Quite a number of banks around the world are going to be raising capital over the next few years, on terms which are very disadvantageous to current bank shareholders.
Smart investors like Warren Buffett will make major investments in banks . . . later at very advantageous terms, when risk is very quantified and contained - just as Buffett did this month when he started his own Municipal Bond insurance business to take advantage of the nearly dead existing bond insurers.
I think these excerpts from a recent CNBC television interview with Warren Buffett will illustrate the situation.
CNBC: Warren, I assume you've been approached about every single one of these bank capitalization deals that we've seen get done by Sovereign funds all of that stuff?
Warren Buffett: That's close to true.
CNBC: You've turned down every single, solitary one of the them, and I think that is very, very noteworthy. And I just want to know why? Because some of these things are selling at a 50 to 60 percent discount from where they were, and you like things when they're cheap, unless they're getting a lot cheaper. So you must be pretty darn bearish about the prospects for a lot of these financials.
Warren Buffett: Well, or there are other things that I feel I understand better, which I think are cheap. Just because something is down 50 percent from where it was doesn't necessarily mean it's cheap. It's something that you look at, but as you've noticed with some of these deals, the first news is not necessarily the last news.
The nice thing about the investment business is there's no "degree of difficulty" factor. If you're in Olympic diving, you have to do some very complicated dive in order to get points. But in the investment business, you get paid as much for stepping over a one-foot high bar as you do for jumping over a seven-foot high bar.
Jack Bogle: Let me just ask you one question on these bond insurers. About 25 to 30 percent of their portfolios outside of the municipal areas, isn't that correct?
Warren Buffett: That's probably correct. They, it's kinda interesting what happened, Jack. It would fit in with some of your theories. They originally started out being pure, municipal bond insurers. And then they sort of did what Mae West said, "I used to be Snow White but I drifted." (Laughter.)
Jack Bogle: Well, yes, and I think the rating agencies have an awful lot to answer for here. You could say they're in cooperation with the issuers. I would say they're in collusion with the issuers.
Warren Buffett: Well, when a company issues a 14 percent bond when U.S. Treasuries are below 4 percent and it's rated triple-A, we've now seen the cow jumping over the moon.
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