other things but there is no need to list everything. We all know their loan book is far healthier today. So anyways, I don't want to lose $3 or $4 bucks in the likely scenario. Depends on what you think is likely I guess. I think it's too risky to stay in cash, others disagree. I could lose money on this, but it's money I only have in the first place due to similar opportunity cost focused choices in the past. Now, if I thought the odds of success were different it would change things. But I'm not going to say pass up an 80% chance of tripling my money simply because there's a 20% chance of losing 50%. Congrats Ericopoly. Just to close the loop -- for me personally, I didn't view the opportunity set as singularly BAC vs cash. Rather -- cash vs BAC vs all the other companies within my circle of competence. And I also don't view the opportunity set as fixed at a point in time. So if BAC goes higher, I miss the return but I prefer to hold for cash for a better risk/reward within my circle of competence that will unquestionably emerge in the future. Question for you and others -- if you believed that BAC was a 4-5 bagger on stand alone basis, do you now put every single $ you have into BAC and more via margin? Or does the raise of expensive capital lead you to question whether BAC was as sound as you originally believed? Remember -- GE's stock has been a terrible investment (especially relative to the market) since Buffett's pfd/warrant deal and GS stock has really done nothing as well, although it did move higher before coming all the way back down.

Great deal for Buffett but recognize he is not buying the common stock. If Buffett were Joe Schmo and his investment didn't provide a self fulfilling confidence, would he have simply purchased the common? And if the common were such a great deal, why didn't he simply buy the common in the open market? -- it's not like there isn't enough liquidity for him. And this is a tiny investment for Berkshire and Buffett. And the original thesis at $11-12/share when Berkowitz et al were screaming that the stock was a buy never envisioned having to sell a large pfd deal to Buffett after the common had been cut in half in order to make money in the future on the common stock investment. And so much for Bank of America swearing up and down that they didn't need to sell equity...not only giving away dilutive warrants but also paying 6% on a pfd when interest rates are at all time lows. So the thesis unquestionably devolved. And now we hear BAC leaking that normalized earnings are much further out than originally anticipated, if ever. Nevertheless, his vote of confidence changes the equation and should obviously be beneficial for the common stockholders. But note if you are a true LT shareholder in GS, you're still holding a stock that is near the levels Buffett originally invested. Buffett gets a different deal than us. Genuinely happy for the folks that have done the work and will hopefully reap the rewards. Stock still has a long way to go to get back to $11-12 but the odds of getting have dramatically improved. On Berkowitz, let's see if holds as long as Buffett -- after Berkowitz antics w PFE and FRX, I would never trust him...he hypes his positions and then sells them when the pop. And be honest and admit that if BAC goes down, BRK would have been in a world of trouble as would have the country. The investment is no doubt designed to instill confidence in the system as much as capitalize on possible money making opportunity.

Ericopoly and PlanMaestro -- truly appreciate the dialogue and respect your viewpoints. And I agree -- if we get a normalized earnings period as analysts currently project, the stock will go a lot higher. But I also agree w ragnarisapirate, which is the primary focus for me at this time. The questions that are unclear to me remain 1) is tangible book value as high as management claims 2) what happens to BV if we go into a recession -- does solvency become an issue given the leverage 3) what are the ultimate put back costs 4) the risk of a Europe implosion I don't know how anyone can accurately answer those questions. And maybe I'm too risk averse but I sleep well at night. Appears you both have positions and both have done the work to get personal conviction -- can't stress enough that I honestly hope BAC works for you...seems you have put in the effort and deserve the reward.

Myth -- agree on comments re Android. Also share hope for Motorola -- but tough for me to personally determine. The economics and compet adv of the core GOOG businesses are so powerful that I wish they hadn't moved into hardware...but what's done is done -- will be interesting to see how develops...GOOG guys are no doubt smart.