Buffett’s Berkshire Buying JPMorgan Preferreds?

Buffett’s Berkshire Buying JPMorgan Preferreds?
By Mark Hirschey (Work of Mark Hirschey) [<a href="http://creativecommons.org/licenses/by-sa/2.0">CC BY-SA 2.0</a>], <a href="https://commons.wikimedia.org/wiki/File%3AWarren_Buffett_KU_Visit.jpg">via Wikimedia Commons</a>

Buffett's Berkshire Buying JPMorgan Preferreds?


After JPMorgan Chase & Co. (NYSE:JPM) revealed that they had lost at least $2 billion in trades related to “the London Whale” activities the firm’s share price has tanked. Shares have dropped from just above $40 before the announcement of those losses to just over $31 today.

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Despite the losses JPMorgan is a healthy company and they are doing well. This, and the losses may be much higher than $2 billion, looks like an isolated incident based on one man’s mistakes and a lack of oversight and clear understanding from the higher ups.

The shares have still lost between 20% and 25% since the announcement, and they are falling again today. The company may look like a value buy to investors particularly ones large enough to take advantage of preferred stock and other perks.

Warren Buffet is one such investor. He previously expressed interest in JPMorgan and said in an interview at the Berkshire Hathaway Inc. (NYSE:BRK.A), (NYSE:BRK.B) that he was holding the company in his personal portfolio. There are reasons to speculate  he may now have extended that interest to Berkshire Hathaway’s portfolio.

JPMorgan has not been trading so low since last December and the financial sector looks in much to be in much better health. Buffet may see this as an opportunity to get involved. Preferred stock at JPMorgan, the kind that might be offered to Buffett, offer returns of 7.9% normally. Buffett in the past bought Warrants of preferreds instead of the common equity in companies.

If JPMorgan are interested in getting Buffett involved the firm is likely to offer him a sweetheart-deal possibly above 10% or even as high as 12%. That would certainly attract Buffett’s eye as it did when a similar deal was offered by the Goldman Sachs Group (NYSE:GS) in 2008.

Buffett has great admiration for JPMorgan and particularly its CEO Jamie Dimon. He has said that Dimon’s annual letter is the “best in corporate America”. Buffett’s holding the stock personally and its low price might warrant a buy by his firm.

On another note Buffett might not have to disclose a stake in JPMorgan if he acquired one. He might already have. Buffett has been known to avail of SEC waivers that allow investors to take stakes in firms without having to disclose them. Late last year he took a $12 billion 5.4% stake in International Business Machines Corp. (NYSE:IBM) secretely making use of such waivers.

There are obstacles facing Buffett if he were to acquire JPMorgan shares. He does not like to hold shares of companies that directly compete with each other. That is why he was holding JPM personally rather than under Berkshire. Berkshire Hathaway holds a billions of  dollars of Wells Fargo & Company (NYSE:WFC) shares. Wells Fargo is quickly becoming one of the leading banks in the country. However, in the past, Buffett has purchased competing railroad companies for Berkshire’s portfolio.

There is the fear that JPMorgan’s loss will be enough to destroy confidence in the investment bank. Buffett may see other firms, like WFC, as a much more secure and better investment. JPMorgan shares are cheaper right now, however, and that may be enough to sway the maven to accumulate them.

Furthermore, Buffett’s investment would be a sign of confidence in the banking giant. He previously purchased shares of Goldman and Bank of America Corp (NYSE:BAC), when the market had major fear over their future. In both cases, Buffett got a sweetheart deal for himself, which most retail investors would not have access to.

Finally, Berkshire is generating over $1 billion of free cash flow every month. It has tons of cash to use for acquisitions. Buffett is looking for a big purchase and his universe is limited to a few hundred stocks. JP Morgan may well be one of them.

Buffett may well be accumulating shares in the banking giant. The income he might get from preferred shares would be incentive enough and the return if the shares return to their pre loss value would be excellent. JPMorgan may not be for everyone but Buffett’s perks could make it a really worth wile investment.

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