Buffett Puts $5B Into Bank of America!

[bookie71]

BTW, I'd like to find some 6% preferreds with attached free warrants.

 

-- Long BAC

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All it takes is 5 billion in cash and you too can get a real deal  ;D ;)

[txlaw]

The giddiness of the first couple of pages is hilarious. I particularly like the "Ok which investment is next!" As if this one has been decided. Let's all start a fund after Buffett gets free warrants on a stock we own!

 

 

yep..and I posted something similar earlier in this thread as well. People were starting to get optimistic seeing the stock up 25% this morning. People who bought this morning are already down around 17%. BAC has been very volatile recently, with frequent daily moves of over 10%, both directions. Daily moves of a stock do not mean anyone is right or wrong. Lots of posts based on emotion (almost to the level of Yahoo finance message boards...or the lvlt thread  :P).

 

Skeptics disingenuously attribute optimism on this thread to BAC price movement, rather than on what the WEB preferred investment says about the prospects of the company and the common.  Why?

 

By the way, if there weren't so many other bargains around, I'd be buying LVLT.  Did anyone see that  Amazon AWS has selected Level 3 for its Direct Connect service?  (Boom-- I just LVLT'd this thread!)

[Liberty]

All it takes is 5 billion in cash and you too can get a real deal  ;D ;)

 

Add to that a pristine reputation built over decades that is well known and respected by everybody.

[Santayana]

This could be an interesting development...  Racketering?  Securities fraud?

 

http://www.bloomberg.com/news/2011-08-25/bank-of-america-citigroup-depressed-libor-rates-schwab-says-in-lawsuit.html

 

 

[Parsad]

By the way, if there weren't so many other bargains around, I'd be buying LVLT.  Did anyone see that  Amazon AWS has selected Level 3 for its Direct Connect service?  (Boom-- I just LVLT'd this thread!)

 

Nice! 

 

Our resident LVLT expert, ValueCarl, is away right now helping his daughter settle into her new dorm.  But he'll be back soon enough to torment the RSS Feed folk.  Cheers!

 

[Rabbitisrich]

Aren't these cumulative preferred's? If they don't count as Tier 1 capital in 2013, then the media is misreporting this investment as a capitalization, when it should really be regarded as a reputation buy.

[ericd1]

It's my understanding that cumulative trust preferred stock (TRUPS) will not count toward Tier I capital after January 1, 2013.

 

A traditional preferred (not a TRUPS) would continue to count as Tier 1 Capital before and after January 1, 2013.

[anders]

Thanks for a great discussion, munger, moore, parsad and others.. Im learning a tonne!  :)

 

My reasoning on BAC,

 

As far as I know, WEB first step in his investing process is -- what is the odds that this business is subject to any catastrophy risk..? If there is any such risk, he simply says no. (WEB rule nr 1 -- dont loose money, rule nr 2 -- dont forget rule nr 1).

 

Brk lending 5B to BAC means exposure and, it is therefore logical to assume no catastrophy risk involved in the investment. Sure the preferred is superior than common, but its very junior and according to my knowledge, none of the preferred shareholders got any back from financial bankrupties such as Northern Rock, Bear Sterns, Lehman.

 

I have 60k common BAC shares @ little under 9. I dont know what the price will be tomorrow, next week or next year. All I know is that the market has gone up over time and, will probably continue doing so in the future. (extrapolate curve on DJIA and we are at 2m in 2100  ::)) I believe that the economy in USA will recover at some point and BAC should benefit from that growth.

 

Quite simply, Im trying to buy a systemically integrated part of USA when others are fearful.. "and if a business does well, the stock eventually follows"..

 

[JSArbitrage]

It's my understanding that cumulative trust preferred stock (TRUPS) will not count toward Tier I capital after January 1, 2013.

 

A traditional preferred (not a TRUPS) would continue to count as Tier 1 Capital before and after January 1, 2013.

 

This was my understanding as well.  I haven't looked at the amount of TRUPS BAC has outstanding but I wonder if this capital isn't going to be used as a "refi" of the TRUPS by BoA.  They have to buy them pretty soon; might as well do it now at 6%...

[Rabbitisrich]

It's my understanding that cumulative trust preferred stock (TRUPS) will not count toward Tier I capital after January 1, 2013.

 

A traditional preferred (not a TRUPS) would continue to count as Tier 1 Capital before and after January 1, 2013.

 

I'm not sure. It depends on the specific provisions of Berkshire's preferreds. Cumulative preferreds can't be used as Tier 1 capital, now, unless they meet certain standards, like the ability to defer payments for some period. But Basel III phases in some new test to determine how preferreds are counted as capital. It also takes away some of the seniority benefits.

