Liberty Posted August 25, 2011 Share Posted August 25, 2011 Not true. Very few opportunities to put that amount cash to work at 6% while also getting the option for free upside. Expensive for a company that supposedly was financially sound but nice deal for Buffett, especially since a "Buffett investment" creates confidence. Buffett did well on his GS and GE investments but the common shareholder has not done so great in eithe company. Berkshire's in it for the long-term. They haven't done well with the common of those yet. It'll take a bit longer than this to determine how good that deal was for BRK. Link to comment Share on other sites More sharing options...
Kiltacular Posted August 25, 2011 Share Posted August 25, 2011 Buffett once again plays Yoda to counter the short / distort Sith Lords. 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. I may be wrong, but the game looks so obvious to me. Patrick Byrne is right. It doesn't matter that he's right and I know that this board is one of the few places where Byrne isn't completely trashed. You have to know how these guys are playing the game...and set up your affairs appropriately. But, with this deal, the shorts once again have to be worried about playing their game against any company that Buffett might invest in. It will be interesting to see if they move on to AIG in full force -- but they've got to be worried that Buffett could easily do this type of deal with AIG (a company they must know he knows intimately). They have so much capital that they need to go after large market cap companies. I guess the smaller hedge fund players can go after relatively smaller cap. companies but it seems like that happens less than it used to as hedge funds have gotten so much larger. After Ericopoloy, it seems like Berkowitz is a big winner today (and Buffett too). Note that Buffett got a 10 year life to his warrants...I think this is a tacit admission that his 5 year period for the GE and GS warrants might not have been long enough. 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. Link to comment Share on other sites More sharing options...
given2invest Posted August 25, 2011 Share Posted August 25, 2011 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. Link to comment Share on other sites More sharing options...
given2invest Posted August 25, 2011 Share Posted August 25, 2011 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. Link to comment Share on other sites More sharing options...
moore_capital54 Posted August 25, 2011 Share Posted August 25, 2011 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. Val - In this environment, and considering the sentiment that was surrounding BAC, this was a small price to pay almost like a Triple A Rating. I completely agree with Moynihans logic in allowing Buffett to invest. Also the arguments here about why they raised capital when they kept saying they had enough are ridiculous. Munger and others are calling for a 5-10% haircut in total assets, in that world what is $5b? it wouldn't do anything. If things play out as Munger and others believe, $5B won't save BAC. But if thing's play out the way Moynihan and longs believe, then the additional dilution is bearable. Link to comment Share on other sites More sharing options...
Munger Posted August 25, 2011 Share Posted August 25, 2011 Berkshire's in it for the long-term. They haven't done well with the common of those yet. It'll take a bit longer than this to determine how good that deal was for BRK. Liberty -- I agree. The deals are great for Buffett. He gets paid to make the invetment at close to 400bp over the 10 year and gets a free option on any upside in the equity. He is not going anywhere. He would have held the GS pfd as long as he could. Simply reminding that GS and GE didn't create any sustainable riches for the average joe common long term shareholder to this date -- for the long term shareholder, capital could have been better deployed than by holding the common following Buffett's pfd investments in these companies. The opportunity cost for simply holding GE and GS common since the Buffett PFD investment has been relatively high. Link to comment Share on other sites More sharing options...
S2S Posted August 25, 2011 Share Posted August 25, 2011 Buffett once again plays Yoda to counter the short / distort Sith Lords. 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. I may be wrong, but the game looks so obvious to me. Patrick Byrne is right. It doesn't matter that he's right and I know that this board is one of the few places where Byrne isn't completely trashed. You have to know how these guys are playing the game...and set up your affairs appropriately. But, with this deal, the shorts once again have to be worried about playing their game against any company that Buffett might invest in. It will be interesting to see if they move on to AIG in full force -- but they've got to be worried that Buffett could easily do this type of deal with AIG (a company they must know he knows intimately). They have so much capital that they need to go after large market cap companies. I guess the smaller hedge fund players can go after relatively smaller cap. companies but it seems like that happens less than it used to as hedge funds have gotten so much larger. After Ericopoloy, it seems like Berkowitz is a big winner today (and Buffett too). Note that Buffett got a 10 year life to his warrants...I think this is a tacit admission that his 5 year period for the GE and GS warrants might not have been long enough. 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. Yep. Link to comment Share on other sites More sharing options...
