Buffett Puts $5B Into Bank of America!

[given2invest]

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!

 

Very true and I'm not saying BAC is not a good investment here.  The only thing I've been debating is whether BAC should have done this and whether WEB doing this really says a whole lot about BAC common.   

[txlaw]

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.

 

Wrong.  Once again, you're perspective is the opposite of what most value investors think.

 

The recent downturn in the markets has presented many opportunities for WEB.  Furthermore, he is still looking for elephant acquisitions.  Why put money into a 10-year instrument at a yield of only 6% when he is almost sure to get superior opportunities during the next 10 years by just waiting patiently and then deploying cash opportunistically.

 

The reason is because he was giving up these other opportunities for equity exposure to BAC.

 

[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?

 

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.

 

OK, let's do $2. In my 30B shares out scenario, that gives them another $40B in capital, in addition to the $5B they just got from Warren. Their CCB stake is probably worth way more, but let's say $10B. That's $55B in capital to cover losses, and they're earning $.50/share. Is BOA common dead?

 

[libor.plus1]

BAC is now only up 6% from the 20% a few hours ago... This is certainly not a good sign.

 

An even worse sign is that Jim Cramer said earlier this morning that this is the beginning of a short cover.

 

Sure doesn't feel that way.

[Parsad]

Very true and I'm not saying BAC is not a good investment here.  The only thing I've been debating is whether BAC should have done this and whether WEB doing this really says a whole lot about BAC common.

 

I agree.  We never bought BAC common, because of the risk from legal liability and loan losses.  We invested through the warrants. 

 

But I'm also at the point, and this was before Buffett injected the capital, that the risk to common equity is significantly less than people are assuming.  It's alot higher than WFC or JPM, but not any higher than C.  Buffett bought preferreds in BAC, but not C.  That does indicate something...that he has more faith in Moynihan than the market does.  Cheers! 

[Munger]

The recent downturn in the markets has presented many opportunities for WEB.  Furthermore, he is still looking for elephant acquisitions.  Why put money into a 10-year instrument at a yield of only 6% when he is almost sure to get superior opportunities during the next 10 years by just waiting patiently and then deploying cash opportunistically.

 

The reason is because he was giving up these other opportunities for equity exposure to BAC.

 

Huh???

 

Repeat after me -- he has more cash than opportunities and will have more cash next year and every year thereafter.

 

Listen man -- you bougth too high.  Don't let that cloud your thinking with such nonsense.  Funny how wishful thinking can impede the ability to process simple facts.

 

Here is reality -- Buffett is getting paid 400 bps over the 10 year and 600 bps over the 2 year.  In addition, BAC gave him FREE equity exposure.  In other words, unlike you, Buffett risked $0 capital on the common stock.   

 

 

And I repeat another simple, common sense fact...  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?

 

 

 

[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.

 

OK, let's do $2. In my 30B shares out scenario, that gives them another $40B in capital, in addition to the $5B they just got from Warren. Their CCB stake is probably worth way more, but let's say $10B. That's $55B in capital to cover losses, and they're earning $.50/share. Is BOA common dead?

 

Again, don't put words in my mouth.  I never said BAC common was dead nor did I say it was a bad investment.  I simply said a preferred investment is completely different than a common investment and can't just be looked at as very junior debt in a massively levered financial institution.  I will repeat:  In the case of a 2008/2009 scenario,  common equity holders were hosed while pref holders never lost a penny. 

[Parsad]

BAC is now only up 6% from the 20% a few hours ago... This is certainly not a good sign.

 

An even worse sign is that Jim Cramer said earlier this morning that this is the beginning of a short cover.

 

Sure doesn't feel that way.

 

What the stock does in the short-term is meaningless.  Cheers!

[moore_capital54]

Munger under your assumptions of the events that would cause the fundamental value of the common shares to be worth less (no pun intended) IE: the 5-10% haircut you have repeated several times on this thread equating to $100-200B in losses, even Buffet's PFD position would be worth less, so you are dead wrong.

