given2invest
-
Posts
664 -
Joined
-
Last visited
Content Type
Profiles
Forums
Events
Posts posted by given2invest
-
-
But that doesn't mean that his investment is in any way equivalent to a common stock purchase.
Not sure I understand this. If he had bought the common, what exactly would be different?
You keep saying "free look" -- well, it's not a free look. He's assuming $5B worth of risk in the preferred.
The preferred doesn't have risk you say? Then how does the common? What is the scenario where the preferred remains intact and the common implodes, and how much faith do you think Warren would put into it? Preferred may seem like debt, but it's very junior debt.
Preferred DOES NOT EQUAL common. In 2008/2009, if you owned BAC or C preferreds, and held, you didn't lose a penny. If you owned the common, you'd be down HUGE due to the massive dilution that came.
WEB knows that if we get into trouble again, before nationalization or "bankruptcy" (will never happen but whatever), they would convert the public preferreds to common just like they did last time with Citi.
I can't stress enough how much safer/different a bank cumulative preferred stock is vs. the common given the history of the 08/09 crisis and how it played out.
So you are worried about dilution. Read my post a few spots up, or just do the math yourself. Assuming BAC can continue to earn its current PTPP level -- I'm not giving them any credit for improvements in earnings -- how much dilution would it take for the common to be really, truly, impaired? And what is the probability that they will need to dilute that bad?
Assume they balloon to 30B shares. That's $.50-$.60 of earnings power. Is BAC common dead in the water?
You (and many of the bulls on this board) assume they can raise capital at $4+ a share in a bad market scenario. Who knows what could happen. I don't think its likely but if the S&P went to 800 or 900 and BAC goes to $2, the capital raise would be substantially more dilutive than you think.
OK, let's do $2. In my 30B shares out scenario, that gives them another $40B in capital, in addition to the $5B they just got from Warren. Their CCB stake is probably worth way more, but let's say $10B. That's $55B in capital to cover losses, and they're earning $.50/share. Is BOA common dead?
Again, don't put words in my mouth. I never said BAC common was dead nor did I say it was a bad investment. I simply said a preferred investment is completely different than a common investment and can't just be looked at as very junior debt in a massively levered financial institution. I will repeat: In the case of a 2008/2009 scenario, common equity holders were hosed while pref holders never lost a penny.
-
Preferred DOES NOT EQUAL common. In 2008/2009, if you owned BAC or C preferreds, and held, you didn't lose a penny. If you owned the common, you'd be down HUGE due to the massive dilution that came.
Did Buffett invest in the preferreds of BAC or C in 2008/2009? No, correct. What preferreds did he invest in back then? GE & GS, correct. What was the loss to equity holders in both of those? Cheers!
Very true and I'm not saying BAC is not a good investment here. The only thing I've been debating is whether BAC should have done this and whether WEB doing this really says a whole lot about BAC common.
-
But that doesn't mean that his investment is in any way equivalent to a common stock purchase.
Not sure I understand this. If he had bought the common, what exactly would be different?
You keep saying "free look" -- well, it's not a free look. He's assuming $5B worth of risk in the preferred.
The preferred doesn't have risk you say? Then how does the common? What is the scenario where the preferred remains intact and the common implodes, and how much faith do you think Warren would put into it? Preferred may seem like debt, but it's very junior debt.
Preferred DOES NOT EQUAL common. In 2008/2009, if you owned BAC or C preferreds, and held, you didn't lose a penny. If you owned the common, you'd be down HUGE due to the massive dilution that came.
WEB knows that if we get into trouble again, before nationalization or "bankruptcy" (will never happen but whatever), they would convert the public preferreds to common just like they did last time with Citi.
I can't stress enough how much safer/different a bank cumulative preferred stock is vs. the common given the history of the 08/09 crisis and how it played out.
