The big news yesterday was the “bailout” of Bank of America by Warren Buffett. After weeks of attempting to defend themselves and their capitalization (stooping to what Josh Brown called “investor relations on acid” at one point), it was Uncle Warren to the rescue… to the tune of $5 billion.

The Wall Street Journal made a good point on his efforts:

Bank of America shares [were] up 22% to $8.55 in early trading, from $6.99 [Wednesday], on news that Warren Buffett is buying a $5 billion stake. Remember, $5 billion was the amount Mr. Buffett spent on Goldman Sachs back in September 2008. Just for the record, that did not stop Goldman’s stock price from falling, hard, for a while longer.

It seems as though, in some ways, Buffett is displaying signs of contrarian investing- buying into the drawdown. Unfortunately, the only way this strategy works is if the investment is going to rebound. Buffet has not been so lucky in the past- Goldman Sachs stock value has declined over 14% since his September 24th, 2008 buy-in.

But is this investing in a drawdown, or is it the propping up of a financial titan, as some have speculated? But at the end of the day, barring some back door Raj Rajaratnam dealing, how effective is it to try to prop something up- be it bank, currency or entire sector? Let’s think about some of the most recent market interventions:

• Quantitative Easing- Yay, liquidity! Except… maybe not. The value of the U.S. Dollar has fallen by over 14% since QE1 was introduced on March 18th, 2009. All the money in the markets that was supposed to spur hiring? Not so much. Josh Brown from the Reformed Broker summed it up quite nicely: QE2 simply didn’t work.  It temporarily jacked up stock and food and energy prices but it resulted in zero hiring, zero new business activity and zero real estate market amelioration. 

 

• Bank of Japan- Seriously, the BOJ may be the worst forex investor in the history of the world. As Zerohedge explained quite succinctly here and here, efforts by the Japanese to keep their currency in check has failed miserably. We’re talking billions of dollars worth  of manipulation down the drain. Even though their March 2011 intervention was slightly more durable than the others, generally speaking, their track record is about as bad as it gets these days. Our favorite quote on the subject? “Going forward we will need to measure the half-life of Japanese intervention not in days, not in hours, not even in minutes, but in actual ticks.”

• TARP- The biggest, baddest bailout on the street, this bill was supposed to deliver us all from the economic hell that was the credit crisis by throwing enormous sums of money around. Here we are, two years down the road, and where do we stand? Housing in the dumps, unemployment soaring, foreclosures up, wages down, and Warren Buffett is instituting what amounts to a second bailout of Bank of America. Fantastic.

The fact is that intervention is all too often a temporary, inefficient means of getting what you want in the world of finance. Stocks and currencies will always be susceptible to this kind of manipulation. Futures, as we’ve discussed in the past, have found themselves both negatively and positively impacted. The end result here? Nobody knows… least of all, Buffett. With Bernanke set to deliver his highly anticipated comments from Jackson Hole later today, everything could change in a moment.