BUFFETT’S BANK OF AMERICA DEAL
I’ve spent quite a bit of time in the past discussing the world’s most misunderstood investor. This folksy old man from Nebraska doesn’t lurk like a lion in the shadows waiting to pounce on his prey. No, he just comes up and gives you a nice big “hug” as the someone described the B of A deal.
Let’s be clear here. This is a distressed play with sophisticated hedging involved. And it’s classic Buffett. He is essentially stepping on Bank of America’s throat when they are vulnerable and extracting his billions in future cash flows. If you’re not familiar with the terms, Reuters breaks them down:
“Buffett’s Berkshire Hathaway will in many ways make out even better financially than Bank of America did in the deal. Berkshire had a position in the bank that he sold in the fourth quarter of 2010 when the stock had an average price of $12.24.
The warrants to buy 700 million shares of common stock he gets in this deal are priced at just over $7.14 per share, with an unusually long 10-year exercise period.
One long-term Berkshire shareholder said the warrants were the best part of the deal by far.
“He could well make a 100 percent return on his investment in a few years,” said James Armstrong, president of Henry H. Armstrong Associates. “It’s amazing how much a little hug from Buffett is worth these days.”
Bank of America will also sell Berkshire 50,000 shares of cumulative perpetual preferred stock with a 6 percent annual dividend, it said. Bank of America can buy back the investment at any time by paying Buffett a 5 percent premium.
It is virtually a mirror of the deal Berkshire did with Goldman in the depths of the crisis in fall 2008, except in Goldman’s case it paid a 10 percent dividend. The Goldman deal paid Berkshire $15 a second in dividends until Goldman bought Buffett out earlier this year.”
Just like the Goldman deal, Buffett is buying a distressed stock in which he has embedded a fairly substantial downside hedge. I have no idea if Bank of America is actually solvent and I can’t and won’t speculate over the balance sheets of a banking industry that I believe are not entirely understandable, but I am sure Buffett has done the math at least well enough to believe that the risk of insolvency is low. I don’t know if he’s right. But I know one thing – this wasn’t your average “buy great brands at a great value and hold forever” sort of investment. This is classic Buffett. Savvy, cunning, aggressive and 100% Wall Street, 0% Omaha. It’s a step on your throat deal. Not a “hug”. But the myth of folksy “buy and hold” Warren lives on….
I’d love to have a cheesburger and a coke with him.
I’d pee my pants sitting across a board room table from him.
I expect you would have to pay for Buffet’s meal. He would just happen to have no cash or credit card.
Wow, BAC is up 11%!
The market doesn’t presently think they have a foot on their throat!
Yes it’s totally irrational. The other financials were up as well, some great short setups right there.
I don’t see myself ever holding a bank stock again, unless I can get buffetesqe conditions (which I won’t because I don’t have 5 billion in cash to spare anytime soon).
It’s funny that Fox News called Warren a socialist the other day after Warren asked for higher taxes on the rich. If he’s a socialist, hide me from the real cold blooded capitalists like Mr. Roche.
Maybe because he pledged to give 99% of his wealth to philanthropy and giving back to society makes his a socialist
http://givingpledge.org/#warren_buffett
LEFTIST “charities” of course.
What Warren did is called a “Bear Hug” Cullen, and not the financial definition, but the wrestling one…
Ha.
We can name Mr. Roche’s finishing move “Cullen the herd”.
howling! most excellent W.! my distant farmer’s background got revisited….
Savvy, cunning, aggressive and 100% Wall Street, 0% Omaha. It’s a step on your throat deal. Not a “hug”.
Yup, definitely a finesse pimp.
http://www.urbandictionary.com/define.php?term=finesse%20pimp
“Japan is a buy”….
“Just like the Goldman deal, Buffett is buying a distressed stock in which he has embedded a fairly substantial downside hedge.”
Do you mean he intends to sell the warrants and purchase puts?
Or, you think he is taking the 6% to purchase CDS (not sure what the current CDS quote is), and then get’s the free warrants?
I don’t understand, why BAC is up. This deal tells me that they’re desperate.
I thought the exact same thing when I saw these deal-points unfold… unreal!!! Funny how Moynihan tries to act like it was a “hmmm i guess we should, okay” move. BAC is hurting very very bad, the amazing thing is “Warren to the B” gets to actually move the market with this kind of a lousy deal… unreal…
I just read your comments guidline…I’m scared. Only my wife has stayed with me and I think if I post this in 10 years…wait..at that point she’ll be gone and I’ll be banned.