So you are worried about dilution. Read my post a few spots up, or just do the math yourself. Assuming BAC can continue to earn its current PTPP level -- I'm not giving them any credit for improvements in earnings -- how much dilution would it take for the common to be really, truly, impaired? And what is the probability that they will need to dilute that bad?
Assume they balloon to 30B shares. That's $.50-$.60 of earnings power. Is BAC common dead in the water?
You (and many of the bulls on this board) assume they can raise capital at $4+ a share in a bad market scenario. Who knows what could happen. I don't think its likely but if the S&P went to 800 or 900 and BAC goes to $2, the capital raise would be substantially more dilutive than you think.
-
But that doesn't mean that his investment is in any way equivalent to a common stock purchase.
Not sure I understand this. If he had bought the common, what exactly would be different?
You keep saying "free look" -- well, it's not a free look. He's assuming $5B worth of risk in the preferred.
The preferred doesn't have risk you say? Then how does the common? What is the scenario where the preferred remains intact and the common implodes, and how much faith do you think Warren would put into it? Preferred may seem like debt, but it's very junior debt.
Preferred DOES NOT EQUAL common. In 2008/2009, if you owned BAC or C preferreds, and held, you didn't lose a penny. If you owned the common, you'd be down HUGE due to the massive dilution that came.
WEB knows that if we get into trouble again, before nationalization or "bankruptcy" (will never happen but whatever), they would convert the public preferreds to common just like they did last time with Citi.
I can't stress enough how much safer/different a bank cumulative preferred stock is vs. the common given the history of the 08/09 crisis and how it played out.
-
And he also helps to improve a tiny bit the capital ratios. Anyone really thinks that $5B ($10B w/warrants) was a rescue? Not me.
Confidence is a huge thing to financial institutions. If your depositers, shareholders and employees don't feel confident in the company and management, you could have very painful events occurring that have nothing to do with the actual finances of the business. This occurs simply because they are leveraged institutions and any dollar that leaves the vault has a ten fold effect on the company.
Having Buffett inject capital means hardly anything in terms of their balance sheet and cash flows. What it tells the markets and the general public is that Bank of America is ok. You can ignore the flood of recent negative articles and analyst reports; you don't have to panic and pull your money; and you will be perfectly fine doing business with or working for them. That is enormously signficant!
Now it allows the company to continue to improve their circumstances and focus on restoring the business. It changes nothing on the timeline it will take to make improvements and increase shareholder value, but it gives them the time to actually now implement the entire gameplan. Cheers!
This is absolutely correct.
There is debate right now over whether the price of the capital was too expensive. Maybe so.
But there was at least a price paid for the common exposure when you think about WEB's opportunity cost. There are plenty of investments that WEB can and probably did make that will do much better than a preferred investment in a bank at 6%.
1) It's a debt investment in one of the biggest banks in the world. It's basically an alternative to cash. Risk is not the same in every investment so you can't say "there are better places for him to put his money".
2) He isn't just getting a 6% yield on his money. He also got at the money long term warrants that have significant value! You don't have to be the worlds best value investor to know that a 10 year "free look" on BAC is very, very, valuable. Shit, even Blodget would like to have that!
-
that the "asymmetric risk/reward opportunity" is present.
Helllooooo -- he didn't pay a single penny for equity exposure and this so called "asymmetric risk/reward" opportunity. He was given a FREE option on any equity upside that may or may not materialize and is being PAID 400bps over the 10 year on $5B of capital. Nothing about this deal relates to an "asymmetric risk/reward" in the common stock. And so much for BAC being a fully capitalized great investment opportunity at $11-12...BAC raising capital after the stock has been cut in half renders that thesis completely wrong -- you don't raise capital at $6-7 if you are fully capitalized and have nothing but massive free cash flow on the horizon.
Which brings us to the discussing you are having with txlaw. If you want to believe BRK is in it for that 6% return that can be withdrawn any moment by BAC... Fine, I am not going to start that kind of discussing.
haha he isn't in it for the 6% yield! But if it gets called tomorrow, that would be great for him. He'd then have put up no money and got a free 10 year warrant on BAC. If it doesn't get called tomorrow, he gets a great, safe, 6% yield + the free 10 year at the money warrant.
