Time to get [really] worried

Dateline: Saint John, NB

News report: Berkshire to invest US$5 billion in BofA

As always, Warren Buffet has recognized an opening and made the most of it. Buying US$5 billion of Bank of America (BAC:NYSE) 6% prefs with 100% warrant coverage was a brilliant move on a bank trading not far from 50% of book value. But does that mean the dark clouds on the horizon are gone? Not a chance.

Financial stocks, such as JPM, Morgan Stanley and Wells Fargo are trading higher today just the same.

Earlier this week, I learned from a market participant that although the bank world’s appetite for loan product is strong, the institutional loan market was drying up. Pension funds and life insurance companies are suddenly no longer interested in taking down a $10 million share of a traditional $200 million syndicated five year bank term loan…just like the Fall of 2008. Add that datapoint to the outflows from high yield funds this month, and the British Bankers’ Association recent assurance that credit liquidity remains high starts to sound hollow (see prior post “Worried about a credit crunch? The British Bankers’ Association says don’t be.” Aug 12-11).

But the most interesting news of the week comes from London, where the Telegraph came across some bankers who sound quite scared:

The cost of insuring RBS bonds is now higher than before the taxpayer was forced to step in and rescue the bank in October 2008, and shows the recent dramatic downturn in sentiment among credit investors towards banks.

“The problem is a shortage of liquidity – that is what is causing the problems with the banks. It feels exactly as it felt in 2008,” said one senior London-based bank executive.

“I think we are heading for a market shock in September or October that will match anything we have ever seen before,” said a senior credit banker at a major European bank.

In the months that followed Berkshire’s 2008 era US$5 billion pref investment in Goldman Sachs (GS:NYSE), the stock fell from $115 to something in the $60s before recovering as 2009 progressed. Today’s BofA news doesn’t signify the bottom, a turning point, or a buying opportunity. It’s just a single bit of news that should be compared with what the overseas bank folks are seeing and hearing.

MRM

Seeking Alpha link here.