Do You Trust Bank Of America As Much As Buffett Does?

| About: Bank of (BAC)

It goes without saying that Warren Buffett of Berkshire Hathaway (NYSE:BRK.A) is one of the most successful investors in the history of finance, and many people follow his portfolio each and every day. If there’s an inclination toward any company in his portfolio, it shows in the stock market price of the company the next day - or even in a couple of minutes.

That is what we saw when Bank of America's (NYSE:BAC) stock price surged by over 13% today, August 25. That’s the magic of Warren Buffett. But what do you think – will this make any difference?

For that, we need to understand how the action might affect Bank of America in this state of distress. In the recent Q2 report this year, the company reported a $14.5B loss in the consumer real estate services segment. Although global card services segment and global commercial banking, including commercial real estate services, looked positive with a net income increase of $300M and $458M respectively, the big loss in the consumer real estate services sector overwhelmed the rest.

This huge loss was primarily due to the legacy mortgage issues, including representations and warranties to resolve the repurchase agreements, and partly due to the mortgage default correction and increased credit loss provisions. Things have been tough indeed for the largest American bank in terms of assets.

And here comes Warren Buffett with $5 billion in pocket, asking to buy 50,000 shares of cumulative perpetual preferred stock with a 6 percent annual dividend from Bank of America. Nonetheless, the bank can always buy them back anytime paying 5% premium to the market value. A lovely offer, and a good source of capital just in times of need.

Looking at the current condition of Bank of America, retail investors like you and me would definitely shy away from it. But hey, Warren Buffett puts his faith in the company like he did in Goldman Sachs some time ago.

If you had asked me a week ago, I would have said to sell Bank of America. But now the story is different indeed. I say hold for now. The effect may take some time, but my intuition says this is going to be positive over the next two to three quarters. If you have held until now, you should wait and watch a bit.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.