Monday, August 29, 2011

Buffett Sees Buffet In Ever-Rotting BofA Carcass; Opportunistic Financier To Feast Off Recent $5B Investment In Beleagured Bankster?

Fox Business reports:

  • Berkshire Hathaway’s investment of $5 billion in Bank of America comes with a costly price tag for a bank that has a host of real estate problems, as did Berkshire’s $5 billion investment in Goldman Sachs at the height of the financial crisis (even though Berkshire’s warrants in this deal would create losses for Buffett’s company if exercised today).

  • The way the Bank of America deal is structured, Warren Buffett’s Berkshire will get 50,000 preferred shares in a private offering that carries a sweet dividend of 6% a year; Bank of America can buy those shares back at any time by paying Berkshire a 5% premium.

  • Along with that, Berkshire gets warrants to buy 700 million shares in Bank of America at an exercise price of $7.14 each. The warrants may be exercised in whole or in part over a very long 10 years, following the close of the deal.

  • The shares are moving higher on the news, and Berkshire had a $546 million paper profit based on BofA’s share price of $7.92 by late morning. Fully exercised, the warrants would give Berkshire an estimated 7% stake in the company.

  • A 6% dividend is a high price to pay, and along with the 5% premium, is expensive capital on any measure. The deal is a red flag that Bank of America is struggling through a portfolio of mortgage, home equity, and commercial real estate loans it is having difficulty getting out from under.

  • The Bank of America deal is similar to a $5 billion investment Berkshire made in Goldman in September 2008, at the height of the financial crisis. Goldman paid a rich 10% dividend, or interest, on those preferreds to Berkshire. Goldman had to get Federal Reserve approval to buy back Berkshire’s $5 billion in preferreds this past March, and it did so by also paying a $500 million fee.

For more, see Buffett’s Big Bet Comes at a Hefty Price for Bank of America.

(1) In a possibly related story (one I'm sure is pure concidence, right?), it's been recently reported that, according to two Democratic officials not authorized to speak publicly about the event, billionaire Warren Buffett plans to hold a Sept. 30 fundraiser in New York City to help beef up President Barack Obama’s campaign chest (possibly to 'grease the wheels' of communication btween Buffet & the administration? Possibly as an 'insurance policy' on his $5B BofA deal?). See Bloomberg: Buffett to Host Obama Fundraiser in New York.

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