Cullen- can you set up a booth on your site I can go into and ask for grace. I’m a good person..I just say the darndest things. But I’m off the drugs..I think this will help.
The adjoining cubicle wonders what I’m laughing about….there’s no way to explain…thanks VII!!!
Now they think I’m on drugs….
Well I hope you offered them the drug of laughter you found on the TPC. It is one addicting site.
Thanks Roger
BTW- Rosenberg had some excellent comments this morning. I don’t know how the reprinting works but he really get’s into how economists are dismissing alot of the bad data. As well he is still bullish on Gold with a retest to 1630.
I think Rosie is spot on his analysis..but we have some people who have done a better job forcasting short term 1 year less investments. But that’s Rosenbergs view…Gold Bull up up and up. He sees more fear than greed in gold…Not mine. But he’s a smart guy so I never shut him out.
Simply amazing BAC agrees to this deal in a ZIRP environment. What worries me is that they must be completely shut out of accessing credit markets. Agreed with earlier comments that it is perplexing that BAC is up 8-10% today. Maybe a good opportunity for a short. But again who in the world knows how to interpret their financial statements. Could be a $1 stock or $20 stock. I am leaning closer to $0 after this desperate move!
Knowing the details I would bet the bounce doesn’t last through tomorrow
D-
interesting take. I see it similar to QE- If we need it that is not good.
Yes, if BAC is willing to get bent over like this…well that can’t really be good can it.
If Hersh the shilock gives me a loan does that mean I’m credit worthy?
But for the active trader I’m sure profits will be booked on this position.
Clearly two things at play…the meeting with Obama and Bufett recently I want that transcript. and two..I will reconsider and take a look at BRK. It has some good gains coming its way.
BAC is not only raising capital. They are buying confidence. For better or worse, Buffett’s got a reputation as a savvy investor, and just having his name pop up around the stock will give confidence to a lot of people. He knows that and he’s charging a premium for his name.
The only way Buffett is losing here is if BAC is insolvent and is forced into bankruptcy, with the government taking over ans screwing the preferred shareholders. Now, in the capitalist system this *ought* happen, he should lose his shirt if BAC goes bankrupt. But we all know that’s ain’t gonna happen. In case of bankruptcy, the American government will step in and BAC will get bailed out one way or another.
Wait a minute. Nothing is guaranteed unless Obama gave Buffett some kind of special guarantee in their secret meeting. And any guarantee might be dependent on congressional appropriations not yet made. Buffett is taking a calculated risk, perhaps the risk is small but it is still a risk, even if he got some personal assurance from The Great Obama.
Why would he need a personal guarantee from Obama? Does anyone really think that if BAC goes under the United States government will just watch while we have another Lehman? No way. The government will break the law if it needs to. Also, markets dropping 10% in one day will force reluctant congressmen into passing legislation.
Now, that doesn’t mean the BAC common stock is a screaming buy. The common shareholders might get hosed.
Start your own blog if you want free speech. Cullen is just trying to keep the level discourse above a certain threshold, which is well within his rights as the owner of this site. Throwing around insults as you’ve been doing today kind of reinforces the need for the guideline, dontcha think?
and financials tanked the whole day long….hellova zombie bank system we got.
i guess he’ll end up owning whats left of the’good parts’ of BAC after they finally get around to taking them apart ‘swedish style’ ….
nothing is off the table……what, they’re going to announce ‘tarp 2′ when TSHTF…… thats not happening in this enviroment.
Hillbilly-
I counted only 2 people I thought were unhappy personally and found this site to discharge there anger on others. I must have dimentia…clearly there are three.
To that. I wish you the best Hillbilly I hope you find peace in what ails you.
Cullen and the other readers did not come here to fight with you or be spoken too this way.
Enjoy your path
….and may it lead far, far away from here….
It is the lively, civil and intellegent discourse that sets this site far above others of its ilk, (and there are thousands of them).
Cullen, I know it must be taxing to both hold forth on the stage and be the usher in the theater (and presumably sell popcorn and tickets) but many appreciate the effort…
Why all the Ad Hominem attacks? Please realise, it is the lowest form of retort and usually comes from those who out of their frustration of not being able to attack the argument instead attack the man. To be frank, it looks like bullying and is dragging down this site. For the sake of this site I encourage everyone to stick to debates and drop the Ad Hominem attacks.
I bank at Wells Fargo…for now. I have twice had offerings misrepresented to me by a personnal banker at WF causing me to take action then reverse these actions and request a reimbursement of funds…this all in the past 6 months. When I expressed my concern that this was quota driven advise from the original personal banker the individual correcting my account acknowledged that this is a possibility.
