Why Warren Buffett Lost His Faith -- and Money -- in Bank of America

Last Updated Feb 16, 2011 11:28 AM EST

Warren Buffett still believes in banking -- just not in Bank of America (BAC). The legendary investor has liquidated his remaining stake in the financial company.

If anything, the only surprise is that Buffett didn't do it sooner. He's been steadily reducing his B of A holdings for more than two years. And no wonder. When his Berkshire Hathaway (BRK) bought into the company in the second quarter of 2007, the banking giant's shares traded well north of $40. One epic financial crisis later, they're scraping by at roughly $14.70:

"He's closing out a loser," said Jeff Matthews, author of "Pilgrimage to Warren Buffett's Omaha," whose Ram Partners LP invests in Berkshire and Bank of America. "We bought it during the crisis. But its earnings power coming out the crisis has been reduced."
Buffett could have many reasons for closing out his stake in B of A. Most obviously, he wants to cut his losses. The Oracle of Omaha also may not like what he sees in the company's future.

Certainly, investors remain nervous about what additional mortgage-related losses may be lurking within the bank's balance sheet. B of A also faces what could be prolonged litigation with investors over its purchase of subprime mortgages during the housing boom, homeowners wrongly "robo-signed" out of their houses and state legal officials investigating the bank's illegal foreclosure practices. Having WikiLeaks hanging over your head doesn't help, either.
None of this is good for B of A's already tarnished brand. And as Buffett says in these 2007 remarks to MBA students, a strong brand is something he cares deeply about in a company (see from 3:45):


Blame the other guy
Another interesting possibility -- perhaps Buffett never really believed in B of A in the first place. Berkshire never had a large investment in B of A. That leads Business Insider to speculate that the stock pick was the work of Lou Simpson, who until he retired last year oversaw investments for Berkshire subsidiary Geico:

It's crystal clear that Warren Buffett made Lou Simpson sell all his stock picks. Buffett was probably never comfortable with Simpson's stock picks, so he got rid of those stocks even if it meant changing his "Rule Number 4: Our favorite holding period is forever."
If Buffett has lost faith in B of A, he still believes in Wells Fargo (WFC). He bought another big block of shares in the California financial firm in the fourth quarter, bringing his total holdings to more than $11 billion.

Wells has emerged from the housing crash, if not unscathed, then at least in far stronger position than B of A. Despite being the biggest mortgage lender in the U.S., Wells has weathered the downturn well. The company is profitable, sitting on tons of cash and led by a highly respected management team.

Of course, reputation isn't everything. Buffett has made a mint investing in Goldman Sachs (GS).

Thumbnail from Flickr user Franco Folini; Warren Buffet image from Wikimedia Commons, CC 2.0
Related:

  • Alain Sherter On Twitter»

    Alain Sherter covers business and economic affairs for CBSNews.com.