 

Buffet's analysis which forms an opinion of a PFD investment of "only" $5B which is meaningless in terms of capital to BAC validates that the common is extremely undervalued as well.

 

In reality you have been proven wrong for the fourth of fifth time on this board, and actually as a contrarian indicator you worked perfectly, once again, based on the history of your posts.

[given2invest]

BAC is now only up 6% from the 20% a few hours ago... This is certainly not a good sign.

 

An even worse sign is that Jim Cramer said earlier this morning that this is the beginning of a short cover.

 

Sure doesn't feel that way.

 

What the stock does in the short-term is meaningless.  Cheers!

 

Not if the only reason BAC did this deal was to create confidence in the company (and the stock). 

 

They didn't do it for capital.  They did it solely for confidence.  If the market shrugs it off that's a very bad sign even if BAC isn't in trouble financially.  Perception is important here, as you have repeatedly said and I agree with.  The closer BAC common gets to 0 the worse they are, even if financially they are sound.

[coc]

OK, let's do $2. In my 30B shares out scenario, that gives them another $40B in capital, in addition to the $5B they just got from Warren. Their CCB stake is probably worth way more, but let's say $10B. That's $55B in capital to cover losses, and they're earning $.50/share. Is BOA common dead?

 

Again, don't put words in my mouth.  I never said BAC common was dead nor did I say it was a bad investment.  I simply said a preferred investment is completely different than a common investment and can't just be looked at as very junior debt in a massively levered financial institution.  I will repeat:  In the case of a 2008/2009 scenario,  common equity holders were hosed while pref holders never lost a penny.

 

I apologize for putting words in your mouth. But all I'm trying to show is how tough it actually is to kill the common stock at $8.  And if you can't kill it...

 

Let's be cautious in comparing 2008 to now. As Buffett said this morning, the circumstances are no longer the same.

 

I would agree with you that the preferred is not common. It's not the same. But I disagree about what that implies in Warren's thinking. (That he is too worried to take a common position, but OK with preferred.)

 

[libor.plus1]

BAC is now only up 6% from the 20% a few hours ago... This is certainly not a good sign.

 

An even worse sign is that Jim Cramer said earlier this morning that this is the beginning of a short cover.

 

Sure doesn't feel that way.

 

What the stock does in the short-term is meaningless.  Cheers!

 

 

Actually, what this particular stock does today is VERY meaningful. There's a lot of talk about 'confidence' because of the WB investment. If the current market activity is a reflection of said confidence, then it's not very inspiring.

[Parsad]

And I repeat another simple, common sense fact...  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?

 

Sure you do.  And just like people are going to be doing the same thing with Prem in the future. 

 

You aren't getting an injection of capital from just anyone...it's Warren Buffett!  How many people on this board were buying BYD stock because Buffett and Munger invested?  That business has no competitive advantage, but people invested tons of money because they did.  How many people heard of LiLu before Munger talked about him?  What happened to Goldman and GE when Buffett invested, compared to everyone else at the time? 

 

It's a shot of confidence that no amount of presentations by the CEO could muster.  It means that you have one of the world's greatest investors and businessmen telling the world that I like the management of this company.  It's huge, because it now gives them time to execute their gameplan.  Just like Jeff Amelt needed.  Is GE in better shape today than when the capital injection was made?  You bet!  Why?  Because they got breathing room. 

 

BAC just took a deep breath, as Munger exhaled with a sigh!  ;D  Cheers! 

 

 

 

 

[Santayana]

I'm really surprised at a lot of things being said by so called value investors in this thread.    Starting with

 

Ha Munger!  We told you.  Cheers!

 

Really, what did you tell him?  That BAC was going to raise capital?  That a 20% pop in the stock price means it's a good investment?  Or is it just because Warren buys that it must be a good deal?

