Buffett Puts $5B Into Bank of America!

[txlaw]

The exact same thing happened last time when I was talking about WFC and GE in 2008/2009.  The Oracle himself stepped in then too.  And now again, all those guys who were doubting Berkowitz are going to sing a different tune in a couple of years.  Ok folks, what is the next big idea?  Goldman?  ;D  Cheers!

 

MBIA, Sanjeev, MBIA.

[txlaw]

Genuinely happy for the folks that have done the work and will hopefully reap the rewards. 

 

I call bullshit on that.

[txlaw]

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.

 

Totally agree.  Imagine that people were clamoring for a dividend not too long ago!

[txlaw]

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.

 

I agree. 

 

I mean, come on.  Look at the values available in the market right now.  Clearly the equity exposure was extremely attractive to WEB.

[enoch01]

 

I think it says more about the value of Buffett's franchise than BAC's.

 

 

Agree 100%.  I continually underestimate Buffett's value to Berkshire.  Disclosure: I'm long both, about equally.

[rranjan]

Genuinely happy for the folks that have done the work and will hopefully reap the rewards. 

 

I call bullshit on that.

 

+1

[Junto]

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.

 

+2 and I would add the general consumer marketplace. Buffett still holds weight with consumers as a point of reference. This provides defense against both worries of consumers and placates regulators with a generally small dollar amount in the bigger scheme of things.

[txlaw]

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

 

It's all about confidence, right?  Not just with respect to deposits but also with respect to all the businesses under the holdco.  If BAC was losing any real business due to confidence being lost, that was likely taken into consideration by Moynihan when agreeing to the preferred investment. 

 

Hedge funds and the media have been pushing very strongly for a settlement with the monolines and other parties to the various suits filed against BAC entities.  Zerohedge specifically recommended that BAC settle with the monolines.  People are watching the MBIA/Countrywide proceedings and stating that an upcoming hearing could drastically change the calculus of settlement.  Nobody wants BAC to put Countrywide into BK, as that will delay things further with respect to litigation.

 

People who are short or skeptical of BAC, or who are long the monolines, will say that the preferred investment by WEB confirms their thesis that BAC was weak.  Of course, Buffett has said the exact opposite with his investment.

 

I'm more long MBI than BAC, btw.

 

Apologize for the flurry of posts.

[Valuebo]

Great deal for Buffett but recognize he is not buying the common stock.  If Buffett were Joe Schmo and his investment didn't provide a self fulfilling confidence, would he have simply purchased the common?  And if the common were such a great deal, why didn't he simply buy the common in the open market? -- it's not like there isn't enough liquidity for him.  And this is a tiny investment for Berkshire and Buffett.

 

Well, If Buffett bought the common he wouldn't have the 6% and the 5% break up premium on his cash? Am I missing something?  ???

 

And tiny? Please... $5b is almost 3% of BRK's market cap. Considering how diversified BRK is I would say that is a decent bet. Imagine what his return could be. Doubt you would call it tiny if things turn out well... In a bull scenario the 6% from the preferred will be peanuts in comparison with his return on the warrants. 10 year is a long time.

[biaggio]

Happy to be a BRK shareholder.

[ERICOPOLY]

The exact same thing happened last time when I was talking about WFC and GE in 2008/2009.  The Oracle himself stepped in then too.  And now again, all those guys who were doubting Berkowitz are going to sing a different tune in a couple of years.  Ok folks, what is the next big idea?  Goldman?  ;D  Cheers!

 

MBIA, Sanjeev, MBIA.

 

I hope so.  It's 30% of my money now (averaged down to cost of $8.60).

[berkshiremystery]

Eric/Txlaw/others,

 

Wondering why you bought the BAC call options today, rather than the underlying?  On a day of panic where implied vol. has spiked to 62%, the option price is over two times the price at a normalized vol. of say 42%.

 

 

I think the stock will be at least as high as $17 by expiration of those 2013 calls.  Nearly 7x returns.

 

I didn't go "all in" on the calls, if it blow up 100% I've only destroyed 5% of my fingers -- which I would expect to recover from the warrants.

 

I have the same number of warrants in AIG as I do in BAC.  I hope AIG gets their $10b back!  That gain in book value alone would repay me for the cost of my BAC warrants.

 

Congrats Eric for the perfect pitch, your calls might lead to an early retirement. But i would rather set up a personal hedge fund....  if I would be you.  ;D

 

 

 

[ERICOPOLY]

Eric/Txlaw/others,

 

Wondering why you bought the BAC call options today, rather than the underlying?  On a day of panic where implied vol. has spiked to 62%, the option price is over two times the price at a normalized vol. of say 42%.

 

 

I think the stock will be at least as high as $17 by expiration of those 2013 calls.  Nearly 7x returns.

 

I didn't go "all in" on the calls, if it blow up 100% I've only destroyed 5% of my fingers -- which I would expect to recover from the warrants.

 

I have the same number of warrants in AIG as I do in BAC.  I hope AIG gets their $10b back!  That gain in book value alone would repay me for the cost of my BAC warrants.

