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On the BAC deal
A few random thoughts on the BofA - Buffett deal.
This deal is $5b. A fair bit of change. But it is also small beer for a bank with $2.2 Trillion of assets. The stories that went around re BAC were related to the following issues:
Litigation risk
Second lien mortgages
Commercial Real Estate
Good will on the balance sheet that is in question
Direct sovereign debt exposure and indirect risk from CDS
Countrywide
Business Insider summed up the various concerns. The number came to as high as $200b.
it looks as though we could easily come up with, say, $100-$200 billion in write-offs and exposures to "clean up" Bank of America's balance sheet.
I don’t know what BAC has on its books, so I won’t hazard a guess on these numbers. I can’t believe there is no fire with all this smoke. Buffet’s 5 bill will cover 3-5% of the nut. Not much of a margin if there is, in fact, some big ticket issues.
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BAC could have done a public deal for common and pref under much better terms than Buffet is charging. To me, the only conclusion is that BoA bought Buffett’s name. Admittedly, Warren does have a lot of clout. I have no doubt but that many small investors are thinking, “If Warrens in, it’s gotta be good!” I’m thinking that Buffett is just an expensive show pony.
Just a question, How many times have we heard that there was no need to raise equity? I guess that was just a bluff.
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This is perpetual cumulative Pref. I find that interesting. There is no intention to pay a cash dividend. The 6% will be paid in more pref script. What does this structure mean to common shareholder and the hopes they might see some dividend action out of BAC? I think it means they will see very little (if anything) for a long time to come. It will be interesting to see (if we ever do) what covenant restrictions the Buffet Pref has regarding dividend restrictions on the common shares. If I were doing the deal I would get some capital ratio hurdles and restrictions that would limit future payouts (and stock buybacks). WB’s got sharp lawyers, so I expect he has language in the deal that protects his preferred position. Again, this is an “evergreen” deal. It doesn’t go away.
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Common shareholders (especially in a leveraged company like BAC) ALWAYS have to ask the question:
“What’s above me?”
.
By this I mean, “What are the obligations that must be satisfied before common shareholders see a dime?” Whatever your thoughts of being a shareholder today, you should keep in mind that $5b just got ahead of you.
Good old Warren Buffett is not sitting side by side with you at this table. He is sitting at the head of the table. That is a very big difference.
Speaking of dilution, another 700,000,000 shares have joined the table you are sitting at.
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This is crony capitalism at its best and worst. We have created a situation where wealth and power is concentrated in just a few hands. Buffet shows up as a white knight. Maybe. I think this guy is a predator. I think of him like an Oligarch in Russia a decade ago.
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Buffet met with Obama the other day. I have to wonder if this came up in those talks. My suspicion is that it did. What if it went down like:
O: We’re a bit worried about BofA. The last thing I need right now is another problem with a big bank.
WB: I might be willing to plug that dyke. But it will cost. I need a pound of flesh from the boys at BAC. I want something from you.
O: I’m all ears.
WB: I’ll put up 5 large in fresh equity for the bank. But I want a Preferred position. I’m not taking an equity risk on this dog. In addition, I want stock options deep in the money. My investors have to eat, after all.
O: Sounds fair. What do want from me?
WB: I want you to be neutral on the Marcellus gas field. I have train lines running all through the area. I stand to make a bundle moving fuel. Don’t take a stand either way on this for the next couple of years. By then the momentum will be unstoppable.
O: Do nothing and win? Who can say no?
BK: Of course I’m just making this up, but if you think deals are not being cooked on the side, I’ve got a bridge for you.
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Even after the Buffett 'bucks' BAC remains on the top of the list of the TBTFs that is most vulnerable. That fact hasn’t changed. The stock is a target if things go wrong that are outside of BAC’s control.
Consider what market conditions would be like if we had something unthinkable like a credit squeeze in Europe that led to a second or third tier Euro bank being forced into a merger. Something like this could trigger a flight to quality in bank stocks and their preferred securities. As the market cap of the mid-sized banks shrunk, more forced mergers would happen.