 

Preferred is just as risky as the common?

 

6% yield isn't worth bothering with?

 

I'm long BAC LEAPS myself, but how can people not admit that this deal isn't what it's being cracked up to be.

 

 

[moore_capital54]

And I just want to add that I think you are one of the more intelligent posters on this board, I just think you are waiting for a 1940's style value investing utopia that may never happen due to the fact that since 1971 financial assets are denominated in fiat currencies, not governed by tangible assets, and increased at will by man. You may never ever get your great businesses at 3x FCF and you should seriously look at periods after 1971 and use that as a basis.

 

 

 

 

 

 

 

 

 

[PlanMaestro]

It's a shot of confidence that no amount of presentations by the CEO could muster.  It means that you have one of the world's greatest investors and businessmen telling the world that I like the management of this company.  It's huge, because it now gives them time to execute their gameplan.  Just like Jeff Amelt needed.  Is GE in better shape today than when the capital injection was made?  You bet!  Why?  Because they got breathing room. 

 

+1 That is a very good point Sanjeev. Moynihan has been under a lot of pressure despite the very good work he is doing (dividend debacle). And anyone that knows BAC's history knows that Charlotte's insiders are powerful and dangerous ... and not only because of BAC. This is a window of opportunity, in a key US institution, that is working.

[Munger]

Sure you do.  And just like people are going to be doing the same thing with Prem in the future. 

 

If you are a fully capitalized bank (in fact some bulls have argued overcapitalized) with nothing but massive free cash flows on the horizon -- YOU SURE AS HELL DON'T.  You tell Buffett to buy as much common stock in the open market if he thinks it is such a good idea.  Why would you ever give Buffett a sweetheart deal if it is not needed???  Silly and potentially criminal.

 

Now if you are uncertain about your capitalization and future cash flows, you sure do take Buffett's capital.  But note, Moynihan just told investors and the world 2 weeks ago that BAC was swimming in liquidity, future cash flows would be massive, and the company did not need to raise capital.  The bull thesis at $11-12 was complete NONSENSE.

[Parsad]

Really, what did you tell him?  That BAC was going to raise capital?  That a 20% pop in the stock price means it's a good investment?  Or is it just because Warren buys that it must be a good deal?

 

We told him that there was value in the business.  That management seemed to be doing the correct things.  That there was significant over-reaction by the market and nonsensical innuendo.  That the business had enough cash flow to cover it's legal liabilities going forward and enough non-core assets available for sale to bolster Tier 1 Capital.  That many of the analyst reports were making far-fetched guesses without actually examining the company's loan portfolio.  I guess you are correct.  We didn't tell him anything.  Cheers! 

 

 

 

 

[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

 

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.

 

I know, just harvest the rewards yourself.  ;)

 

Anyway,... you might be all gawking at my idea, that Sanjeev should install on our boards here some "RecordedFuture.com" script !!!!!

He once ask us days ago, about some wild ideas how he could perfect the forum. So I come up with some odd ideas. But don't take me serious, I just throw here some wild ideas for public debate, how Eric might grasp the future gist . ;D Current users of RecordedFuture are they guys at Goldman Sachs or the C.I.A.  :)

 

RecordedFuture is a cutting-edge company funded by Google, Inc. and the C.I.A.'s venture capital firm "In-Q-Tel". They developed the world's first Temporal Analytics Engine. A new predictive analysis tool that allows you to visualize the future, past or present using computer algorithms that scan linguistically chatter in Wall Street news releases, on Facebook and in financial boards for hidden patterns. It's the same way like the FBI hunted for years the Unabomber through linguistic patterns in university research papers. The Recorded Future team includes similar guys like Jim Simons people at RecTec, they are computer scientists, statisticians, linguists, technical business people with deep domain expertise in areas such as intelligence and quantitative finance. They sort of try to create a linguistic Kelly criterion for patterns that swing around certain themes or key words (like the Google page rank algorithms) and they predict the mathematical future trends, the same way like NOAA (National Oceanic and Atmospheric Administration) in their hurrican maps --> http://www.nhc.noaa.gov/refresh/graphics_at4+shtml/152235.shtml?tswind120#contents. I posted the link just as an example.