[given2invest]

BTW, I'd like to find some 6% preferreds with attached free warrants.

 

-- Long BAC

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All it takes is 5 billion in cash and you too can get a real deal  ;D ;)

[/quote

 

Actually, this isn't true.  Need $5 Billion and you need your name to be WEB.  They wouldn't have sold this deal to anyone else.

[berkshiremystery]

Although Buffett has more than enough experience to make his own assessment of BAC's prospects, don't forget that Todd Combs has a fair amount of experience with financials.  I would imagine Buffett had been viewing the carnage in BAC over the past several weeks and he had some time to do enough due diligence to make the investment.

 

I wish Buffett had waited a little bit longer, so I could have added to my position, but he didn't.

 

BTW, I'd like to find some 6% preferreds with attached free warrants.

 

-- Long BAC

 

I am sorry to disappoint, but Buffett sparked the deal to invest in BAC in the bathtub on Wednesday morning. His only close advisor may have been a bath duck & a marble  ::)  ;D Don't you all remember in Alice Schroeder's book, the one chapter that is titled “The Bathtub Steeplechase.” As a child, Warren would play a game with his sisters in which they would roll marbles down the side of a bathtub filled with water. The marbles, each of which was given a name, were rolled simultaneously into the water, and the first to hit the stopper won the race.

[given2invest]

It's my understanding that cumulative trust preferred stock (TRUPS) will not count toward Tier I capital after January 1, 2013.

 

A traditional preferred (not a TRUPS) would continue to count as Tier 1 Capital before and after January 1, 2013.

 

I'm not sure. It depends on the specific provisions of Berkshire's preferreds. Cumulative preferreds can't be used as Tier 1 capital, now, unless they meet certain standards, like the ability to defer payments for some period. But Basel III phases in some new test to determine how preferreds are counted as capital. It also takes away some of the seniority benefits.

 

I'd be everything I own that BRK's preferreds are as senior/secure as TruPS and don't count towards Tier 1 after 1/1/13.  This transaction did not add any capital.  Why would warren buy a non-cumulative preferred?  Those are sucker investments.

 

 

[berkshiremystery]

It's my understanding that cumulative trust preferred stock (TRUPS) will not count toward Tier I capital after January 1, 2013.

 

A traditional preferred (not a TRUPS) would continue to count as Tier 1 Capital before and after January 1, 2013.

 

I'm not sure. It depends on the specific provisions of Berkshire's preferreds. Cumulative preferreds can't be used as Tier 1 capital, now, unless they meet certain standards, like the ability to defer payments for some period. But Basel III phases in some new test to determine how preferreds are counted as capital. It also takes away some of the seniority benefits.

 

I'd be everything I own that BRK's preferreds are as senior/secure as TruPS and don't count towards Tier 1 after 1/1/13.  This transaction did not add any capital.  Why would warren buy a non-cumulative preferred?  Those are sucker investments.

 

Well, they might be sucker investment for most investors, but he got some good poison pill. If you haven't read the details of the transaction. If BAC can’t pay its 6% annual dividends to BRK, they will accrue at a rate of 8%, and BAC will be barred from share buybacks or dividends to other shareholders. Essentially, no other shareholders will receive dividends if BAC doesn’t pay Buffett his $300 million a year. Isn't that an incentive for him to hold the preferreds.

 

(On a footnote: He had agreed not to increase his BAC common holding above the 14.9% mark, if he would ever want to purchase more common stock.)

[given2invest]

It's my understanding that cumulative trust preferred stock (TRUPS) will not count toward Tier I capital after January 1, 2013.

 

A traditional preferred (not a TRUPS) would continue to count as Tier 1 Capital before and after January 1, 2013.

 

I'm not sure. It depends on the specific provisions of Berkshire's preferreds. Cumulative preferreds can't be used as Tier 1 capital, now, unless they meet certain standards, like the ability to defer payments for some period. But Basel III phases in some new test to determine how preferreds are counted as capital. It also takes away some of the seniority benefits.

 

I'd be everything I own that BRK's preferreds are as senior/secure as TruPS and don't count towards Tier 1 after 1/1/13.  This transaction did not add any capital.  Why would warren buy a non-cumulative preferred?  Those are sucker investments.

 

Well, they might be sucker investment for most investors, but he got some good poison pill. If you haven't read the details of the transaction. If BAC can’t pay its 6% annual dividends to BRK, they will accrue at a rate of 8%, and BAC will be barred from share buybacks or dividends to other shareholders. Essentially, no other shareholders will receive dividends if BAC doesn’t pay Buffett his $300 million a year. Isn't that an incentive for him to hold the preferreds.

