Omaha, Nebraska (NYSE: BRK.A; BRK.B) – An editor in today’s Wall Street Journal says that “Berkshire Hathaway will enjoy an effective tax rate of 10.5% on the $ 300 million dividend it will receive each year from Bank of America.” This statement is incorrect.
Warren Buffett saves Bank of America
Almost all of the shares that Berkshire owns are held in its asset-related subsidiaries, and this will be the case with the Bank of America’s preferred.
The tax treatment of dividends paid by American corporations to property insurance companies was substantially changed by a law passed in 1986. The changes are described in detail in the chairman’s letter included in Berkshire’s 1986 annual report. a small change in the rate has been made. Since then, dividends that insurers receive from US companies have an effective tax rate of 14.175%. For Berkshire, this rate will apply to dividends received from Bank of America.
Warren Buffett injected $ 5 billion into Bank of America
These moves are great news for the bank’s employees and shareholders, as well as for US taxpayers, who are likely to be lost if Bank of America’s management takes the business to the mountains. But many analysts believe that Bank of America will need to raise much more capital before returning to sound foundations. These analysts believe that Bank of America nevertheless overestimates the value of some of the assets in its balance sheet. When businesses are finally forced to understand the true values of these assets, this theory states that the bank will immediately have to fill a significant capital gap.
Warning: Why you should not follow Buffett when buying Bank of America’s Stock
Why would a big bank like Bank of America, which can get money from the Fed at an interest rate of no more than 0.25%, pay 6% to get money from Buffett? The first plus is that it strengthens the balance sheet, but the tangible equity is $ 128 billion, so what will $ 5 billion do? The bank simply had to settle for more than $ 8 billion for a mortgage repayment situation that has not yet been resolved. Buffett’s $ 5 billion will be spent quickly.
On September 24, 2008, Buffett assisted Goldman Sachs (GS) by buying GS preference shares with a 10% discount along with warrants for $ 5 billion. Warrants can be exercised at $ 115. Shares were about $ 110 a week ago. So, the warrants are below cost.
Exactly how did the real moment for this end up? The economic crisis turned out to be only twenty days old, which ended only five months later, on March 6, 2009.
One week later, on October 1, 2008, he invested $ 3 billion in General Electric (GE), which required money as the business paper market was frozen. GE shares had a 10% interest rate discount, similar to GS’s investment. He received orders to acquire $ 3 billion in stock options at a price of $ 22.50. The shares were trading at $ 15 a week ago. The warrants are under water.
Let’s draw some conclusions: Two large companies that actually had divisions or subsidiaries in the business of financing companies were happy to set aside 10% interest to acquire funds from Buffett. Wasn’t that a reasonable warning of the crisis? Warrants have become largely useless. It therefore appears that Mr Buffett has made a high interest rate, but otherwise there is absolutely no return on investment. In addition, he still had to go through the deepening financial crisis of 2008-2009, which presented us “within 10 minutes of the shutdown of the entire banking system,” according to Senator Chris Dodd.
Business activities of Berkshire Hathaway
Berkshire Hathaway and its subsidiaries are engaged in a variety of business activities, including property and accident insurance and reinsurance, utilities and energy, rail freight, finance, manufacturing, retail and services. The company’s common stock is listed on the New York Stock Exchange, trading symbols BRK.A and BRK.B.