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Betting Against Buffett: Short Bank of America on the Rally

Many will gasp at the audacity of betting against one of the world’s wealthiest and most successful investors, but I think the recent rally in Bank of America (BAC) provides an excellent opportunity to short the stock. I am not necessarily saying that the “Sage of Omaha” made a poor investment, after all he did receive preferred stock, 6% interest for 10 years, a $250 million bonus if BofA tries to pay him back early and warrants that were nearly $1 Billion in the money just two days after the deal.

But if you think it is a good idea to chase his trade and buy common stock without all of these perks, you may want to think again. The fact that Bank of America was desperate enough to give Buffett these generous terms and then sell half of its stake in one of the biggest banks in one the world’s fastest growing economies to generate cash should raise caution flags. Both moves smack of desperation to me and one might infer that the balance sheet troubles at America’s largest bank might be worse than most believe.

Bank of America may soon need to tap this newly acquired cash as the lawsuits keep piling up, including today’s announcement that they are being sued by the trustee of a $1.75 billion mortgage pool, which seeks to force the largest U.S. bank to buy back all of the loans in the trust because of alleged misrepresentations. Ouch!

On the macro level, I believe the stock market is due for a resumption of the recent downtrend, as FED chairman Bernanke did not have too much bullish to say last Friday from Jackson Hole. QE3 will happen in one form or another, but there does not seem to be any sense of urgency from policymakers. Indeed, the past bailouts and easing programs have proven to be utter failures as GDP growth has slowed, official unemployment remains above 9% and stocks are in the red year to date. What did those Trillions in taxpayer bailouts get the American people exactly?

And in case you did not catch it, Bank of America did receive a “Backdoor Bailout” earlier this month, by dumping some of its most toxic and near-worthless home loans on the taxpayers. Bank of America sold the rights to process and collect payments on 400,000 home loans to Fannie Mae, the government-controlled mortgage giant for $500 million.

Bank of America also has the Obama administration helping out by cooking up a deal that would allow the banks to walk away with a seriously discounted fine of $20 billion from a generation of fraud that led to millions of people losing their homes and dreams of a comfortable retirement. Obama appears ready to let the banks off the hook with this slap-on-the-wrist fine in order to keep the market afloat and keep his masters happy going into re-election. As Matt Taibi pointed out in Rolling Stone:

To give you an indication of how absurdly small a number even $20 billion is relative to the sums of money the banks made unloading worthless crap subprime assets on foreigners, pension funds and other unsuspecting suckers around the world, consider this: in 2008 alone, the state pension fund of Florida, all by itself, lost more than three times that amount ($62 billion) thanks in significant part to investments in these deadly MBS.

So this deal being cooked up is the ultimate Papal indulgence. By the time that $20 billion (if it even ends up being that high) gets divvied up between all the major players, the broadest and most destructive fraud scheme in American history, one that makes the S&L crisis look like a cheap liquor store holdup, will be safely reduced to a single painful but eminently survivable one-time line item for all the major perpetrators.

Our elected leaders are doing everything possible to help the banks at the expense of the taxpayers. Political will for more bailouts and quantitative easing seems to have dried up, so they are resorting to backdoor bailouts and multi-billion-dollar gifts in the form of absurdly-discounted fines and future immunity from lawsuits. To be sure, the government shares in the blame for this whole mess after pressuring the banks to lower their lending standards and using taxpayer dollars to back people that could not afford the homes in the first place. Now, instead of letting home prices drop to free-market values, the government is once again intervening, offering first-time homebuyer credits and keeping interest rates at artificially-low levels. If they would just get out of the way and stop protecting the banks, home prices might fall to levels where most Americans could actually afford to buy a house.

It may take a new crisis and widespread panic in order to ram another round of banker bailouts/quantitative easing down the throats of the public once more. Given that the FED will likely wait for a full-blown crisis before announcing any official QE3, I don’t think the recent market rally is justified and expect stocks to resume their downtrend in the coming days, adding a further drag to the share price of the embattled Bank of America stock.

Despite all of the government assistance, Bank of America still appears in desperate straights. Buffett will likely make out on the deal, but I think it is foolish to try to follow him on this trade. I am more inclined to short BofA stock at this juncture or on a move towards $10, than attempt to follow in his footsteps. I think Buffett did nothing but throw the bank a short-term lifeline. I may look to either short BAC or FAS in the coming days.

In addition to generating profits with gold and silver mining stocks, I have also been profiting from shorting leveraged ETFs such as FAS. If you would like to see which mining stocks I believe are undervalued and which ETFs I am shorting, sign up for the Gold Stock Bull Premium Membership.

By | 2017-03-23T14:06:29+00:00 August 30th, 2011|Gold & Silver Commentary|

About the Author:

Jason is the founder of He previously worked in data analytics for the world's largest research firm, consulting to Fortune 500 companies globally. Jason eventually leveraged those skills to trade successfully full-time and after helping friends and family optimize their investments, he launched Gold Stock Bull and The GSB Contrarian Report newsletter. Jason is a cycles investor with a contrarian eye for identifying undervalued assets. He has built an expertise in both the precious metals and cryptocurrency markets. Jason believes in honest money, limited government, decentralization of power and enjoys studying alternative economic models.