Warren Buffett rode to the rescue of Bank of America today, as he did for Goldman Sachs in the dark days of September 2008.
FLOYD NORRIS
Notions on high and low finance.
B of A will pay less to be saved, but that can be explained by the fact there is less panic to contend with this time. This time the rumors were that the bank needed to raise capital; back then, the rumors were that Goldman was the next Lehman Brothers.
The terms of the two deals are similar. Berkshire Hathaway, Mr. Buffett’s company, invests $5 billion in straight preferred stock, and gets a warrant allowing him to invest another $5 billion in common stock at a set price. The preferred stock is perpetual, but the company can buy it back at a premium whenever it wishes to do so.
At Goldman he got a 10 percent coupon on the preferred, and it would cost Goldman a 10 percent penalty to buy it back. At B of A, he gets 6 percent coupon and a 5 percent premium for a buyback.
The warrants are different, and reflect that B of A was in a better position. B of A stock closed on Wednesday at $6.99. The warrants are at $7.142857. So at least B of A gets a little premium to market price at the time of the deal if the warrants are exercised.
Goldman shares were at $125.05 when the deal with Mr. Buffett was announced. His warrant was at $115 per share. He got a discount exercise price.
How has Mr. Buffett done at Goldman? Fine on the preferred. Not so fine on the warrant. Goldman bought the preferred back in April. Add in the interest and the repurchase premium, and Berkshire made $1.75 billion over two and a half years. Anything it collects on the warrants will be gravy, but at the moment there is none available. Goldman shares trade around $110.
The warrants had five-year terms, so Berkshire has until October 2013 to exercise them.
Mr. Buffett did do a little better on one term of the warrants at B of A. They are 10-year warrants, twice as long as at Goldman. So he has a lot longer time for the share price to work out.
When Mr. Buffett made his first Wall Street rescue, of Salomon Brothers amid a scandal two decades ago, he was reported to have called his investment a Treasury bill with a lottery ticket attached. He would get a solid return if the company merely survived, and a great one if it prospered.
Seen that way, this is not nearly as risky as a bet as a purchase of B of A stock would be. That may be the essential point that led the early euphoria to fade. B of A stock leaped to $8.80 soon after the opening this morning, but was under $8 by 11 a.m.
It is a sign of both the prestige of Mr. Buffett and of the fragility of markets that either of these deals were available to him.
Of course, there are risks in being a rescuer. A rescuer needs to use cash it can afford to lose, and it needs to have the judgment and courage to refuse to throw good money after bad if things do not go according to plan.
In August 2007, Countrywide Financial, a major home lender, was bailed out by B of A, which invested $2 billion in convertible preferred stock. It was convertible at a discount to current market value. B of A stock rose on the news.
A few months later, with Countrywide in deeper trouble, B of A agreed to take over the whole company for stock then worth $4 billion. The deal closed July 1, 2008. By then B of A was trading for about half what it was worth when it first invested in Countrywide. It had a lot further to fall.
It was one of the worst mergers ever. B of A has yet to reach the bottom of the sinkhole of legal liability created by Countrywide’s reckless lending policies.
But for that rescue by Bank of America, this one — of Bank of America — would not be necessary.
Article source: http://feeds.nytimes.com/click.phdo?i=a44c0dceca1979679e02d2e25fbd62d0
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