Warren Buffett consistently advocates a policy of investing when others cower. Today the billionaire investor delivered on his message with the announcement that his Berkshire Hathaway fund would invest a massive $5 billion in the fraught Bank of America Corp. (BAC). Buffett has been among the most vocal supporters of major financial institutions since the 2008 financial crisis. Earlier this year, when many investors were fleeing shares of banks, Buffett broadened his holdings in Wells Fargo (WFC).
Buffett’s influence on the market was evident today after the majority of the sector surged in the aftermath of the announcement. Bank stocks have outpaced the losses of the broader market alongside continues anxiety surrounding the impact of European debt contagion and the threat of a double dip. Buffett’s decision reversed that trajectory in morning trading leading eight financial stocks into the S&P top ten gainers list early today.
On a day when the broader market took a significant hit, the strength of the financials is atypical and speaks to Buffett’s influence. The oracle of Omaha, as Buffett is oft referred, cited good leadership and strength as the incentive for the investment. Though it may be the largest bank in the U.S., there continue to be challenges for Bank of America, including continued exposure to mortgages that led the bank to huge second quarter losses. The $5 billion dollar influx will help BAC to stay afloat during these trying economic times and survive the lingering lawsuits surrounding toxic-mortgage backed securities.Preventing the North Carolina based financial institution from collapse will dually act in support of other holdings owned by Buffett, like his shares of Wells Fargo, which were also considerably higher for the day. While current share prices across the financial sector are weak, they are still floating considerably above 2008 lows. A catastrophic event at Bank of America could derail them to new lows and threaten the future of the financial stocks as a whole.
Citigroup (C) and Morgan Stanley (MS) were both up for the day. JPMorgan Chase (JPM), which has set aside considerable cash for the ongoing lawsuits having to do with its own mortgage-backed securities, fell slightly for the day. It was joined by Goldman Sachs (GS), which has had an especially tough year. Goldman lost considerable value just last week after it was discovered that the firm is keeping an exorbitant, well-known attorney on retainer, presumably to defend it in the event of further complications with the bank’s involvement in the 2008 financial crisis.
