The Power Of Brand-Name Buffett

by Thom Forbes, Aug 26, 2011, 7:46 AM

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Talk about a trusted name adding value to a generic product: Just by transferring a measly $5 billion from wherever he keeps his Money Market with Free Checking account to purchase a piece of Bank of America yesterday, Warren E. Buffett issued a "seal of approval" that sent the latter's stock price soaring by 10% in subsequent trading.

In fact, Buffett's halo effect is so contagious that the announcement "boosted the stock of other big banks, including Citigroup Inc. and Wells Fargo & Co., on a day when the broader stock market was down 1.5%," Dan Fitzpatrick reports in the Wall Street Journal. 

"An hour after the deal was announced, Buffett had already made a profit on paper of $500 million on stock warrants, thanks to a surge in Bank of America's stock price," reports the AP's Pallavi Gogoi.

"This is a vote of confidence by a savvy investor," Bank of America's chairman, Chad Holliday, tells Fitzpatrick and Serena Ng. "We've got some work to do. We understand that. He understands that."

A few weeks ago, when I read the Sage of Omaha's proposal in a New York Times op-ed piece that the "mega-rich" such as himself should be taxed at a higher rate than we hoi polloi ("Stop Coddling the Super-Rich"), I forwarded it to a friend who is an economist with a lifelong interest in the distribution of wealth. After reading the piece over his morning coffee a few hours later, this well-read researcher fired back a one-line assessment: "Thanks for sending out Buffett -- nothing new, but people tend to listen to very rich people."

Well, yes, my friend. Even to people who make you think that they are, perhaps, richer than they are. How else to explain the phenomenon of "American business magnate, television personality and author" Donald John Trump, Sr.? Simple, and it ain't the Power of Affirmation. Self-promotion. (And, in Trump's case, a willingness to affix his name to just about anything.)

There's a whole lot of financial rigmarole involved in both the Bank of America transaction itself -- when was the last time your heard the phrase "cumulative perpetual"? -- and in what Bank of America needs to do to keep solvent. We'll leave let you read about that elsewhere, such as the New York Times story by Nelson D. Schwartz.

But it's clear that BOA is not yet out of the woods, despite Buffett's imprimatur. "They're the poster child for the unknown," Brian Wenzinger, a principal at money management firm Aronson Johnson Ortiz, tells Schwartz. "Nobody knows where it ends."

Still, "having Warren Buffett join the Bank of America ship is like having a whole squadron of Navy SEALS supporting you," Charlotte businessman C.D. Spangler, one of the bank's largest individual shareholders, tells Rick Rothacker and Kirsten Valle Pittman of the Charlotte Observer.

What interests us is how Buffett has built himself into a corn-fed (and sometime cornball) oracle whose very word can make or break an enterprise. Who else could be taken seriously by bankers, traders and old-guys-in-Bermuda shorts nursing their IRAs after revealing, as the Huffington Post headline puts it: "I Dreamt Up Bank Of America Deal In The Bathtub"?

Writes Harry Bradford: "He says he just dreamt this idea up on Wednesday morning while he was in the bathtub, CNBC's Becky Quick said on Thursday after speaking with Buffett over the phone." And then, presumably dripping water beads and protecting his modesty with a threadbare towel, he got on the honker and called BOA CEO Brian Moynihan, according to Fitzpatrick's account.

"When Mr. Moynihan returned the call shortly after 11 a.m., Mr. Buffett proposed the investment. At first, Mr. Moynihan was skeptical, telling the Berkshire Hathaway Inc. chief that 'we really have the capital we need,' according to someone familiar with the conversation. But Mr. Buffett persisted."

Less than 24 hours later, the deal was done.

"Warren Buffett is the 20th century's greatest investor. More than that, he is a showman, explaining multibillion-dollar investments with metaphors that make him sound like a ruminative Nebraskan corn-farmer leaning on a five-bar gate," a Financial Times editorial said two years ago on the eve of the annual Berkshire Hathaway shareholders' meeting in Omaha which, it points out, has been cleverly "rechristened 'Woodstock for Capitalists'."

"Of course, because he's Warren Buffett, he gets a great deal," commentators are fond of pointing out whenever a Berkshire Hathaway deal is announced. That goes not only for the financial terms he arm-wrestles out of savvy businesspeople but also for the press coverage he stages so masterfully.

After all, who can resist a guy who understands the value of a good, hot bath?

After "lending" Goldman Sachs $5 billion in 2008, Buffett compared the struggling economy to the tub with "cold water in the front and hot water in the back," Kevin Roose tells us in the New York Times.

"And that's not all," Bradford reveals in his Huffington Post story. "Buffett allegedly says his mind also frees up space to 'look forward' in the same way a bathtub fills up and then drains, according to a 2008 biography by Alice Schroeder."

Draw the water, please, Jeeves. I'll see the rest of you back here after Labor Day.

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0 comments on "The Power Of Brand-Name Buffett ".

1. Clifford Jones
   

   commented on: August 26, 2011 at 9:36 a.m.

   He is a wise man in many ways. Great article.

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