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Buffett Lost $1.5 Billion in Four Months on Bank of America (BAC) Investment

December 20, 2011 | About:

As shares of Bank of America (NYSE:BAC) slid below $5 per share, Warren Buffett, is about $1.5 billion underwater on his BAC common stock warrants.

As part of Buffett's investment in the beleaguered bank, he received warrants that allow him to buy 700 million Bank of America shares at a strike price of about $7.14 a share. After the news of Buffett's investment, shares of BAC skyrocketed to $8.80 per share leading many to declare that Buffett had pocketed a cool $1.4 billion in a day. Since the initial pop, shares of BAC have plummeted as many fear the bank will need to be recapitalized which will dilute existing shareholders.

However, it should be noted that Buffett has 10 years to exercise his options. It should also be noted that the core of Buffett's investment was actually preferred shares, meaning he most likely is unconcerned with day-to-day volatility. Berkshire purchased $5 billion of preferred stock that pays a six percent annual dividend.

It is important to watch when Buffett may decide to exercise his warrants because it will be highly dilutive to existing BAC shareholders. If Buffett exercises 700,000,000 warrants, then Bank of America shareholders will experience a roughly 7 percent share dilution.

Rating: 2.4/5 (11 votes)


Traderatwork - 4 years ago
Wrong. Check your fact.

Under the terms of the deal, Berkshire will buy $5 billion of preferred stock that pay a 6 percent annual dividend, and receive warrants for 700 million shares that it can exercise over the next 10 years. Bank of America has the option to buy back the preferred shares at any time for a 5 percent premium.

-- nytimes.com

Most of the thing you mentioned in the article is wrong.
AlbertaSunwapta - 4 years ago
Traderatwork, I'm rather slow. If most of the things / facts are wrong, can you point out which of matsandalex's comments are factually incorrect please.

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