So I moved my office this morning into my bath, specifically the tub. My wife walked in and asked me what the (explicative) I was doing? I had forgotten the tub was just cleaned this week and she had not had a chance to use it yet.
The kids just went back to school this week and I forgot she was looking forward to a nice relaxing bath this weekend, but too bad, because genius cannot wait. I mean, if Warren Buffett can make a billion dollars from being in the tub it has to be worth a thought. Ben Franklin used to start off his days with an "air bath," so there has to be something to this, and thanks to Ben I don't even need water! That made my life insurance company happy to hear as well, due to all the electronics surrounding the tub.
But back to Mr. Buffett and his investment in Bank of America (BAC) this morning. First, a hat tip to Mr. Buffett as it permitted me to make some quick adjustments and catch some profits on bank buys over the last two days. Still, what investors have to remember is what is good for Mr. Buffett is meant to be good Mr. Buffett. He's not interested in saving all the banks or backing equities. He is interested in his book and his bottom line. Look at the deal Sir Warren received versus what the pre-market buyers of BAC got.
Berkshire Hathaway (BRK.B) gets $5 billion in preferred stock paying it 6% per annum in quarterly installments. Who cares about what the common does as long as the 6% rolls in? Furthermore, BAC can buy it back, but at a 5% premium. Hey, BRK.B says go ahead and buy it back next week!
And that's not all. Johnny, tell them about Mr. Buffett's consolation prizes. Hardly any consolation here, but BRK.B holds warrants to buy 700 million shares at $7.14 per share.
Alright it is $7.14 and a bunch of more numbers in the decimal places, but an exercise of these shares is equal to $5 billion. Maybe I'm wrong here, but wasn't the $40 billion to $50 billion mark an area mentioned as a need for BAC? A need they denied. So BRK.B spends $5 billion to get $5 billion worth of leverage on BAC while being paid 6% and BAC makes a big dent in the potential capital that they may need, but say they don't.
Even better, it may not be called front running, but Buffett and BRK.B know that as soon as this hits the public radar, the stock is going to shoot higher. In fact, the warrants were up more than $1 billion at one point this morning. Invest $5 billion at 6% and see 20% return within minutes? We'd all take that.
Considering the warrants can be exercised at any time over the next 10 years, I would have been hedging off quite a bit this morning. Unfortunately, the intrinsic gain on the warrants has faded to a paltry $448 millino as BAC fades a bit. But don't shed a tear. I'm sure everyone will get by.
I don't think this marks a bottom in the banks. It may help BAC get back up to resistance at $9.50 by the end of the year, but it does little to solve the European situation, add jobs (employment, not Steve), or do much with the domestic mortgage mess outside of BAC. Furthermore, it undermines the integrity of BAC's management stating they did not need capital when it has become clear they just lined up a $50 billion "line of credit" that isn't even guarantee if the dirty stuff starts hitting the fan. Take the trade. Book the profit and wait for more data before chasing banks again.