In 2011 Warren Buffett arranged a deal with then-struggling Bank of America to purchase $5 billion in preferred stock, paying 6% annually. These preferred shares came with a warrant to purchase 700 million shares of common stock for the price of $7.14/share at any point before 2021. It’s just been announced that Buffet will convert into common shares following the dividend increase by Bank of America.
Similar to his deal with Goldman Sachs in the middle of the financial crisis, this investment showed the market the positive sign that comes with the Buffett seal of approval. Bank of America was undergoing turmoil in the aftermath of the financial crisis, and the Berkshire’s investment gave them needed capital as well as the vote of confidence.
The warrant on this investment gave Berkshire the right to convert the preferred shares into common shares at a price of $7.14, which is far below the current share price of $24.68. This conversion into common shares will give Buffet a hefty $12 billion profit on paper. This would also make Berkshire the largest shareholder in the company, which also happens to be the case with Buffett’s stake in Wells Fargo.
My take is that while this deal is very profitable for Warren and Berkshire, it highlights one aspect of Buffett that I don’t like, which is a crony relationship with the big banks and the US treasury. Buffett got sweetheart deals with Goldman and Bank of America, that were available to only him. He used to be the outsider, the Oracle from Omaha, but his willingness to help out the big banks is telling.
Sources:
http://economictimes.indiatimes.com/markets/stocks/news/buffett-is-about-to-make-12-b-on-his-bank-of-america-bet/articleshow/59419716.cms
http://www.pbs.org/newshour/tag/bank-of-america/
http://content.time.com/time/subscriber/article/0,33009,2104309,00.html
That is a nice pay day.
Buffett has been bailing out businesses for decades. The cozy relationship with banks lately tells me that the financial ride of the dollar is coming to an end.
How many times can companies be bailed out?
Downvoting a post can decrease pending rewards and make it less visible. Common reasons:
Submit
If there is another 07-08 level crash any time in the near future, Buffett would be able to buy an entire bank if he wanted with his war chest of capital ready to be deployed. He could scoop up practically any blue chip company if/when that type of crash occurs again. Plus if he teams up with 3G Capital this gives him access to more capital which can then buy even bigger companies. Heck, Berkshire and 3G could almost own the Dow if they put all their capital to use to buy huge companies at fire-sale prices, assuming the crash is indeed that bad.
Downvoting a post can decrease pending rewards and make it less visible. Common reasons:
Submit
This post received a 2.2% upvote from @randowhale thanks to @thefinanceguy! For more information, click here!
Downvoting a post can decrease pending rewards and make it less visible. Common reasons:
Submit
He's a very smart Investor. Thanks for sharing
Downvoting a post can decrease pending rewards and make it less visible. Common reasons:
Submit
done sir
Downvoting a post can decrease pending rewards and make it less visible. Common reasons:
Submit
dont chase! But wam that was fun on monday!
Downvoting a post can decrease pending rewards and make it less visible. Common reasons:
Submit