In this type of environment global investors would pull back from those institutions that are perceived (rightly or wrongly) to have a capital adequacy issue. In the US market, that would make BAC a target of opportunity.
Just a reminder, we are in the midst of a credit squeeze for EU banks. There was a forced Greek bank merger in the past week. Very possibly the tip of a big iceberg. The destruction of market cap equity is what brought the big global banks to their knees in 2009. That was what took out Lehman. If that cycle repeats itself we will see it in full force on the weakest banks standing.
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There are tremendous opportunities in front of us to trade BAC stock. Both from the long and short side. One thing that I would not recommend is to think of the shares as a buy and hold.
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Regarding Buffet's position in line in the event of a BAC bankruptcy, I seem to recall all of that "old time" stuff like seniority went out the window in the Chrysler bond deal, though a self-dealing (junior subordinate owner) by the name of Car Tsar Steve Rattner had a hand in that. He's cashed out and gone, but the precedent is there for Buffet to claim, or pre-arrange.
Shareholders never had much going for them anyway, but Rattner's Chrysler along with NY Fed Chairman of the Board of Directors (and coincidentally JPM CEO) Jamie Dimon's hand in the Bear Stearns Two Dollar Sale shattered any remaining illusion of fairness. The two deals make it Insider>Bondholders>Shareholders>>>>>>>Taxpayers.
I do not understand Buffet's gesture. B of A is a corrupt Bank. It smells of politics....
All I can say is, let's hope Buffet goes down with the rest of the ship when the USSA collapses like the USSR did. I'm betting the wheels come off the bus this year, in 2011, and the whole bus disintegrates in 2012.
The only thing I would change in your Obama/Buffet conversation is tone. This was an EMERGENCY meeting. They knew BofA was going down for the count. They were scrambling to put a deal together. You say it yourself: look at the deal. This is desperation time for BofA...promise anything (6%, 700 million shares), find anyone (preferably Buffet), sell anything (Canadian credit card biz).
The day before this deal was announced I said to a friend that QE3 had to come on Friday just to save Bank of America. Well...that's off of The Bernank's plate for a moment, so does he now get to slow play the QE hand?
You seem to be lying! You say that you have been reading ZH for about 3.5 years? That's ridiculous. According to Wikipedia, ZH was founded in 2009!!
And BTW: Your account is only 1 year + old... so stop bragging
I think "old crusty" Buffoon has just loaded 5 Billion onto the Titanic and will be the Vulture eating BAC's carcass as it goes to the bottom. He just literally "bought" the company.
bruce i have been a zh reader almost daily for 3.5 years. when it had the old format.
there are people who have posted so many bad articles on here i dont read them at all any more.
you are one of the posters of which i read every article. thank you. even when you are writing a bad article, it is still pretty professional and good and worth the time to read. and when you are good, you are excellent. thank you again.
But Bruce, what about the inevitable 1 for 10 stock split ala Citi-BoNY?
This crazy game of mindless dilution to a 401k proletariat too busy drawing it down to cover the mortgage (ironic), or too busy working a 60 hour week to care, has to have an ending, doesn't it?
Most of the 401(k) proletariat holders of BofA stock are probably thrilled to have Warren Buffet on board, if they're paying any attention at all to what's in their 401(k) holdings. Off to slaughter with a grin and a side of fries.
I wanted to see what BK would say because I knew he couldn't pass this up.
The deal reminds me of the Citi's stake offer to China's SWF in 2008 as the banking business was coming down around everyone's ears. China appeared to be the Richard Whitney of the moment, ready to ride into town on a white horse and bail and bail again.
Now, Buffett is the Richard Whitney character. There is more to this than meets the eye.
What happens when BAC capsizes? Considering the rot that BAC carries, a straight buy/sell on Buffett's part makes little sense. Buffett is on the equity side of a bankruptcy. He's not last in line but next to last. Buffett could have lent $5 bil to BAC but he put up capital, instead. This looks risky ... or is it?
