Warren Buffett Gives Bank of America What it Doesn't Need
Warren Buffett strikes again with a $5 billion investment in Bank of America, put together to guarantee him a profit. This despite the fact that BofA said just 2 weeks ago that they did not need any cash. Warren Buffett clearly has hypnotic powers!
Berkshire Hathaway will receive 50,000 perpetual preferred shares from the deal, which has a 6% annual dividend payable quarterly, compared to what you or I would get i.e. 0.5%, which means that Berkshire Hathaway will be getting around $300 million from Bank of America each year, which the number-crunchers at NYT have worked out is $821,917.81 a day.
Berkshire Hathaway will also get 10-year warrants that it will be able to convert into 700 million common shares in Bank of America, at a strike price of $7.142857, which at the moment would represent a paper profit of $392 million on the warrants.
Mr Buffett also bailed out Goldman Sachs back in 2008 but on harsher terms as it was right in the middle of the financial crisis.
So does this mean that the current slump is over? Bank of America shares rose 26% at one point on the news but have fallen back to only 9%. Is this a vote of confidence in Bank of America and the economy in general by Warren Buffett ? No doubt, but plenty of people have pointed out that it is odd that Bank of America should accept Warren Buffett's terms when they had previously stated they did not need any cash. This leads people to think that the economy may in fact be in worse state than we are led to belive.
As a result Bank of America's share price may soon be lower than it was before the deal. It should be remembered that Warren Buffet is a long-term investor (most of the time) and that he did not call the bottom of the financial crisis, he was in fact six months early as the markets only bottomed out in March 2009.
"BofA may be a good value here but that doesn't mean it's a great stock for average investors," said the President of Springer Financial Advisors. "Buffett knows that the government is not going to let BofA fail. So he's got a quasi-government insured CD with a 6% yield and upside potential."
BofA is now in possession of $5 billion it didn't have before, but there are still legal risks linked with bad mortgage assets that not even Warren Buffett can cause to disappear.
BofA will probably be a slow-growth stock for a long time. Banks no longer churn out ridiculously strong earnings due to taking exorbitant risks. Investors would be better advised to lok at Wells Fargo and JPMorgan Chase that yield 2% and 2.9% respectively.