berkshiremystery Posted August 25, 2011 Share Posted August 25, 2011 Institutional guys are the first to pull their money. So much for being professionals! Cheers! Sanjeev,... these days remind me of 2003 and FFH, the worse the news, the greater a bargain BAC becomes. ;) I guess the smart money is always down after purchasing, this doesn't worry me, personally. IMHO, at almost 1/3 of book value (~$20 something book, currently trading around $7), BAC represents one of the biggest undervalued long term treasures of all the big cap companies. I give a thumbs up to all of us that are long BAC ;D AIG sues BofA for $10 billion alleging "massive fraud" On Monday August 8, 2011, 10:16 am EDT http://finance.yahoo.com/news/AIG-sues-BofA-for-10-billion-rb-2884649640.html?x=0&sec=topStories&pos=3&asset=&ccode=[/ Unbelievable friggin'. :P The first time I came back here to the boards 3 weeks ago, after a long abstinence since last spring, I told you all that BAC is the biggest undervalued long term treasures of all the big cap companies, at almost 1/3 of book value. We averaged all the way down, as it was our only major investment recently, after we did strike on LUK last year. We even bought in todays market in the morning lows more BAC. Where else could Buffett place his big elephant hunting gun. ;D Link to comment Share on other sites More sharing options...
ERICOPOLY Posted August 25, 2011 Share Posted August 25, 2011 I just think that if we keep getting "once in a generation" opportunities every three years, then Berkshire is not going to be held down by the law of large numbers for quite a while yet. Link to comment Share on other sites More sharing options...
PlanMaestro Posted August 25, 2011 Share Posted August 25, 2011 Instead, he lends $5 billion @ 6% and receives warrants for 700 million shares with a strike of ~$7 per warrant. In other words, he gets to invest $5 billion in Bank of America's common without moving the price. 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. Link to comment Share on other sites More sharing options...
merkhet Posted August 25, 2011 Share Posted August 25, 2011 C'mon...silly. He doesn't have to buy $5B common in a single day or even a single week...BRK makes $5B investments in a common stock year in year out. BRK does make $5B investments in common stock year-in and year-out. The question is how often does BRK make a $5B investment without moving the price significantly. Of course he's not going to go out and buy it all in a day or a week -- the two important things are (1) will your volume/purchases on a daily basis move up the stock price and (2) can you pick up all you need before you have to report that you're doing so? Not true. Very few opportunities to put that amount cash to work at 6% while also getting the option for free upside. Expensive for a company that supposedly was financially sound but nice deal for Buffett, especially since a "Buffett investment" creates confidence. Buffett did well on his GS and GE investments but the common shareholder has not done so great in eithe company. Again, not really what I was saying. There are few opportunities to pu $5B to work at 6%, but both Warren and Charlie have said that most people forget opportunity cost. If you're putting money to work at 6% you're forgoing the opportunity to put it to work 6 months, 1 year, etc. in the future for much greater than 6%. I'm sticking to my position that the investment was not about the 6% -- I mean, it's better than sitting around in treasuries right now, but his real goal is the warrants. Link to comment Share on other sites More sharing options...
PlanMaestro Posted August 25, 2011 Share Posted August 25, 2011 Where else could Buffett place his big elephant hunting gun. ;D AIG, but he would not control the float and does he really want more financials? When he hired the new PM he said no more banks ... I wonder what changed his mind ;) Link to comment Share on other sites More sharing options...
benhacker Posted August 25, 2011 Share Posted August 25, 2011 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 Link to comment Share on other sites More sharing options...
moore_capital54 Posted August 25, 2011 Share Posted August 25, 2011 Munger I simply most disagree with you. GS rose substantially from the time of Buffet's investment. Your argument only holds credence due to the recent drop in markets over the last 30 days. Also, The investments in GS and GE were made at much higher price/book price/earnings ratios. Link to comment Share on other sites More sharing options...
rranjan Posted August 25, 2011 Share Posted August 25, 2011 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 Ben - I am with you here. BAC did simply hand the money because they wanted to instill confidence. Link to comment Share on other sites More sharing options...
rranjan Posted August 25, 2011 Share Posted August 25, 2011 Instead, he lends $5 billion @ 6% and receives warrants for 700 million shares with a strike of ~$7 per warrant. In other words, he gets to invest $5 billion in Bank of America's common without moving the price. 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. No, I don't think it was a rescue. Link to comment Share on other sites More sharing options...
given2invest Posted August 25, 2011 Share Posted August 25, 2011 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. Link to comment Share on other sites More sharing options...
enoch01 Posted August 25, 2011 Share Posted August 25, 2011 Ben, Hard to disagree with what you said. I think partly they are willing to pay Buffett because they want the regulators' confidence. That could be of decent value to BAC. Link to comment Share on other sites More sharing options...