Someone has to be ready to pick up his trash, for sure at par, when he needs to get out.
Taxpayer.
This deal has Geither fingerprints all over it. Somewhere @ 15th and Pennsylvania $10 billion is being handed over to Goldman- Sachs or some other conduit to Buffett.
I'm thinking that BAC will be broken up. Buffett will keep the 'good part' perhaps by way of a merge w/ Goldman. The good part will have the retail banking, Treasury deals, F/X, CDS operations.
Mortgages and worthless derivatives will be folded into a bad bank w/ Countrywide and Merrill. Common stockholders will be offered new shares ... I bet that's what the warrents are to be used for. Uncle Sam will 'capitalize' the bad bank by purchasing warrants from Buffett.
This way BAC can fail without actually failing. Ther would be Buffett's BAC and the new bank "Merrill & Company" or some such shit will be fobbed off on the taxpayers, another GSE without the quality assets.
Looks like a capitulation move since a second failure on the BAC scale leaves few options. I don't think the Chinese want to buy any more US banks.
This deal stinks for BAC and it stinks for the markets as what we were told is now proven to be false. 5 billion won't even come close to solving BofA's issues as explained here but more importantly, who's next? Where's there's one, there's usually another. I guessing Morgan Stanley is right there in line... I agree that this deal is more of an advertisement than a real relief effort.
I thought the same thing. I read the terms and went....really? What exactly is the point for BAC? But then I remembered...these are the same idiots that bought Countrywide.
I am not doing these things every day, but isn't every bond holder senior to even the most preferred shareholder?
Is that one goes belly up, no need for a shareholder to check his exact place in the line - he won't ever see anything anyway...
Could Buffet be the little Dutch boy who is trying to plug the dyke ? Or is he on the government payroll as a spokesperson trying to promote hope and change ?
Remember folks, these are highly paid, trained professional actors and the government and its lapdog media assume no liability or responsibility in the event taxpayers or investors are once again deceived.
BTW, I think there is an order outside of D.C. called Our Lady of Perpetual Cumulative Preferred. How inspiring !
Great work Bruce, you're spot on here !
The correct name of the order is Our Ladies of Perpetual Sin.
so--is uncle Warren a sissy and is the "O" porkin him?? rumor has it "O" likes older white guys--- just saying
I love seeing a rally on news of shareholder dilution. One of the easiest shorts there is.
Only sane reason for that happening here is that the price was reflecting lack of liquidity. 5B in the pot, even if added on lousy terms, releases a little of that pressure.
Ultimately though, it's not liquidity that's the problem, it's solvency. Not just for BAC, but for the whole damn Ponzi Finance Enablement Machine.
What a fucking gong show. 700 million shares. That's 7% of the ownership given away at the bottom. One has to think BAC is going to be vended into WFC at some point. One big east coast bank, one big west coast bank, leaving C. Brian Moyiihan is a liar. "We don't need to raise equity"
I bought the Sept. 7$ puts on the spike up this morning. You really can't go wrong going against the sheep.
Ever notice, Warren and Mr. Potter are never seen together?
There was a side note to the deal..Becky Quick gets to travel with me on my private jet twice a week all expenses paid, and she has to pick the crust of my old ball sack with her teeth! To think there was no correlation between the Obama/Omaha call a few days ago and this is blindness, I wonder what O'robyomama cooked up for old O'wrinklyarse behind the scenes?
Buffet wishes he could have gotten in this good with the OLD GM before the BK.
BOA in liquidation within the next 30 days is all this signals.
Race to pick the bones before the FDIC/SIPC
Buffett, "Uncle Crusty" hilarious, thanks for the good belly laugh,
But back to my pointless point of view on Uncle Crusty. I like to call him the ukulele playing , "Oh Shucks", dirty dirty Re-insurance goon, peanut butter and jelly eating power grabbing POS. In other words, when I hear his name all I can think of is that nazi war crimminal "The Swedish Angel" character from the movie Running Man with Dustin Hoffman. The sweet old man that has a dagger in his cain. ready to use it on your ass when you let your guard down. This is Buffett. I agree with the previous author ,if you want to volunteer your money thats ok with me but don't volunteer mine.