I have decided to change banks due to a lack of trust in a Wells Fargo banker. The behavior of bankers have not changed…why would it as they were never punished for their actions.
I have little respect for Warren Buffet and all the bs games he plays based on his mass accumulation of wealth and pulling of strings.
Maybe it is just a patriotic act?
However I remember well the day, when Buffet entered the Goldman Sachs deal and a colleague and I were joking that Buffet has become old. How ridiculously wrong we were on that day
!
This is reminiscent of the Goldman deal in that BAC is a great franchise in desperate shape that needs a lot of capital and a vote of confidence. BAC’s balance sheet is dreadful if you take price to book literally; if it were a community bank its assets would be marked to market and it would be closed by the FDIC the next day. Buffett knows that he has a Bernanke-Obama put in place, so that his downside risk is limited on a TBTF investment, and BAC is a classic TBTF institution.
I smell desperation on BAC’s part, and also a little kindness to Obama from Uncle Warren. After all, the Fed bailed out his investment in Wells Fargo and his huge derivatives book, thus preserving his legend, and he can make a one way bet and also look good to his amigo in the White House. Buffett is looking more and more like a Latin American corporatist playing to Obama as his Juan Peron.
I would love to hear what Charlie Munger thinks about this, but I suspect he was sent on a long vacation.
Neither wells or berkshire have a big derivative book, absolutely or relatively. BAC, C, GS, and JPM have unreal exposure to them however, with JPM’s being at a level of insanity.
Buffett is really tight with Obama, and probably got some assurances of an Obama/Bernanke Put in their secret meeting, but it would not surprise me if Buffett hedged his bets by investing in Romney or Perry also, when the time is right. Remember, he is a businessman.
NO> Buffet is a corrupt and lying THIEF. Why do you guys think he is so smart??? YOU could make the same money this guy makes if you had the connections, inside information, and the ear of the President backing him up for the sake of the President’s election.
You think this is GOOD for business, the market or Amerikka?
if you want to just insult instead of discuss, do it over at chairman krugman’s or premier joe klein’s…you can really get under their skin there…….i do……this is not the place, man.
and i am to the right of both you and atilla the hun.
so bac is basically paying buffet for advertisement. and if they get in trouble buffet has obamas ear.
Cullen,
I have heard some very bad things said about BofA on other blogs. In fact, one blog that seems to be well-respected has even put BofA on a “deathwatch” because of its involvement in the present real estate fiasco. Any commentary on this?
Haha i bought BAC (90% of my portfolio into it)yesterday morning at 6.44 a share, sold this monring at 8.51.
nice one Dylan, you must have had great confidence in the trade, had you planned to be out so rapidly?
or just nuts.
Buffet is no sage. He is an “Inside trader” with inside information and inside connections.
Thinking this man as a “Great Man” and “Great Investor” is just ignorant.
He is the new BATHTUB BOY!
you mean like the quick 280 million buffet picked up, when he announced the deal.
yeah dave, i was trying to smarmy
Buffett is sponsoring a reelection fund raiser for Obama. What is horribly wrong with that picture? Does the super savvy investor really believe that the worst president for business in my lifetime (and also the most incompetent) should be reelected? There can only be one reason. He thinks he will get sweetheart insider deals. Corrupt.
I read Cullen’s piece from 2010 on Buffett and it’s a very good article, shedding some new light on the man.
I’ve always been wary of the public image of Buffett. Ingvar Kamprad, the founder of IKEA, also employs the ‘chummy old man’ image. It was revealed just days ago that he was deeply imbedded in the nazi movement in Sweden during WWII. And worse still, he kept contacts with the people long after the war into the 50s when he saw the cause was definitely lost. And even last year he called one of the great architects of the Swedish fascist/nazi movement a ‘great man’.
Yet despite all this, his chummy image remains.
I don’t think Buffett is a nazi, say, but the similarities are there. The image projected is far different than the ruthless character he actually has.
Now, in the piece Cullen wrote, I would take note of the dissing that investing won’t make you rich. Tell that to long-term holders of Google or Apple. Sure, finding those companies is hard, that’s why most fail getting really rich, but I know many families here in Sweden who have held a substantial amount of money in the stock market and generally gotten richer and richer. Not very rich, but definitely richer, accounting for inflation and all the rest.
