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Buffett Puts $5B Into Bank of America!

Parsad

By Parsad
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PlanMaestro Newbie

PlanMaestro

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The person that wrote the interesting article at Bronte Capital, concerning Bank of America, appears to be (if memory serves me) the same John Hempton of Australia who piled onto Fairfax with the shorts during the company's darkest days, a few years ago.  His extremely negative appraisal of FFH completely ignored the history and reputation of the company and Prem.  I don't recall if this was an innocent mistake or in collusion with the short attack.

 

And it looks like he is getting a taste of his own medicine. From the comments section, some people are driving him nuts with nonsense.

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Rabbitisrich Newbie

Rabbitisrich

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Has anyone confirmed that the purchase adds to Tier 1 capital? Hempton responded to a question about qualifying non-common instruments by providing the Citi TARP preferreds as an example. But I thought that the TARP instruments received special dispensation to count as Tier 1 capital despite cumulative proceeds and a step-up coupon provision.

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berkshiremystery Contributor

berkshiremystery

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Very good article on the Buffett investment from the man who must not be named. Posted here so that Sanjeev does not have to go to his site. Very much along the lines we were discussing.

 

Check the comments, I think is showing more emotions on aka-Munger type of comments that we have shown here.

 

http://brontecapital.blogspot.com/2011/08/bank-of-america-some-comment-on-buffett.html

 

 

Unbelievable what our strange aussie bird chirps  :o

 

I put it in extra small letters so Sanjeev don't have to read it  ::) ... just teasing him...  ;)

 

I think it will make Buffett a fortune.

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berkshiremystery Contributor

berkshiremystery

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The person that wrote the interesting article at Bronte Capital, concerning Bank of America, appears to be (if memory serves me) the same John Hempton of Australia who piled onto Fairfax with the shorts during the company's darkest days, a few years ago.  His extremely negative appraisal of FFH completely ignored the history and reputation of the company and Prem.  I don't recall if this was an innocent mistake or in collusion with the short attack.

 

ValueDan38,... I can assure you, that you don't have to worry about your memory. We all had a bad memory of him. He came through his aussie nickname b*****boy to the Canadian StockHouse boards and was also on the Yahoo boards. He attacked all of us, Sanjeev, bsilly, cardboard and lotsofcoke. I felt sorry specially for Prem and his folks, but somehow bsilly was too strong for him, he always was wrestling his allegations down.

 

Here's an article from the DeepCapture about JH:

Introducing JH: the Plunderer from Down Under

http://www.deepcapture.com/introducing-john-hempton-the-plunderer-from-down-under/

 

Google had shut him down, after he published some controversial post.

http://www.businessinsider.com/google-shuts-down-popular-blogger-john-hempton-after-publishing-controversial-post-2010-1

 

Just for curiosity, he still maintains his flat in Paris website.

 

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BargainValueHunter Newbie

BargainValueHunter

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http://dealbreaker.com/2011/08/buffett-got-a-better-deal-on-bofa-than-we-thought/

 

Buffett’s warrant to buy 700 million shares is a stock option: to get his 700 million shares, he has to pay the $7.14 exercise price, which works out to $5 billion. Where is he going to get $5 billion? He’s not exactly short of cash, but coincidentally he’s also got $5 billion of BAC preferred shares lying around. And the warrant agreement lets him hand in those shares to pay the $5 billion exercise price.

 

Does this matter? Well, it wouldn’t, if he had to hand in $5 billion worth of cash or BAC preferred or gold or anything else, at fair value. Paying $5 billion is paying $5 billion. But he doesn’t have $5 billion worth of BAC preferred. He has preferred shares that say “$5 billion” on them, but given their below-market coupon those shares are worth anywhere from $3.3bn (using a high-estimate 9% BAC preferred yield from before the deal was announced) to maybe $4.0bn (using a 7.4%-ish yield on BAC-I today).

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treasurehunt Enthusiast

treasurehunt

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The BofA press release says "This month alone, through non-core asset sales and other actions, we expect to generate approximately $5.8 billion in additional Tier 1 common capital and reduce risk-weighted assets by approximately $16.1 billion under Basel I."

 

As of June 30, BofA had Tier 1 common capital of $114.7 billion and risk-weighted assets of $1393 billion. Assuming no other changes, these numbers go to $120.5 billion and $1377 billion. The Tier 1 common ratio increases from 8.23% to 8.75%. That's pretty good progress.

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Parsad Grand Master

Parsad

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I expect them to continue to sell non-core assets, and combined with cash flows, they should be able to easily maintain Basel III standards.  I see them hitting 9% Tier 1 Capital by the end of the year, if not sooner.  I also would like to see them set up a litigation trust at some point, probably in co-operation with the government, to settle long-term mortgage lawsuits...not unlike the tobacco companies.  Once they do all of that, they can move forward with a much leaner and focused enterprise.  Cheers! 

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Parsad Grand Master

Parsad

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Why is BAC selling half its stake in CCC despite repeated claims it is well capitalized?

 

Because under Basel III, their stake in CCB would be penalized as it is over 10% of the outstanding shares.  They are well-capitalized based on current circumstances, but they need to increase their capital due to the eventual future settlements on mortgage litigation and legacy loan losses from Countrywide. 

