And BAC retraces 50% from its pop. An 81 year old Buffett should really stick to washing himself while in the bathtub, flying in private jets with Becky Quick, and contemplating ways to have everyone in America pay more taxes, and maybe even consider retirement every now and then, than making "Long-Term" investment decisions.
And some more observations from Alex Gloy from Lighthouse Investments:
Remember those people who “co-invested” with Warren Buffet in 2008 in Goldman Sachs (he bought a convertible bond with 10% coupon, exchangeable into Goldman shares at $125. The shares tanked to $48, making those co-investors lose their shirt).
Today the market cheers again, seeing Buffet’s investment as a sign of confidence. Let’s look at the deal:
Poor shareholders of BAC (but they deserve it). Buffet is taking out 300m of their pre-tax profit indefinitely, plus dilutes some of their upside. And they love it (BAC went from $7 to $8.80 within minutes of the announcement).
The calls (atm at issuance I assume) were worth 2.34 a piece (20% vola, 2% risk-free rate), times 700m = 1.638bn
He paid 5bn for the whole package, so 5bn – 1.638 = 3.362bn for the perpetual cumulative preferred. But the preferreds have liquidation value of 5bn, so he bought them at 67% of par. So his current yield is not 6%, but rather 9%. If BAC redeems after 1 year (at 105%) he will have made 105-67 = 38+6 = 44 over 67 = 65% profit (plus profit from the options).
BAC must have been pretty desperate to offer him such a deal. Maybe his part was also not completely voluntary. Before the Lehman bankruptcy, Berkshire sold a lot of naked, multi-year puts on equity markets at elevated levels, so a melt-down is not in his interest. Also the “chat” with Obama on “job creation” in recent days is suspicious.
Note: All my calculations are just back-of-the envelope and prone to mistakes.