Buffett Puts $5B Into Bank of America!

[Munger]

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.

[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.

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.

 

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. 

[Parsad]

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!

[Munger]

He can certainly do better than that with less risk (if you believe that BAC is risky) in many common stocks or debt instruments. 

 

Are you now claiming to have insight into Buffett's opportunity set and his judgement about that opportunity set?

[given2invest]

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!

[S2S]

Here's a spreadsheet put together by DealBreaker's Matt Levine (formerly of Goldman Sachs) that takes a stab at how much Buffett paid.

 

https://spreadsheets.google.com/spreadsheet/ccc?key=0Aij6EG4ObjGidF8zb2NrUjM5ZHI0Szk5Wnh5Qk9LMUE&hl=en_US

 

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.

[Parsad]

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.

 

I don't care about the stock price.  My whole argument, and I think many of the other investors who bought, was simply that there was value there and things were changing for the better.  That's all.  What the stock price does in the short-term we have no clue.  But we felt that the long-term fundamentals of the business were changing and eventually the stock price would recognize that...be it 3, 5 or 10 years from now.  Cheers!

[coc]

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.

 

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.

 

How different is it really?

 

If Warren was truly worried about a series of events leading the BAC's common being worthless (i.e., a bankruptcy or gov't takeover a la FRE/FNM), do you honestly think he'd have made a preferred deal? Would he want to be exposed to the company in any part of the capital structure?

 

It makes little sense to me to say that Buffett's investment in the preferred is somehow less meaningful than an equivalent common stock purchase. He got a better deal than buying common outright, but that doesn't mean that he lacks confidence. If he did, he'd not have called Brian Moynihan and asked to invest in his company.

 

What is the scenario where the preferred is a nice purchase but the common implodes? Are we worried about dilution? Even if BAC ends up with 20B shares outstanding and only earning the current $33B PTPP, that's probably still $18B or so of net income, or $0.90/share on the current $8 share price. Not too bad. 

 

[given2invest]

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. 

[rranjan]

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.

 

+1

[given2invest]

Here's a spreadsheet put together by DealBreaker's Matt Levine (formerly of Goldman Sachs) that takes a stab at how much Buffett paid.

 

https://spreadsheets.google.com/spreadsheet/ccc?key=0Aij6EG4ObjGidF8zb2NrUjM5ZHI0Szk5Wnh5Qk9LMUE&hl=en_US

 

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. 

[Valuebo]

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.

[txlaw]

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%. 

[given2invest]

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.   

[given2invest]

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! 

[S2S]

Here's a spreadsheet put together by DealBreaker's Matt Levine (formerly of Goldman Sachs) that takes a stab at how much Buffett paid.

 

https://spreadsheets.google.com/spreadsheet/ccc?key=0Aij6EG4ObjGidF8zb2NrUjM5ZHI0Szk5Wnh5Qk9LMUE&hl=en_US

 

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.

 

Point taken. WEB would be getting the warrants for free and then some (the prefs alone are worth over $5B) if your assumptions prove correct.

[coc]

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.

 

[Munger]

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.

 

The lack of common sense is stunning.  He was given large equity exposure for FREE -- of course Buffett will take it...  In addition, he is being PAID 6% on $5B of capital.  Awesome deal.  Unlike you an other bulls, Buffett risked $0 capital on the equity, which some humorously proclaimed as a rare "asymmetric risk/reward" opportunity.

 

And if you are  running a fully capitalized bank with nothing but massive free cash flow on the horizon, the CEO of BAC tells Warren Buffett "thanks for your interest, we share your opinion but you can capitalize on the upside by buying common stock just like everyone else."  -- ESPECIALLY SINCE YOU TOLD THE WORLD YOU DIDN"T NEED CAPITAL JUST TWO WEEKS AGO.  You don't give WEB a sweetheart deal (FREE equity exposure and 400 bps over the 10 year) because he is a nice guy with a good reputation.  Are you kidding me?

 

And now all of sudden, we hearing leaks that normalized earning aren't likely to materialize any time soon.  Sh#$ show.

[txlaw]

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!

 

The point is that the warrants are not free when you think about the opportunity cost. 

 

Think about it.  Berkshire could buy a great business for $5 billion that would return economic value far greater than a fixed 6% yield for ten years. 

[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.

[Parsad]

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.  

 

The best way to view this through Buffett's previous similar deals in 2008/2009.  GE Capital was overly leveraged and had large loan losses.  Goldman was being thrown in with Lehman and Bear Stearns.  Both cases there was a lack of confidence by investors and institutions.  Innuendo was abound regarding how both were in trouble. 

 

Buffett's investment was one where he was protected on the downside, and had significant upside.  It was a lose little, win big proposition.  But that gave both of those companies time to work through their problems and separate themselves from the herd. 

 

That's all this deal does...it gives BAC breathing room to continue to move forward on the things they have planned.  Anybody could have injected that capital, but because it was from Buffett, it has a different connotation altogether.  It means we believe that management is doing the right things and we think we can make money here.  Cheers!

[Munger]

The point is that the warrants are not free when you think about the opportunity cost. 

 

Think about it.  Berkshire could buy a great business for $5 billion that would return economic value far greater than a fixed 6% yield for ten years.

 

 

Total and utter nonsense.  Completely delusional.  You write as if Buffett is not already swimming in too much cash and won't have massive amounts of cash coming in next year and every year thereafter that needs to be put to work.  He as more cash than opportunities. 

[Parsad]

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!

[coc]

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? 

 

[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.