Let me be clear: Buffett would not have invested if he thought BAC was insolvent or had a decent chance of going belly up. But that doesn't mean that his investment is in any way equivalent to a common stock purchase.
-
Here's a spreadsheet put together by DealBreaker's Matt Levine (formerly of Goldman Sachs) that takes a stab at how much Buffett paid.
Link to article here: http://dealbreaker.com/2011/08/how-much-did-warren-buffett-pay-for-bofa-anyway/#more-50897
His guess (based on certain assumptions) is $5.28. Certainly not something accessible to your average Joe yesterday.
I actually think this analysis is wrong and he got an even better deal. The rub is in valueing his pref @ 6% yield vs current market at 8.5%. I believe his pref will be called within 2 years so it's not really trading at a huge discount to the 8.5% public prefs.
-
And he also helps to improve a tiny bit the capital ratios. Anyone really thinks that $5B ($10B w/warrants) was a rescue? Not me.
Confidence is a huge thing to financial institutions. If your depositers, shareholders and employees don't feel confident in the company and management, you could have very painful events occurring that have nothing to do with the actual finances of the business. This occurs simply because they are leveraged institutions and any dollar that leaves the vault has a ten fold effect on the company.
Having Buffett inject capital means hardly anything in terms of their balance sheet and cash flows. What it tells the markets and the general public is that Bank of America is ok. You can ignore the flood of recent negative articles and analyst reports; you don't have to panic and pull your money; and you will be perfectly fine doing business with or working for them. That is enormously signficant!
Now it allows the company to continue to improve their circumstances and focus on restoring the business. It changes nothing on the timeline it will take to make improvements and increase shareholder value, but it gives them the time to actually now implement the entire gameplan. Cheers!
I agree with all of this. Time will tell whether it worked or not, but I agree. I disagree that they should have done this deal but I agree with your reasoning as to why they did it though I think it's fairly obvious.
-
I'm upset because you all view Buffett's sweetheart deal as a sign of confidence when it's maybe 10% that and 90% that he got a deal at a huge discount to market. Do you realize that if those warrants the preferred traded publicly, yesterday, the combined value would be somewhere between 7 and 9 Billion? We'll use 7.5 Billion. He paid 5 Billion. How many investors would buy something worth 7.5 for 5? Each and every one. My point is for it to be a real sign of confidence he'd of paid 7.5 for the 7.5 and BAC wouldn't have offered or needed to sell him the package at such a discount to intrinsic value.
It's great for BRK, great for Buffett, lousy for every other BAC shareholder.
I think you are missing my point. Buffett brings something else than money to the table, and BAC thought that it was worth paying for. Should Buffett have paid more just to satisfy you, and if he had, would you be applauding this deal or finding other reasons why it doesn't mean much?
Why do businesses sell to BRK for prices lower than what they could get in an auction? Because BRK brings something else of value to the table (different from what it brought to BAC, but there's a parallel there -- sometimes there are intangibles that change the value equation, and if you don't see them, your model to value businesses will have blind spots).
Buffett has provided a 1 day boost of 11% to the share price. His value here on out is moot. He purchased a preferred equity (debt) investment in one of the largest banks in the world. It wasn't a very risky position. The risk of capital impairment for him is low, almost zero. I don't fault him AT ALL for doing this deal. He's a genius and capitalizing on his name worth. BRK without Buffett wouldn't be able to get this sweetheart deals.
I know why BAC did this but I think they were/are shortsighted. The benefits of the deal will be minimal (1 day pop and some good headlines) but the truth is the deal:
Added no new capital
Diluted shareholders rather significantly without adding new capital!
