Yesterday, Bank of America announced a $5 Billion investment from Warren Buffett's Berkshire Hathaway. I had two thoughts. First, even though the terms are significantly more attractive than similar deals struck during the financial crisis in 2008, Bank of America just received some very expensive financing that they claim they don't need. Second, Buffett's recent editorial on raising taxes somehow failed to mention the huge tax breaks his company will continue to receive with these types of deals.
Bank of America is receiving better terms than Goldman Sachs, General Electric, and others received from Buffett following the Lehman Brothers bankruptcy in October, 2008. Bank of America received $5 Billion for preferred stock yielding 6% (redeemable at a 5% premium) and warrants to purchase 700 Million shares of common stock at $7.14 each. Goldman Sachs and General Electric received $5 Billion and $3 Billion respectively from Buffett in October, 2008 for preferred stock yielding 10% (redeemable at a 10% premium) and warrants to purchase common shares. Even though pricing appears to have improved significantly, this is still expensive capital for Bank of America. Bank of America didn't receive approval to increase the dividend to common shareholders this year, but they are able to pay Berkshire Hathaway $300 Million a year? Not only that, but Buffett gets at-the-money warrants as well? That just shows, once again, that Buffett enjoys a special place in our economy and is able to make investments that aren't available to others.
Warren Buffett also made headlines with his editorial requesting an end to preferential tax treatment for "billionaires and millionaires." While I tend to agree with him regarding his point on the regressive nature of payroll taxes, I chuckled a little when the Bank of America deal was announced. Why? Because Buffett mentioned that higher tax rates should apply to dividends and interest income at the individual level. He remained silent on the tax treatment of dividends at the corporate level. Typically, companies like Berkshire Hathaway get a tax deduction for 70% of the dividends received from other companies. The argument in favor of this "dividends received deduction" is the same argument for lower tax rates for individuals - avoiding repetitive taxation on corporate profits.
There is something mildly amusing about somebody who can preach tax fairness one day and then utilize the same tax code to shelter $210 Million of company income a few days later.