 

Congrats Eric for the perfect pitch, your calls might lead to an early retirement. But i would rather set up a personal hedge fund....  if I would be you.  ;D

 

I don't know much though regarding real fundamental analysis.  I just (think I) know who does, and then piggyback on them when I firmly grasp the gist of it.

 

It would be sort of fraudulent in a way to invest the money of others given my technique.  I can always spend my time learning though -- perhaps a formal course of study like a CFA type thing.  The risk though is then I'd start making huge mistakes believing that being "certified" has made me smart enough to make my own decisions.

 

[rranjan]

Congrats Eric for the perfect pitch, your calls might lead to an early retirement. But i would rather set up a personal hedge fund....  if I would be you.  ;D

 

Jsut for the information of some people who might not know. Eric has been enjoying his retirement for last few years even though I remember him taking some part time work in the middle with his old company to keep himself busy. :) . You can correct me Eric if I am wrong.

[txlaw]

The exact same thing happened last time when I was talking about WFC and GE in 2008/2009.  The Oracle himself stepped in then too.  And now again, all those guys who were doubting Berkowitz are going to sing a different tune in a couple of years.  Ok folks, what is the next big idea?  Goldman?  ;D  Cheers!

 

MBIA, Sanjeev, MBIA.

 

I hope so.  It's 30% of my money now (averaged down to cost of $8.60).

 

Nice average cost.  Unfortunately, mine is not as high.  Too early.

[rjstc]

Didn't Buffett just have a meeting with Obama and probably Geithner Probably this buy did more to settle bank fears for now than treasury or federal reserve could have done.

   

  Also, wasn't it around the early 90s or so when everyone thought the banks were going to go broke because of commercial real estate loans etc. Wells Fargo was a gonner and yet he stepped in when nobody else would because he knew it was a screaming bargain. In fact doesn't he say sometimes it's so obvious that simple logic is all you need to know plus simple math.

 

  He I'm sure he is buying more WFC but I'll bet he also is saying that the price of BAC has been knocked irrationally down by "MR MARKET" AKA Mungers to the point that it's a no brainer.

 

  Also when he started originally buying up WFC C and BAC were both in the dumps also. BAC was selling off their headquarters building in SF, lots of assets in Japan etc. Both of them came roaring back.

 

So yes I own both BAC and C. This is a bargain time like the 90s. Or when oil was at $15 a barrel a while back. Or when people thought Obamas health care plan would mean a bust for all the pharmaceutical company's and they all nosedived.

 

  So isn't that what you're supposed to do? Buy them when they really go on sale? I like what Peter Cundill said. He liked to buy sometimes when good values were hitting 52 week lows. But he really liked to buy when they were hitting multiyear lows.

[txlaw]

Amazing that BRK is down right now.

 

This is the perfect environment for WEB.

[Myth465]

Genuinely happy for the folks that have done the work and will hopefully reap the rewards. 

 

I call bullshit on that.

 

I tend to agree. There is just too much activity to really be indifferent and hopeful......

BofA is hot right now. What happened to the LVLT 3 thread.

[given2invest]

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. 

 

 

[Liberty]

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.

[given2invest]

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. 

[Valuebo]

taxlaw and rranjan -- you can't possibly be such simple, bitter, and pathetic individuals...nasty.  Lighten up and put a smile on your face and enjoy the "luck" you so readily acknowledge to have benefited from in life:)  I can say without reservation that if someone has done the work and I am happy if they realize deserved success. 

 

I mean, come on.  Look at the values available in the market right now.  Clearly the equity exposure was extremely attractive to WEB.

 

Reality check -- he didn't invest one penny in the common equity, which some had boldly and loudly proclaimed offered an a rare "asymmetric risk/reward opportunity"...that claim was pretty funny -- I liked the fancy language, again as if he had come across a concept uniquely understood by him and a select few others on the planet...we can only guess who that someone was:)   

 

Buffett was given a free option on any upside in the equity and paid 400bp over the 10 year on $5B of cash -- nice work on behalf of Berkshire, Mr.  Buffett.

 

Others are emotional, yet you resort to name calling. Keep it up!

 

Not sure what your reality check is all about. Like that claim should be not true now because Buffett got this deal instead of buying the common. What kind of logic is that? This deal is much better for BRK and all it says to me is that Buffett believes it is highly unlikely that BAC goes to zero and that the "asymmetric risk/reward opportunity" is present. He still gets all the upside and almost eliminates the risk as that he would have as a shareholder.

 

 

Amazing that BRK is down right now.

 

This is the perfect environment for WEB.

 

+1 In my mind I just upped my IV calculation by roughly +2+3%.  ;D

[rjstc]

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.

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.

[Liberty]

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).

[txlaw]

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.

 

I disagree.  Why would Buffett make a $5 billion investment at a yield of 6% given the recent market downturn.  He can certainly do better than that with less risk (if you believe that BAC is risky) in many common stocks or debt instruments.