Warren Buffett’s strange $5 billion play in BofA

As Warren Buffett makes headlines again with his $5 billion preferred stake in Bank of America (NYSE: BAC), many questions have swirled surrounding Buffett’s thinking about this complete dog of a bank.

The problems with BofA’s balance sheet are so numerous, just with the bank’s tier 1 and 2 assets, alone, that the bank should have gone under in 2008 along with Lehman.

Here are the problems with BofA’s balance sheet:

Yves Smith (Susan Webber of Aurora Advisors) of Nakedcapitalism.com has looked at the second-mortgages assets of BofA and cannot fathom a write down of anything less than 60% of the $80 billion reported by BofA.  That’s $48 billion.

Smith also winced at BofA’s “Goodwill” fluff of $78 billion, stating that “perhaps a lot of their $78 billion of goodwill might have air in it.” Add that to the $48 billion and we get a total of $126 billion in questionable valuations.

Next, BofA is being sued by everyone who’s ever heard of the bank, which according to zerohedge.com could amount to $20 billion in judgments and/or settlements to make whole the customers of its Countrywide subsidiary.  Now we’re up to $146 billion of inflated garbage.

Next, European exposure to Europe sovereign debt totals $17 billion, of which $1.7 billion is on the line with the PIIGS (Portugal, Ireland, Italy and Spain).  $1.7 billion is not enough to put the bank in trouble, but the domino effect of contagion within the banks of France and Germany could be substantial.  Would BofA have to set aside billions more for the inevitable demise of the euro?

Lastly, the biggy.  The Bank of International Settlement (BIS), the central bank of central banks, has notified the 14 largest holders of tier 3 derivatives to begin clearing them by June 2012.  Of the $697 trillion on the books of the top 14 institutions, of which BofA is one of them, how much in write-offs will BofA have to take?  Who knows?  And that’s the problem.  BofA’s balance sheet, like the other TBTF banks report fictitious numbers.  That write off could be too large for anyone to bailout.

Buffett knows all of this.  Then, what in the world is he thinking?

The $5 billion “investment” in BofA may just be Buffett’s way of remaining a “good” guy with Washington and the American public during the slow-motion collapse of the financial system.  He’s already been the biggest beneficiary of TARP and clandestine shenanigans from the Fed in the bailout of AIG.  Hank Greenberg took the lion’s share of the hit in the AIG scandal, and the American people bailed out Buffett and his precious AIG.  Buffett owes the American people nearly everything he’s got, because he knows who’s going to be stuck paying the bill for the biggest mess yet to come.