Bank of America, Buffett

Today appears to be a happy day for B of A shareholders, because the stock got a 10% lift after the announcement that Buffett is buying $5 billion preferred share (as vote of confidence). But underneath it, the shareholders as of yesterday got a raw deal: Buffett also got 700 million shares of warrants for common stock (strike price at $7.14), before today there are about 10 billion common shares, so that's about 6% dilution, i.e., each share will worth about 94% if Buffett exercise his warrants.

For Buffett he got protected from 6% annual dividend, and 10% premium for early redemption. Note the deal was struck very similar to the deal he stuck with Goldman during financial crisis in Fall 2008, at the time Goldman agreed to pay 10% for $5 billion preferred share. The only difference is Goldman used the opportunity to issue some common stock (aorund $122 per share at the time), and raised $10 billion this way. B of A does not have similar kind of deal. The only thing they achieved is the short term confidence of their common stock price. This seems to me indicating their management is a bit weak.

Looking from another perspective, many people realized the gist of this kind of deal, after Buffett did Goldman and GE deal during financial crisis in 2008, and so called "buffett endorsement" will be less meaningful in that sense. Because B of A can borrow that money from Federal Reserve at 0.25% with no string attached, the way they did this deal seems more for their own benefit (note management usually have meaningful stake of their personal wealth in the company stock).

Let's see. Tomorrow will be another interesting day because the market is expecting Ben talking QE3.

PS, the valuation of B of A on a napkin. B of A market cap is $78 b as of close today Aug 25. They have about $17 b stake in CCB (10% stake), and they bought Merrill Lynch and Countrywide in 2008. ML can be compared to Morgan Stanley which has market cap of $33 b today. This leaves the rest of the bank (commercial bank + mortgage aka countrywide) about $28 b (=$78 b - $17 b - $33 b)

Some estimates the countrywide loss could mount to $200 billion, which I don't believe so. But there will be huge loss, otherwise the market valuation will not be like this.