I hope Buffett gets run over by the Geico Lizard driving one of those trains.
The "stool of Omaha" --- just another fuckin' terd in President Roscoe's assenhole - I mean arsenal...............bath time, anyone?
Nice article, Bruce. You made a great point that Buffett is not investing side-by-side with the common shareholders who seem oblivious to that fact. Buffett almost always places himself above the existing common shareholders by investing via preferred securities (straight, convertible, perpertual, etc.). With respect to his investment in BAC, Buffett's current cushion today is theoreticaly $77 billion before his preferred investment suffers any impairment. Uncle Warren also benefits greatly from the Dividend Received Deduction (DRD) of 70% for corporations receiving dividends from an investment in another corporation (5.4% after-tax yield in this case). The vig when borrowing from Warren is never cheap.
I sense some outrage here. Where were the folks that can see through this deal that should have offered counterpoint on CNBS?
Thanks Bruce for taking the time to write about what you are thinking.
A friend of mine said he was buying BAC today and that he had heard rumors JPM was going to take them over.
I told him he was behind in his news and that the JPM rumor had been dismissed yesterday. I told him if he wanted
to gamble, go to a casino and gamble, the odds will be more in his favor. I said to him that in todays world, when an
investment house wants to dump a stock, they first create a market for it by recommending it and starting buy-out
rumors about it. He changed his mind about buying BAC. What a pile of feces the financial world has become. Some
people call investment bankers parasites, but I think in nature even parasites serve some useful purpose. These guys
serve no useful purpose and when they die, even the worms will probably spit them out.
While I beleive the CEO's should be held resonsible for their partition in the massive fraud, remember, they are no more than a suit temporarily fillig a chair. It is the system that is at fault and the system gets fixed by the masses, We have the power.
If we would like to see this not happen again, then perhaps we should let these guys serve the purpose of a reminder of what happens when we let big money regulate itself. If they truly serve no purpose, then we are bound to make this dance again.
Uncle Crusty has a talk with the Messiah, invests $5 SuperSizers in one of the largest, most screwed up, financial afterbirths of Gubamintul engineering after he's set the little fellah on his knee and betcha got some assurances about yonder blue skies.
Another storybook ending.
Exactly, and it begs the question, considering that anyone with even the slightest interest in what's going on knows without a doubt that BAC is insolvent, then who is Buffet talking to? I would suggest the uninformed sheeple. Scary when it gets to this point. What does 300,000 shares at $8 come to?
For more along this line, Max Keiser does an excellent session with Catherine Austuin Fitts.
If oblamo was smart he would have leaned on old crusty's shoulder and dictated what he demands or expect a call from place holder.... but 5bil lets him off too easy.
Oblowme doesn't know WTF is going on. His masters are pulling the strings
Bruce is right, there had to have been a quid pro quo here. This is a dirty and disgusting deal from all vantage points...once again, the BAC shareholders get hosed.
Let them. Anyone dumb enough to hold this trash deserves it.
+1
Always enjoy Bruce's articles. Buffett is a slime. Another sweetheart scam deal. How many banks does Warren have his blood stained hands in? BAC is steaming pile of shit.
Bank of America didn't need capital?
Well, well ,well, Bank of America DID need capital after all.... "after all the denials" that they needed any capital and how "strong" they were!
They paid a pretty high price for this capital by the way. They are going to pay Warren Buffett 6% and give him 700 million share options of BAC stock with a strike of 7.14. Pricey to say the least from a "marquis" U.S. bank that insisted it did not need any capital raises as recently as Tuesday.
So Warren Buffett just so happened to be in the neighborhood on Tuesday and stopped by to see President Obama during his vacation to say "hello" and two days later he makes a $5 Billion investment in Bank of America who "didn't need to raise any capital.