But doesn’t mean that it’s easy to become the new Buffett, or even getting rich value-investing. I personally think that value-investment is part of Buffett’s thinking but as Cullen pointed out: it’s far from as monolithical as the the man himself likes to portray(and the media happily re-iterates). Buffett is probably much more of a ruthless Wall St type than many people realize.
Moynihan sold the farm, under the common shareholders feet… as a small investor I am bailing. Buffett before Shareholders is the Mantra these days.
The Orifice of Omaha strikes again! So, to all you Buffet wannabe’s, let me ask you this? Just how is this scavenging parasite someone to emulate? Exactly what necessary products, goods, or services has he ever created? If he is such a great American, instead of bailing out the grossly over-leveraged, derivative diseased, basically insolvent BOA which now gets to continue their charade, why didn’t he just take his 5 billion and open his own bank and start loaning money at a reasonable interest rate to average Americans for mortgages, home equity, small business loans, farm loans, etc.??? Because he is what he is, the evil and sad epitome of America’s impotency – profiting off the backs of others’ entrepreneurship, creativity, and physical labor. Making a fortune solely by manipulating the digital abstractions of the fiat system is akin to playing God. When the SHTF, can you see your “Oracle” planting and tending a veggie patch? Or lending a helping hand to his neighbor’s? Warren Buffet is what is wrong with America. Now, you take the farmer down the road from me………..
Rather than displaying Buffet envy, you can substantially replicate this trade. Buy BACpL at 9.2% current yield($840), and buy 1/2013 7.5 calls at 2.125. As a retail investor, you can’t get a 10 year call, but you don’t want one since BAC will likely start paying dividends within the next 2 years. You obviously pay for the call, but you have 300bp of carry Warren didn’t get to do it with.
I’ve seen this several times with smaller companies. A “White Knight” comes in with cash to “save the company” and gets stock and/or bonds plus a boat load of warrants in return. Then the “White Knight” turns around and shorts the stock with the warrants as protection. Then rides the shorted stock to zero. I don’t know whether it works the same with a larger company like BAC, but it is something to think about.
i don’t like that the deal was done a week after Obama meeting and a day before Jackson Hole. Maybe i am just an amateur conspiracy theorist
I have come to expect very objective opinions from the “Pragmatic Capitalist” and this post is no different. I happen to completely agree with the assertions that have been made concerning Buffet and interestingly so does some big former hedge fund mangers who made fortunes for themselves and their investors, like Michael Steinhardt. Buffet is completely tied to the government and its actions. He has become the poster boy of an era filled with hype and BS. He is the likeable corporate money junkie that everyone idolized at one time. However he is a master of hostile takeover and distressed bailouts. Is it wrong? No. It is the essence of capitalism. One persons mistake is anothers fortune. He is in the position of being able to do so by the government bailing out the TBTF entities with tax payer dollars. Yes, the government protected the Buffets of America and he openly admits it in a letter to the treasury and federal reserve. What is wrong though is, this is not capitalism but a form of facism. He benefits from this new facism which allows him to be perceived as the ultimate capitalist. As PC points out this notion could not be further from the truth.
Anonymous, ADX doesnt lie, the morning of the 24th i went all in expecting a 4-5% pop….went up 12% that day, than i sold first thing thursday morning knowing that 24% pre market gain wasent going to hold all day, so yes i was very confident. Literally has been by best short term trade so far in my life.
I’m no financial wizard but didn’t BAC just borrow from Visa to pay Mastercard?
A loan is a loan is a loan whether it’s from Uncle Ben or Uncle Warren.
This is nothing more than a backroom deal between the White House and Buffet to save BAC. The thinking is pretty simple: The last thing the White House wants to do is publically save BAC with a massive cash infusion. This would send some pretty big shock waves thru the markets that once again, our financial institutions are on the brink.
Buffet was most likely given guarantees that if this deal did not save BAC, the administration would come to BACs aide. Basically, since Buffet did the deal, the market would assume BAC is not in dire straight and reward it with share price increase. At the same time BAC gets capital it needs to survive from Buffet, not the White House. Buffet’s loan is being secretly guaranteed by the White House, he is taking no risk.
Interesting comment on talk radio today about Buffet Of America, wherein the talk show host stated, ” look for special considerations from the federal government to the BOA.”
For the sake of Herr Buffett’s ethos I hope the comment proves unfounded…
Please stay tuned…
B of A just announced today it is selling its Correspondent Mortgage biz?
What do you bet that the old codger Buffet is going to buy it at a huge discount.
This unit originated around 47% of all mortgages for B of A this year, generating huge fee income. Why then would they sell it? Something stinks