DCG Posted August 25, 2011 Share Posted August 25, 2011 Guys, don't get overly greedy or boastful over a 2-day move in the stock price (unless you bought at the bottom and sold out at the top). I own some BAC leaps and common as well, but as we've seen quite often recently, the stock can easily go back down 20% in a day or two as well. This stock has been moving over 10% a day on almost a daily basis recently, so people claiming victory (and putting down other board members) over a daily move, or daily news is most likely unwarranted. And don't forget that when Buffett bought GE and GS, the stocks got a short-term pop, and then proceeded to drop by 50% over the following few months before rebounding. Link to comment Share on other sites More sharing options...
Liberty Posted August 25, 2011 Share Posted August 25, 2011 The fact is, Buffett's reputation is worth a lot, especially to financial companies where trust matters. Buffett's reputation wouldn't be worth what it is worth if he invested in bad companies, so they both win. It's not because BAC is paying for something intangible that they're not getting something for their money. In fact, I would be surprised if the premium they are paying won't end up being worth it to them... Link to comment Share on other sites More sharing options...
MrB Posted August 25, 2011 Share Posted August 25, 2011 I do not follow BAC, but this is obviously a good deal for Buffett. Good yield in a company with an implicit government guarantee. So his downside is pretty much zero, because come hell or high water he will eveeeeeeeeeeentually get his money back and clip market equivalent returns (equity market); Plus significant upside if there are no significant bumps in the road. However, I don't interpret the deal as a good sign. If I told you I'm in good shape and don't need money and tell you the next day that I just raised some capital you might call me a liar or at least mark down by credibility buy a notch or two and definitely question my assessment of how swell things are going in my company. Why is this any different? The other point that stands out is that Buffett or at least the news reports of what he said makes it sound as if he called BAC and proposed this deal and what? BAC just said, "Yeah, great idea. Let's do it!". This smacks more of the kind of calls Buffett gets at 7am on a Sunday morning or at least somewhere in between the reported version of events and the Sunday morning calls. Great deal for Buffett, so-so deal for BAC and a question mark over the recovery. P.S. I have no opinion on the value of the equity of BAC Link to comment Share on other sites More sharing options...
berkshiremystery Posted August 25, 2011 Share Posted August 25, 2011 Where else could Buffett place his big elephant hunting gun. ;D AIG, but he would not control the float and does he really want more financials? When he hired the new PM he said no more banks ... I wonder what changed his mind ;) See guys I was so convinced in BAC over the last year, that I had even converted some part of my beloved BRK to BAC in my personal account. I had never done or sold a single Berkshire in all my life. Hahahaha that was a damn conviction. My mind played Darwinian BAC against Berkshire. Yes, I know for a 100 storm, Berkshire is Fort Knox, but I considered BAC so much financially stronger compared with the BAC in 2008, that with a current market value of about 1/3 book it is even a bigger medium term play then BRK itself, so I had told myself why not buck up the truck with my conviction and play Darwinian BAC vs Berkshire. ;) Link to comment Share on other sites More sharing options...
given2invest Posted August 25, 2011 Share Posted August 25, 2011 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! Link to comment Share on other sites More sharing options...
PlanMaestro Posted August 25, 2011 Share Posted August 25, 2011 I think partly they are willing to pay Buffett because they want the regulators' confidence. +1 Pushed to dilute is the main risk with the banks today, and everyone that is following banks know about overzealous regulators. I wish regulators were more of a countercyclical force, as they are meant to be, but that is the world we are leaving in. Link to comment Share on other sites More sharing options...
benhacker Posted August 25, 2011 Share Posted August 25, 2011 Plan / Enoch, I see your point. $5B is a high price to pay, but maybe it was the right price. I think it says more about the value of Buffett's franchise than BAC's. I think BAC is cheap enough, buyers at this price will view it as a positive, but I'm questioning the logic of BAC management here. Ben Link to comment Share on other sites More sharing options...
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