-
At the time I don't remember any of them offering that type deals then. Now it has become more common like GE, Goldman. He does have the option to convert into common of BAC though. Will he keep it long term after he converts? I doubt it because he is so into WFC. The point is would he have made this investment if he thought there was a huge downside so he couldn't get his money back or convert eventually? I don't think he would have no matter how sweet a deal he was getting.WFC was a common stock investment, no? This is a sweetheart deal where he is taking essentially no risk and has all upside.
Point blank: If you can't see that ANYONE would have made the investment Buffett was exclusively offered, you are not being intellectually honest.
Option to convert? Huh? The warrants and the preferred are two separate investments. And the warrants are 10 years in length! He won't make any exercising decisions till 2021. I'm gonna guess it will be a pretty easy decision by then to see if they are well in the money or not.
Re: Wouldn't make the investment if he thought there was huge downside, agree. The risk of impairment to preferred shareholders is almost 0. But all of you that are common equity holders, it's much, much different.
-
WFC was a common stock investment, no? This is a sweetheart deal where he is taking essentially no risk and has all upside.
Point blank: If you can't see that ANYONE would have made the investment Buffett was exclusively offered, you are not being intellectually honest.
How is this a bad thing? The reason why Buffett can get better conditions is because he's worked all these years to develop a reputation as a good judge of businesses and a man of the utmost integrity. That has value, and people are ready to pay for that value (otherwise they'd be getting value for nothing), so what's wrong with it? I don't get why you seem to upset.
Buffett probably said "these are my conditions" and BAC agreed because they thought it was a good deal. No arms were twisted.
I'm upset because you all view Buffett's sweetheart deal as a sign of confidence when it's maybe 10% that and 90% that he got a deal at a huge discount to market. Do you realize that if those warrants the preferred traded publicly, yesterday, the combined value would be somewhere between 7 and 9 Billion? We'll use 7.5 Billion. He paid 5 Billion. How many investors would buy something worth 7.5 for 5? Each and every one. My point is for it to be a real sign of confidence he'd of paid 7.5 for the 7.5 and BAC wouldn't have offered or needed to sell him the package at such a discount to intrinsic value.
It's great for BRK, great for Buffett, lousy for every other BAC shareholder.
-
I just hate that his handle is "Munger."
Funny because I was thinking if it's possible to stop people using handle such as Buffet or Munger ot Graham if they are poles apart in thinking. Handle might create an association bias and people might take time to respond which they would have ignored in general. But I guess it's an online forum and people can chose any handle they want.
Are you 12?
-
WFC was a common stock investment, no? This is a sweetheart deal where he is taking essentially no risk and has all upside.
Point blank: If you can't see that ANYONE would have made the investment Buffett was exclusively offered, you are not being intellectually honest.
-
The true test of the deal will be looking at it in hindsight a few weeks/months from now. If this stopped a run on the bank, obviously it was worth it. But from a financial perspective, the deal did nothing but hand away $5+ Billion from shareholders to Buffett (Value of warrants that were given for free). The pref does not count towards core capital and they will have a $300 million interest payment to boot. You want confidence? Buffett investing in common equity, even at a discount. Now that would be confidence.
I also agree with the previous poster as it raises concerns about whether management is being honest or not. Yesterday: we don't need capital. Today: Warren Buffett wants to invest in an absurd sweetheart deal! Oh my god THE WARREN BUFFETT? WHAT DO I WEAR TO THE MEETING! Give him anything he wants! It's Buffett!
-
So I get the excitement here for the longs. It's nice to have Buffett validate your thesis, and it's great to see the huge rally. But I am sitting here as someone who owns a tiny piece of the Class A warrants, and I'm scratching my head as to the amazing high price BAC just paid for a little bit of confidence.
700m 10 year warrants @ 60% of tangible book -- what do you guys think the market price of those are (today)? Maybe $6-7B. Preferred is probably good for face value.
It really seems to me that BAC just handed Buffett $6-7B (ok, maybe $5B since BAC preferred are paying way more than 6% these days).
