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Todd Sullivan
Todd Sullivan

Buffett in Wachovia?

June 19, 2008 | About:

It has been a while since the latest rumor about what Berkshire's (BRK.A) Buffett is buying so lets look at this one. It think the last one was a Bear Sterns deal?

Wachovia (NASDAQ:WB) credit protection costs fell yesterday on rumors Buffett is considering making an investment in the bank. Five-year credit protection costs on Wachovia fell to 193 basis points, or $193,000 a year to protect $10 million of debt, in from about 202 basis points.

"There is unconfirmed speculation that Warren Buffett is considering an investment in Wachovia," said Paul Foster, option strategist at Web information site theflyonthewall.com in Chicago.

Now, Buffett does have consider equity investment in financials in Wells Fargo (NYSE:WFC), M&T Bank (MTB) and US Bancorp (NYSE:USB).

Would he consider a purchase in Wachovia? The argument could be made that it is undervalued today based on it's long term potential. We also know that when Buffett invests in banks, the time frame to this point is measure not just in years but decades.

But, Wachovia will not be one of those investments. The reason? Management. Buffett has said repeatedly about Wells Fargo that its management is the "finest at any bank" and M&T and USB have so far shown to have escaped the worst of the current situation through conservative decisions.

This is not to say that what is left at Wachovia management wise is not good, it is just that the situation is unsettled. Buffett, to my knowledge has yet to invest in a company during a time of management transition, especially when the situation has deteriorated as it has at Wachovia. I guess one could argue his investment in Salomon Brothers was one such investment but if we use that as a guide then since he has called it one of his "worst decisions" we can then all but eliminate a Wachovia deal.

What if Buffett did do a deal? If he did then we can only figure that he sees a current valuation so low that even mediocre management at the bank will not mess up the eventual revaluation to normalized levels.

At the end f the day this is nothing more than a rumor but the exercise is always fun..

Disclosure ("none" means no position): Long WB,WFC, none

About the author:

Todd Sullivan
Charlie Tian, Ph.D. - Founder of GuruFocus. You can now order his book Invest Like a Guru on Amazon.

Rating: 3.0/5 (16 votes)


Tojigarshah - 9 years ago    Report SPAM

It is not good quality managment and they made big mistake by acquiring GDW. very difficult to expect WB to buy in this company.

Smartdada - 9 years ago    Report SPAM
Buffet holdings of 17 millions shares makes him the biggest holder of USG ! For sure he knows what he's doing.

Fairholme, Third Avenue, Weitz and T. Price are also big owner of USG.

Ccyork - 9 years ago    Report SPAM
right now in the banking sector, nothing is more important than

1. management integrity

2. balance sheet

if either of these is lacking in quality...run, run, run

X_rbb_X - 9 years ago    Report SPAM
An investment in Wachovia would be a stark deviation from conservative banking investments Buffet has made in the past. This rumor is just that -- a rumor.

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