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turdburglar (43.20)

Bank of America didn't need to raise capital



August 25, 2011 – Comments (10) | RELATED TICKERS: BAC

They told us that a few days ago.  Today they raised capital.  They sold preferred stock to Warren Buffett that pays 6% and includes warrants to buy common stock at approximately the price just before the deal was announced.

Let me reiterate:

1.  Everything is fine.

2.  Bank of American does not need to raise capital.

3.  Any allegations that Bank of America's balance sheet is full of garbage that will need to be written down are completely false.

4.  If you are a common shareholder, you should be very pleased to know that before you receive a dime, Warren Buffett will be receiving $300M per year.

5.  Please take this sale of preferred shares to Berkshire as a vote of confidence in the credibility of management.

All joking aside, I think it is time to get out of BoA common stock.  This is an emergency.  Do not freak out.  Just walk calmly and quickly to your computer and place a sell order immediately.

10 Comments – Post Your Own

#1) On August 25, 2011 at 1:06 PM, chk999 (99.96) wrote:

Buffett is getting a bunch of warrants at 7 something a share, so he thinks it is worth at least that much.

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#2) On August 25, 2011 at 1:10 PM, turdburglar (43.20) wrote:

chk999 - not so fast.  Buffett is getting preferred stock that pays 6% along with the warrants.  6% is way above market.  He might have taken 5% if the warrants were to buy the stock at $4 or he might have demanded 10% and taken warrants at $30.  Buffett comes out ahead as long as the bank doesn't go under even the warrants are worthless.  Let's note that he did NOT buy a single share of that common stock for $7.

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#3) On August 25, 2011 at 1:10 PM, beadnell (78.33) wrote:

Banks always deny the need for capital, until they have already raised it.

Isn't the risk of imminent negative equity already priced into the common stock of most banks?

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#4) On August 25, 2011 at 1:12 PM, TheDumbMoney (67.46) wrote:

$7.14/share, on the warrants, I heard. 

700 million of them works out, oh what do you know, to almost exactly $5 billion. 

So that's the potential size of the investment; $5 billion in preferred, plus $5 billion in common, equals $10 billion, or a little over 1/8 of BofA's current marketcap.

That said, I think turdburlgar's post is hilarious, and I rec'd it.

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#5) On August 25, 2011 at 1:21 PM, turdburglar (43.20) wrote:

dumberthanafool -

thanks for the rec. 

As for $10 billion, you have to think like Buffett.  The way he measures it, it's $5 billion.  That's his risk of loss and his amount of capital that is tied up.  So he invested $5 billion and got 6% plus the upside as if it was common stock he was buying.

Now as for thinking like a common stockholder, you have to think you just got diluted by that potential extra $5 billion as well as the original $5 billion that pays 6%.  The common stock just got diluted pretty hard.

Put it this way, if I had $5 billion I'd be willing to invest it in BoA and get 6% in front of the commoners and also the right to share dollar for dollar in any gains they get.  But I would not buy the common stock.  If I had some I'd sell it for the current market price and find a stock that isn't going to let someone else buy in front of me and get 6% along with the same upside I get in the common.


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#6) On August 25, 2011 at 1:53 PM, TheDumbMoney (67.46) wrote:

Oh I'm very aware of the dilution.  I don't own common shares of BAC, though I do own a few LEAPS.  (I realize that's an option based on the common of course, but I just think the stock is worth far more than it's trading at.  Of course, nobody is even 90% sure of the worth, which is part of the problem.  The reason the stock is up today is that it has been depressed by panicky concerns about failure that are weighing on the stock, and some of that is gone -- at least temporarily.  In the absence of a panic, I estimate BAC worth at least $13/share, even post-dilution.)

I do own a bunch of BRK/B shares, of course, and I have been adding during the most recent crisis.  I added at $73ish, and then at $67.47, precisely because I know that in a crisis Mr. Buffett can get deals none of the rest of can get, and his own company is trading at or on some days below book value.

Here is a great post on BofA, by the way:

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#7) On August 25, 2011 at 2:12 PM, turdburglar (43.20) wrote:

I'd rather own the BRK/B shares. 

I think the reason for the BAC selloff is the fear that they'll have to raise capital.  We know they won't be allowed to fail, but the common shareholders could be more or less wiped out.  The panic was they they'd have to raise capital and that's exactly what happened.  That balance sheet it full of dung and no one believes it's Godiva chocolates, even though that's how they are valuing it. 

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#8) On August 25, 2011 at 2:25 PM, davejh23 (< 20) wrote:

"Buffett is getting a bunch of warrants at 7 something a share, so he thinks it is worth at least that much."

He also has GS and GE warrants from three years ago, but they're out of the money...the GS warrants by ~4.5% and the GE warrants by 30%+.  Even if they never get used, the deals made by Buffett were still good.  However, he may be looking at the warrants as a bonus IF the stock climbs significantly, not necessarily a real bet that BAC is really worth $7.XX.  He should have turned around and used them this morning for a $1 billion+ profit right off the bat.

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#9) On August 25, 2011 at 2:35 PM, VExplorer (29.08) wrote:

davejh23, looks like GS bought his preffered/warrants back long time ago. BAC has had this option too.

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#10) On August 26, 2011 at 9:44 AM, TheDumbMoney (67.46) wrote:

turdb, here's a better analysis of the dilution and of the upside and downside of the deal:

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