Does this seem like a rational thing for management to do? I understand that the market was just crapping on them, and confidence is important, but damn, I'm scratching my head a bit more worried about BAC than I was.
Glad I own orders of magnitude more Berkshire than I do BAC...
Ben
Wow, someone posting with some common sense. Refreshing.
-
also:
Finally, I love how the people on CNBC are already saying "only Buffett can get these deals." As we know, an enterprising investor could have built a nice portfolio of BAC preferreds together with BAC warrants that mimicked Buffett's deal pretty closely right up until yesterday.
Totally incorrect.
-
The best part about this deal is that since BofA did not have to issue new shares into the marketplace, the huge shorts can't cover -- I love it. I'm going to miss Buffett when he is gone.
Huh? The short interest is 1.3% of shares outstanding and a fraction of a recent days volume.
-
Hey guys,
I have a question about this. From the perspective of BAC, how is this any better than just offering $5bn in common equity? I see the WEB halo effect, but beyond that I can't see how this is a relatively good deal for them, or for common shareholders. I see the same level of dilution as common (with the warrants), but with a pricier yield to service, a more senior form of capital above common and a redemption fee of $250mm.
I also think it's a little bit strange that BAC is resorting to a capital raise at this time. They've been talking about how well capitalized they are for the past couple months. Market's gonna market and screw around with your stock price, but this seems like an extremely expensive bit of PR.
Thoughts? I feel like I'm missing something fundamental.
You are missing absolutely nothing.
-
Sweetheart deal for warren. Also, this won't count towards core capital at BAC. Just a confidence thing that dilutes you. Let's hope it works beyond a day...
-
The options market-making scares me. I use them, don't get me wrong, but I'm not totally comfortable with an institutional account that my career depends upon (not even mentioning my equity in there) being intertwined with computerized market making. Hopefully there are different subsidiaries for the market-making but corporate veils do get pierced! Of course, the odds are low of something happening. I don't really understand broker-dealer financials anyways which is probably most of the reason I'm not totally comfortable. High insider ownership doesn't prevent algorithm craziness or rogue traders.
They're levered 7 times. I've had personal options trades cancelled by them because the implied volatility was too high - their computers messed up.
They are not levered 7 times. Totally untrue. They have tangible equity of 4+ billion. They don't risk 21 billion for their options market making. The balance sheet is messed up because trades don't settle for 3 days. I have analyzed the company as an investment - there is no risk the options business blows up the brokerage business. I think in the worst quarter they've lost like $50 million on the options side on a $4 billion base of capital. Also, they are long gamma so in times of vol they make money. In the case of a crash they'd make a lot of money.
-
Interactive Brokers - unbeatable.
Yah, stop looking. This is the best broker. And your capital is totally safe, no matter what happens in the market.
Why do you think IB is so safe?
They have billions in excess capital and it's 85% owned by the CEO who is a super smart guy and does not take risks. They don't invest the excess capital outside of day to day market making which has never brought big losses.
But yah, SIPC will cover your account at any broker.
I use Schwab but just like Liberty I generally don't do anything fancy.
I recently signed up for IB as I wanted to buy a foreign stock and IB offered the best fees, however I really didn't find their trading platform to be user friendly at all... It was so painful to use that I almost gave up on the trade. Maybe it was just due to the fact that it was a new environment for me.
Yah, you get used to it. It's definitely an adjustment.
-
Interactive Brokers - unbeatable.
Yah, stop looking. This is the best broker. And your capital is totally safe, no matter what happens in the market.
Why do you think IB is so safe?
They have billions in excess capital and it's 85% owned by the CEO who is a super smart guy and does not take risks. They don't invest the excess capital outside of day to day market making which has never brought big losses.
But yah, SIPC will cover your account at any broker.
-
Interactive Brokers - unbeatable.
Yah, stop looking. This is the best broker. And your capital is totally safe, no matter what happens in the market.
