Buffet's Investment in Wachovia Is Unlikely

by: Todd Sullivan posted on: June 22, 2008 | about stocks: BRK.A / WB    

 

It has been a while since the latest rumor about what Berkshire's (BRK.A) Buffett is buying, so lets look at this one. (I think the last one was a Bear Stearns deal.)

Wachovia (WB) credit protection costs fell Wednesday on rumors Buffett is considering making an investment in the bank. Five-year credit protection costs on Wachovia fell to 193 basis points, or $193,000 a year to protect $10 million of debt, in from about 202 basis points.

"There is unconfirmed speculation that Warren Buffett is considering an investment in Wachovia," said Paul Foster, option strategist at Web information site theflyonthewall.com in Chicago.

Buffett does have considerable equity investment in financials in Wells Fargo (WFC), M&T Bank (MTB) and US Bancorp (USB). Would he consider a purchase in Wachovia? The argument could be made that it is undervalued today based on its long term potential. We also know that when Buffett invests in banks, the time frame to this point is measured not just in years but decades.

But, Wachovia will not be one of those investments. The reason? Management. Buffett has said repeatedly about Wells Fargo that its management is the "finest at any bank" and M&T and USB have so far shown to have escaped the worst of the current situation through conservative decisions.

This is not to say that who is left at Wachovia management-wise is not good, it is just that the situation is unsettled. Buffett, to my knowledge has yet to invest in a company during a time of management transition, especially when the situation has deteriorated as it has at Wachovia. I guess one could argue his investment in Salomon Brothers was one such investment but if we use that as a guide then since he has called it one of his "worst decisions" we can then all but eliminate a Wachovia deal.

What if Buffett did do a deal? If he did then we can only figure that he sees a current valuation so low that even mediocre management at the bank will not mess up the eventual revaluation to normalized levels.

At the end of the day this is nothing more than a rumor, but the exercise is always fun...



Disclosure: Long WB, WFC

This article has 8 comments! Add yours below...
Todd Sullivan

Todd Sullivan

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This article has 8 comments:

  •  
    notsosmart
    Jun 22 11:33 AM
    My Website
    is it ok to buy a cd from wachovia? i know its insured but will i live long enough to collect from the feds in case of a problem?
  •  
    Whisper On
    The Wind
    Jun 22 12:35 PM
    Aren't CDs insured through FDIC?
  •  
    Vegasjoe
    Jun 22 02:42 PM
    My Website
    Being long Wachovia is very brave! Buffett doesn't buy black box investments, unless the ransom is so prohibitive that remaining shareholders are diluted into oblivion. LET'S SEE: Wachovia paid $25 billion for #2 Golden West; B of A's Ken Lewis paid $6 billion, the last 4 in shares, for Countrywide, #1 in the mortgage business. Commercial real estate is deteriorating. Look out below! Keep your CD's at less than $100,000.
  •  
    notsosmart
    Jun 22 04:34 PM
    My Website
    thanx vegasjoe.
  •  
    notsosmart
    Jun 22 04:36 PM
    My Website
    whisper- insured by fdic means a long wait(up to a year)& no interest.im77 yrs old.
  •  
    SuperDock
    Jun 22 10:49 PM
    I am a retired senior officer of the ORIGINAL Wachovia Bank, not the bank presently carrying the name of Wachovia. I agree with Buffet's assessment of executive management of the present Wachovia (WB); this management IS lousy, to include Lanty Smith, the fellow who is acting CEO. "Acting" is a good way to describe Lanty, because his knowledge of the banking business appears to be very limited.
  •  
    jacobsen
    Jun 23 12:18 AM
    I don't care what WEB buys or doesn't buy anymore. He's a socialist democrat. He's a glorified lefist! WB write downs will be fine and the bank is certainly viable. The fearmongering democrats are at it again........It's the economy stupid.......Carvel and his bunch won't destruction at any cost to get Obama the most extremist abortionist in US history serving. WEB is a elitist as well a Gates and his family. Rumor, whatever. BUy US equities and stop the nonsense and rid ourseloves of lying 'progressive'' socialist which our house and congress is filled. Coansumer tax and the irradication of IRS and income tax, and tarr and feather anyone who dares tries to stop the US taxpayer from this goal! Abortion is the slaughter of the unborn and we all darn well know it, accept the leftist!
  •  
    cloclo
    Jun 23 01:55 PM
    My Website
    Jacobsen, have you forgotten to take your med again?
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