WOW, what a coincidence! AND just a day before Ben Bernanke will make a statement (he wishes he didn't have to and it would be much better if he says nothing) which has a very high probability of creating havoc but that's a whole 'nother story!
Anyone hanging onto the ideology that Buffett’s punt on Bank of America is a sure fire signal of a turning point in the equity markets demise should take a long hard look at what happened the last time he stuck his pudgy paws into ‘government sponsored’ deals.
The Dow lost some 20% more 3 weeks after and then went on to lose another 20% more over the following 6 months!
Ouch!
www.lemetropolecafe.com
Warren Buffett will do what is good for Warren Buffett .. always has, always will. Nothing wrong with that. However, to save his self-respect and reputation, it may be wise to steer clear of political sheenanigans. But, then again, being smart and being wise are two different things.
if he has leveraged his political connections
if he has influenced policy- if he has benefited at the expense of the taxpayer
then there is everything wrong with that
I disagree. I think the blame is mis-placed. There is everything wrong with a political system that allows this to happen. I think the politicians are way, way more corrupt than Buffett will ever be. They are the ones bending the rules for their own self-centered interests. They are the ones whose duty, ostensibly, is to represent the public interest. I think dealing with the slime balls in the political class will come back to haunt him big time in the end.
No matter how perfect the system, some people will still try and game it to their advantage. Buffet falls into the category of that type of person. Just because it is easy for Buffet to game the system doesn't make him any less responsible for doing so.
As Becky quickly rolls over her weeks-old baby to pick up Uncle Warren who breathlessly tells us that Warren got the idea in his bathtub Wednesday morning to get 6% with a “what-you-don’t know” put..... Not so fast, Archimedes and hold the Eureka but my momma got out of her tub yesterday and got a 5 yr CD at 1.0% for her kind of hard-working savings money. This avuncular land shark gets the ear of the NYFED and access to Permanent Zero funds to fund his ATM calls, without mentioning the AIG no-haircut free money granted in 2008 for his armchair heroics that kills anyone’s Bar Mitvah money.
Enjoy the circus; watch your wallets.
Uh. Check. Check. Check. Yup.
"O: I’m all ears."
LOL!!! Stop it, I can't take it anymore...my ribs hurt...lol.
I'm glad someone caught that. I really want to write comedy.....
You do a fine job pointing out the tragic comedy that our financial system has become. I've found a little levity takes the edge off of the discussion of what it is now...basically a fascist system...run by complete incompetents & the criminally inclined.
We here, the public (reds & blues) sometimes talk right past each other...one side screaming about the corps, the other side yelling about government...when it has become, in fact, one in the same. A marriage of two self interested parties contemplating how best to divide up the future labor of our children's children. They have no sense of integrity, ethics, morality and have never exhibited shame or contrition by acknowledging they have none.
So they shouldn't expect anything but cold retribution from me, delivered as always, with a smirk ;-)
Interesting take Bruce. I wonder, what is BAC's exposure in the EU?
I know BAC isn't the kind of dog I'd want in my home.
I'm with you on the lemmings. They heard about this deal and probably all of them thought the bottom was in.
'what is BAC's exposure in the EU. Besides having billions in direct exposure to EU banks, BAC has written CDS's on them,
guaranteeing them for 100's of billions. When PIIGS default, and they will, EU banks will default, and CDS's are called in.
And it's bye-bye BofA. At that point bailing them out with taxpayer money would not be tolerated by the masses so it
will be a government takeover with stock price going to zero, bank being spit up and sold in pieces.
One report 17b another 4. None of the numbers reflect what may be on the books in the form of CDS exposure. So you have to guess. The uncertaintly and lack of clarity from BAC is what got the stock running in the first place. Now we think there is a greenlight because WB is in? I don't think so.
The stock touts that are pushing BAC today because of Buffett are the same people who said BAC was a buy when J. Paulson owned a ton of shares. That "smart guy" lost his shirt. Smart guys are not always so smart.
"Smart guys are not always so smart."
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