-
A question for the bulls - how confident are you that BAC is similar to FFH (i.e. a stock that was punished but had management of impecable integrity that you could really trust)? This stock sounds tempting but my historical weak spot has been leveraged financials and I would only invest in something like this if the management team was similar to FFH in actions. Do you have examples of management putting shareholders in front of thier own interests? TIA. Note: historically, these bank turnarounds typically take quite a long time to happen (BAC from 1988 to early 1990s and C 1989 to early 1990s).
Packer
I don't see it as an overnight turnaround by any means and I am getting more comfortable with management as time has moved along even though the stock price has gone lower. I think Moynihan is taking the right actions; pulling back on international credit card lending, trimming non-core investment stakes in Blackrock and potentially China Construction Bank. The bank will shrink itself to meet capital requirements in my worst case scenario. Here is a synopsis on Moynihan from Fortune in July if you haven't seen it already (http://bit.ly/nVlGTl). This is a quote I like from the article:
But Murray and Moynihan shared the same philosophy on making deals. They concentrated on extremely complex transactions, and they liked to pay cash. The reason was simple: The tangled deals scared off other potential bidders, allowing Fleet to buy on the cheap. Mike Lyons, who now heads strategy at BofA, worked on Moynihan's team for two years in the mid-1990s. "Brian would use a strategy we called 'hanging around the hoop,' " says Lyons. He'd make a low-ball offer on a complex deal and wait while all the other bidders dropped out, then low-ball again. That strategy worked brilliantly with the purchase of NatWest's U.S. business in late 1995. The ailing British bank's investment bankers, Goldman Sachs (GS), handed Moynihan a letter with the asking price. Moynihan whipped out a pen, crossed it out, and wrote in a drastically lower number. He got his price.After completing an acquisition, Moynihan and his team would swoop down on the credit card unit or broker, analyze the business, then decide which parts of it to sell, grow, and fix. Recalls Lyons: "Brian would examine every asset, including securities, land, buildings. He'd do an assessment of what it's worth and what we should do with it."
The crowning deal for Murray and Moynihan was Fleet's $16 billion acquisition of BankBoston in 1999. It was a landmark moment in New England. BankBoston, founded in 1784, had dominated banking in the region for decades. Once again, it was Moynihan who turned a complex twist to Fleet's advantage. The Justice Department required that Fleet sell 280 branches in New England. Strong buyers lined up, including Chase and RBS Citizens. But Murray and Moynihan wanted to keep powerful rivals out of their territory. "The point was to find absolutely the worst operator possible," says an investment banker whose client wanted to buy the Fleet branches. Moynihan arranged to sell them to a weakling, Sovereign Bank. FleetBoston quickly won back old customers from Sovereign.
In a brief analysis, say they need to raise $25 billion at $5/share. That would be 5 billion shares to add to the existing 10 billion and result in a tangible equity of $8.47/share. The earnings power would decrease as well, but given analyst estimates of $1.48/share on average, the new estimate would be $1.00/share. It is still trading at six times next year's estimates. Let's say they can accomplish a stabilized 1% ROA, you are looking at $1.50/diluted share after the capital raise. Stock is at four times stabilized earnings.
This is just a brief. I think there is enough downside protection at just over $6.00 to make this extremely compelling at these levels if you can be comfortable with unknown put back risk and Euro issues that will play out over the next few years.
Didn't we think this was all over after 2008/09? What's to say this is the end of the crisis? I just don't understand how after they raised lots of capital in 09 they now might need to raise lots more. They've had 2 years of earnings to "grow" out of the losses. Why should we believe this is the end? (I ask honestly, I don't know a lot about financials.)
Buffett Puts $5B Into Bank of America!
in General Discussion
Posted
Not if the only reason BAC did this deal was to create confidence in the company (and the stock).
They didn't do it for capital. They did it solely for confidence. If the market shrugs it off that's a very bad sign even if BAC isn't in trouble financially. Perception is important here, as you have repeatedly said and I agree with. The closer BAC common gets to 0 the worse they are, even if financially they are sound.