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.

Warren Buffett Moves on Citigroup

Citigroup (NYSE:C) is back in the spotlight once again. After plummeting to near penny-stock status, then rebounding, this banking stock became the darling of the hyper active high frequency trading brigade. The robot traders had a ball with Citi’s deep liquidity and ultra tight spreads. However, this algorithmic army quickly lost interest in the stock when Citi instituted a 10-for-1 reverse split pushing the share price above $40 per share.  This strategic move knocked the high frequency trading boys out of the game, but may create more long term institutional interest in the financial stalwart.

Now, perhaps the most interesting Citigroup rumor of all, has hit the underground secrets media network.  The Oracle of Omaha Warren Buffett’s juggernaut acquisition machine Berkshire Hathaway (NYSE:BRK) may be part of a consortium to purchase Citi’s troubled consumer finance division, One Main Financial. Pre-financial bust, this unit was known as Citi Financial.

Center Bridge Partners and Leucadia National Corp. (NYSE: LUK) are also rumored to be part of the buyout group.  Interestingly, One Main only has a book value of $2 billion but may obtain a bid in the $8 billion range due to its extensive asset base.  Citi has been in talks for the last several months about spinning off this division, but this is the first time that Buffett has been involved.  The star power of the Oracle combined with his mountain moving resources may just be the impetus Citi needs to actually flip this troubled unit away from itself.  Time will tell, watch this one closely!

Jim Rogers’ Top Two Commodities

In an after-the-bell interview with CNBC’s Maria Bartiromo, Wednesday, commodities king Jim Rogers said he’s a bull on all commodities now, but especially likes silver and rice.

The 68-year-old Rogers, known for his partnership with George Soros at Quantum Fund, spelled out what he expects of Ben Bernanke and other central bankers as the financial crisis plays out—that is: print money.

Strong demand from Asia’s growing middle class from a pool of a 3-billion-plus population as well as an anticipated continuation of loose monetary policies by central banks worldwide will lift commodities prices, he said.

“It [print money] is all they know to do in Washington, Tokyo and a few places,” said Rogers.  “They’ll print more money.  And if they print money, you should own silver and rice and real assets.”

If the world economy grows, Rogers likes commodities.  If the world economy goes back into recession, Rogers likes commodities.  It’s a heads you win, tails you win play, he explained.

What happens after QE2 expires at the end of June?  Rogers didn’t venture a guess on the effects on the equities markets as the end of June approaches, but he expects more money printing from the Fed, especially in front of an election year.

“QE2 definitely will go away.  Now it may come back with a different name,” he speculated.  “They may call it cupcakes.  Who knows what they’ll call it, if it comes back.  But they’re going to bring it back, because he’ll be terrified and Washington will be terrified.  There’s an election coming up in 2012.  Washington’s going to print more money.”

On the subject of the debt ceiling impasse in Washington, Rogers doesn’t expect a U.S. government shutdown.  But if the U.S. government didn’t raise the debt ceiling, he surmises that “the dollar would go up,” he quipped.

But a shutdown of the U.S. government won’t happen, he said.  Governments throughout history have all opted to try to inflate out of burdensome debt levels, and this time the response by today’s governments won’t play out any differently, Rogers has repeated stated in the past.

But at some point, the currency crisis comes, and we may be coming close to that tipping point.  “The markets won’t put up with this much longer,” said Rogers.

The billionaire investor’s portfolio is long some currencies (likes the Chinese renminbi) and commodities.  He has no long positions in the U.S., and is short emerging markets and U.S. technology stocks—with the latter, he believes, are in the midst of a bubble, mentioning Facebook (presumably referring to valuation estimates of the social network leader) in particular.

Rogers is also short a U.S. bank stock, but refused to state the name of the bank on two separate occasions during the Bartiromo interview.  Since Rogers initially mentioned more than a month ago that he’s short a U.S. bank, rumors have spread throughout the Web that the bank in question is Bank America (NYSE: BAC).