 

RecordedFuture.com

https://www.recordedfuture.com/

 

Pricing and plans for RecordedFuture are less expensive than a Bloomberg

https://www.recordedfuture.com/pricing-and-plans.html

 

In-Q-Tel. Accelerating Innovation for the Intelligence Community

http://www.iqt.org/

 

In-Q-Tel @ Wikipedia

http://en.wikipedia.org/wiki/In-Q-Tel

 

------------------------------------------------

 

Google Teams Up With CIA to Fund "Recorded Future" Startup Monitoring Public

2010-07-30  video 10:43min

 

http://cdn.pearltrees.com/s/preview/index?urlId=13683474

 

------------------------------------------------

Welcome To Recorded Future

http://www.youtube.com/watch?v=nG97B7tiUQg

 

Social Network Analysis - Obama In The Media

http://www.youtube.com/watch?v=5etSid8G6EU&

 

Terrorism Analysis

http://www.youtube.com/watch?v=ImhVpC-G_jg

 

Time-laps of Tunisian Government Collapse

http://www.youtube.com/watch?v=yyi5KC-eid8

 

Future Friday - Recent Verizon iPhone Rumors

http://www.youtube.com/watch?v=YAL1-jdgOL4

 

Future Friday: Nokia Layoffs and Product Outlook

http://www.youtube.com/watch?v=ko752zSi0Ac

 

[PlanMaestro]

I'm long BAC LEAPS myself, but how can people not admit that this deal isn't what it's being cracked up to be.

 

Well, I read all the news and my humor was not very good this morning considering that I am still waiting for that cash of the special situation so I do not have a position.

 

Now I am very happy that the people and the market are not seeing all the positives of this deal for BAC. Besides knowing that I know what Warren knows.

[Munger]

moore_capital54  -- we are good my man.  We simply have a different margin of safety requirement.  And this board is a forum for debate.  I enjoy the dialogue with you and honestly hope you make a lot of money with your investments.

 

[Santayana]

I agree that you said all those things Sanjeev.  I mostly believe them myself which is why I'm long BAC.  I just don't see how this morning's news confirms any of those points to the degree of warranting an "I told you so".

[given2invest]

I agree that you said all those things Sanjeev.  I mostly believe them myself which is why I'm long BAC.  I just don't see how this morning's news confirms any of those points to the degree of warranting an "I told you so".

 

Because God himself just made an investment in BAC! 

[Munger]

We told him that there was value in the business.  That management seemed to be doing the correct things.  That there was significant over-reaction by the market and nonsensical innuendo.  That the business had enough cash flow to cover it's legal liabilities going forward and enough non-core assets available for sale to bolster Tier 1 Capital.  That many of the analyst reports were making far-fetched guesses without actually examining the company's loan portfolio.  I guess you are correct.  We didn't tell him anything.  Cheers!

 

Huh???

 

This is funny. 

 

All of my posts in relation to you Parsad simply asserted the reality that your bullish opinion was based on the platitudes you so eloquently express above and not any independent fact based analysis of the perceived risks driving the stock price lower 1) the quality of the assets underlying reported book value and the corresponding assumptions 2) the risk to BV and solvency in a recession 3) put back risk 4) the risk to the company from a Euro implosion.  You and others were/are just guessing.

 

Nothing about today gave you any greater insight into these risks.

[berkshiremystery]

Warren's BAC investment comes with a tax break. BRK gets $300 million in dividends each year on his preferred. Dividends bring a major tax advantage: the dividends-received deduction.  It allows Berkshire to exclude 70% of the interest they’re paid when calculating taxes, leaving them with a 10.5% effective tax rate.