 

(On a footnote: He had agreed not to increase his BAC common holding above the 14.9% mark, if he would ever want to purchase more common stock.)

 

Um, I never called him a sucker.  Man you guys can't read.  I said he would never invest in a preferred w/o a cumulative feature.  And sure enough, not only did he get a cumulative feature, but he got a higher interest rate if they defer!  In short, his preferred won't count toward Tier 1 capital on 1/1/13 so this can't be looked at as a capital raising event - just a dilutive one that hopefully will keep a run from happening on the bank. 

[biaggio]

you gotta love BRK + WEB

[ericd1]

According to the yearend annual report BAC had 16B in pfds 21B in trust pfds. They are included in the total 163B of Tier 1 capital. At YE their tier 1 capital was 11.2%

 

Basel III requires 6% tier 1 capital and excludes trust pfds along with other balance sheet adjustments. Removing the trust pfds doesn't drop their tier 1 ratio enough be be a concern. Also i do not believe the final Basel rules and phase-in rules have been established yet by the Feds for US banks. I believe they will be able to swap the trust pfds for new pfds that qualify if they want to.

 

See pages 68-70 in the 2010 annual report. 

[anders]

Basel III requires 6% tier 1 capital and excludes trust pfds along with other balance sheet adjustments. Removing the trust pfds doesn't drop their tier 1 ratio enough be be a concern. Also i do not believe the final Basel rules and phase-in rules have been established yet by the Feds for US banks. I believe they will be able to swap the trust pfds for new pfds that qualify if they want to.

 

 

Basel III requires 8% Minimum Total Capital plus conservation buffer 2013.. Then 10.5% as of 1 january 2019

[ericd1]

True, and BAC's Total Capital ratio was 15.77 at YE. Taking out the trust pfds still isn't an issue.

[Parsad]

Don't go by the year-end numbers as they had significant losses due to settlements in Q2.  Although with the capital they've raised in Q3, they should be close or above 9% Tier 1 Capital, which is more than adequate relative to other large U.S. banks.  Cheers!

[PlanMaestro]

Very good article on the Buffett investment from the man who must not be named. Posted here so that Sanjeev does not have to go to his site. Very much along the lines we were discussing.

 

Check the comments, I think is showing more emotions on aka-Munger type of comments that we have shown here.

 

http://brontecapital.blogspot.com/2011/08/bank-of-america-some-comment-on-buffett.html

 

[moore_capital54]

I read the post PlanMaestro and just couldn't disagree more. I think quite frankly that this is just another example of a Value Investor that missed the boat and is looking at the glass half empty.

 

True Contrarian Value Investors buy more when their positions go down, and are happy to do so as was demonstrated in real-time on this thread by several investors.

 

The guys waiting on the sidelines for more data and confirmation will never be Great Investors.

[PlanMaestro]

I read the post PlanMaestro and just couldn't disagree more. I think quite frankly that this is just another example of a Value Investor that missed the boat and is looking at the glass half empty.

 

True Contrarian Value Investors buy more when their positions go down, and are happy to do so as was demonstrated in real-time on this thread by several investors.

 

The guys waiting on the sidelines for more data and confirmation will never be Great Investors.

 

 

Do we know how big is his position? I am a concentrated investor but I understand why a small fund without a long lock-up period would like some diversification and limits ... and he was buying as it went down.

 

"if you really think that the dilution matters - that is if you really think the shares are cheap then there is a solution: buy more"

 

I find more interesting his comments on the Deal itself.

 

 

[rranjan]

Do we know how big is his position? I am a concentrated investor but I understand why a small fund without a long lock-up period would like some diversification and limits ... and he was buying as it went down.

 

"if you really think that the dilution matters - that is if you really think the shares are cheap then there is a solution: buy more"

 

I find more interesting his comments on the Deal itself.

 

 

I was reading his blog last night and I don't think I saw exact number but you can deduce it based on some statements. To quote one of them here( not from the post we have it here but from earlier post).

 

"  Bank of America is one of two stocks on which Bronte has lost more than 3 percent of the portfolio."

 

Given that they did not add much below 7, I would guess may be 8-10% position based on total cash deployed. becuase they must have averaged in and also to get 3% loss you do need to have pretty decent total allocation in this.

 

Just a guess on my part.

 

 

[ValueDan38]

The person that wrote the interesting article at Bronte Capital, concerning Bank of America, appears to be (if memory serves me) the same John Hempton of Australia who piled onto Fairfax with the shorts during the company's darkest days, a few years ago.  His extremely negative appraisal of FFH completely ignored the history and reputation of the company and Prem.  I don't recall if this was an innocent mistake or in collusion with the short attack.