 

Some of this will be offset solely by their regular cash flows, but they aren't trying to run a bank with adequate capitalization.  I think Moynihan's goal is to eventually compete with the best banks in the world head-on, and that means focusing BAC on its core business and jettisoning non-core assets to bolster the balance sheet.  So far, so good!  Cheers! 

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treasurehunt Enthusiast

treasurehunt

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I am not Munger -- far from it -- but here are my thoughts anyway.

 

Dick Bove has to be the most manic-depressive analyst I have ever listened to. He seems to switch from "Sell everything!" to "Buy the banks, they are dirt cheap" with great rapidity. Also, he has made some truly horrendous calls in the past, while the financial crisis was unfolding. So for me personally, Dick Bove's endorsement means very little.

 

Also, his recent refrain that "banks are cheap because they are selling below book value and book value is all cash" doesn't make sense to me. Why would the liquidation value of a bank be equal to or more than the book value just because it has a lot of cash on the balance sheet? The remaining assets could still be worth a lot less in liquidation than indicated on the balance sheet.

 

Why not keep it simple and say that most banks are cheap in comparison to normalized earnings and they can get to normalized earnings without diluting shareholders significantly? If this is not true, having a lot of cash on the books is not going to help shareholders.

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Myth465 Newbie

Myth465

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I am not Munger -- far from it -- but here are my thoughts anyway.

 

Dick Bove has to be the most manic-depressive analyst I have ever listened to. He seems to switch from "Sell everything!" to "Buy the banks, they are dirt cheap" with great rapidity. Also, he has made some truly horrendous calls in the past, while the financial crisis was unfolding. So for me personally, Dick Bove's endorsement means very little.

 

Also, his recent refrain that "banks are cheap because they are selling below book value and book value is all cash" doesn't make sense to me. Why would the liquidation value of a bank be equal to or more than the book value just because it has a lot of cash on the balance sheet? The remaining assets could still be worth a lot less in liquidation than indicated on the balance sheet.

 

Why not keep it simple and say that most banks are cheap in comparison to normalized earnings and they can get to normalized earnings without diluting shareholders significantly? If this is not true, having a lot of cash on the books is not going to help shareholders.

 

This is my mistake. I thought Munger quoted Bove in the bank capital thread, but it was actually another guy. I think everyone agrees Bove is an idiot at worst, and a guy who twist whichever way the wind is blowing at best.

 

I think banks are cheap, but most things are cheap at this point. Trash and leverage is very cheap and will run first and run hard. Banks are outside of my circle of confidence so I move on, you cant win em all, but many of the guys investing in banks here will win...

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ERICOPOLY Mentor

ERICOPOLY

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Also, his recent refrain that "banks are cheap because they are selling below book value and book value is all cash" doesn't make sense to me. Why would the liquidation value of a bank be equal to or more than the book value just because it has a lot of cash on the balance sheet? The remaining assets could still be worth a lot less in liquidation than indicated on the balance sheet.

 

Yes it sounds like nonsense. 

 

Who pays him?  I ask this because he says things so absolutely bizarre that I question where his motivations come from here?

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claphands22 Newbie

claphands22

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Why is BAC selling half its stake in CCC despite repeated claims it is well capitalized?

 

Part of their claim they had enough capital was linked to them selling non-core assets. The CCB stake was the just the most obvious none core heavily penalized due to Basel III.

 

Wish they sold the whole stake...hope they aren't keeping it to maintain a good "relationship"...

 

side note: surprised how much it jumped on the news of the stake sale. The stake sell was all but assumed...maybe it had nothing to do with the sale but kind of odd.

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vinod1 Enthusiast

vinod1

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Why not sell all of CCB?  It's non-core after all.

 

I believe there is a lock up preventing them from selling the rest of the stake until 2013

 

Lock expired this month on their entire stake. I think they are not able to find a buyer for their entire stake.

 

Vinod

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gfp Grand Master

gfp

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Why not sell all of CCB?  It's non-core after all.

 

I believe there is a lock up preventing them from selling the rest of the stake until 2013

 

Lock expired this month on their entire stake. I think they are not able to find a buyer for their entire stake.

 

Vinod

 

It looks like only 2 Billion of the shares are still locked up.  From the most recent 10Q:

 

"At both June 30, 2011 and December 31, 2010, the Corporation owned 25.6 billion shares representing approximately 10 percent of China Construction Bank (CCB). Of the Corporation’s investment in CCB, 23.6 billion shares are classified as AFS. Sales restrictions on the remaining two billion CCB shares continue until August 2013 and accordingly these shares continue to be carried at cost. At June 30, 2011, the cost basis of the Corporation’s total investment in CCB was $9.2 billion, the carrying value was $19.6 billion and the fair value was $20.5 billion. At December 31, 2010, the cost basis was $9.2 billion, the carrying value was $19.7 billion and the fair value was $20.8 billion. This investment is recorded in other assets. Dividend income on this investment is recorded in equity investment income and during the six months ended June 30, 2011 and 2010, the Corporation recorded dividends of $837 million and $535 million from CCB. The Corporation remains a significant shareholder in CCB and intends to continue the important long-term strategic alliance with CCB originally entered into in 2005."

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Parsad Grand Master

Parsad

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Why not sell all of CCB?  It's non-core after all.

 

I think CCB is a strategic partner for them long-term.  BAC looks like they want to focus on the core banking / wealth management business, and they want to be the global leader in the future.  They could sell more, but that may hurt their alliance in any future endeavors together.  Cheers!

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