It's good to be the king and almost as good to be among the king's shareholders; all Berkshire shareholders should be celebrating today. Of course the king can get deals no one else can. It seems that in the case of Goldman Sachs (GS, Financial) and now with Bank of America (BAC, Financial), bank CEOs are just as interested in crushing shorts and improving their image as they are in cutting good deals.
Warren Buffett once again cut a deal where the real upside is in the warrants. In fact it appears that he just made well over a billion dollars in unrealized gains as soon as the market opened. Here is a summary of the warrant package:
In conjunction with this agreement, Berkshire Hathaway will also receive warrants to purchase 700,000,000 shares of Bank of America common stock at an exercise price of $7.142857 per share. The warrants may be exercised in whole or in part at any time, and from time to time, during the 10-year period following the closing date of the transaction. The aggregate purchase price to be received by Bank of America for the preferred stock and warrants is $5 billion in cash.
We now live in age where perceptions translate into reality for large bank stocks. The reason that BAC is willing to cut Buffett such a sweetheart deal is not because they are desperate for the capital; rather they are desperate to enhance their image, which ultimately affects their credit worthiness. In other words, when Buffett sees fit to invest in your bank, your bank has just received an A+ credit rating in minds of most investors. It also does not hurt when every short simultaneously rushes for the door.
The real winner of course is Buffett and the Berkshire (BRK.A)(BRK.B) shareholders and the real losers are the BAC shorts. The common shareholder of BAC just received a large pop in their holding but they should not rejoice so heavily since they just paid a hefty price to buy the endorsement of Warren Buffett. In fact, I get this image of Brian Moynihan, the CEO of BAC, left counting his change while Mr. Buffett walks away with a big smile on his face. I would be smiling too if I just cut such a deal.
No position in any of the stocks mentioned.
