Warren Buffet Invests USD5 Billion Into Bank Of America

Posted by Kris | Saturday, August 27, 2011 | | 0 comments »

That the reason people always say that when you are rich , making more money is easy. Money make money!!!

One thing I noticed about Warren Buffet during these few years is he is really an opportunist always lurking to get the best deal in times of trouble. The latest deal in Bank of America is really a very sweet deal for him. He literally make money the moment he agreed to the terms. (maybe the correct word is Bank of America finally agreed to Buffett's term. Seriously it is lopsided deal benefiting Buffet).

Here are the terms for Warren Buffett's investments:

Berkshire's deal with BofA includes: buying 50,000 preferred shares of the bank at a dividend of 6% a year; BofA can buy back the investment at any time by paying Buffett a 5% premium; and, Berkshire will get warrants to buy 700 million BofA shares at an exercise price of just over $7.14 a share, with the ability to exercise any time in the next 10 years. (at today's price of ~7.58, he already made a cool and easy USD280 million if he just decides to exercise the call option today. He can exercise anytime within 10 freaking long years!!!!) And with a dividend of 6%, he is the unofficial loan shark considering US interest rates are damn low. Right now is provided the US banks are willing to loan to you in the first place huge sum of money. I think it is more of a business and consumer confidence that is plaguing the US)
The deal almost mirrors Berkshire's agreement with Goldman Sachs, except that the dividend is smaller in the BofA deal. In the Fall of 2008, Buffett propped up Goldman with a $5 billion investment via purchase of preferred stock that was repaid earlier this year. The investment paid a 10% dividend, and provided Berkshire with warrants to buy up to $5 billion of Goldman common shares.
Eights days after the Goldman deal, Berkshire gave GE a vote of confidence by investing $3 billion via purchase of the industrial giant's preferred stock. The stock paid a dividend of 10%. The deal also gave GE the ability to buy back the shares from Buffett after three years by paying a 10% premium or $3.3 billion. Also, Berkshire received warrants to buy $3 billion of GE common stock for $22.25 a share at any time over the next five years.
Noticed that he also uses high leverage instruments aka options/warrants in his investment. This is coming from a guy that famously said that derivatives is a weapon of mass destruction. But i think because of his investment size is just too huge, to achieve even 1% gain requires significant investment or leverage to make his shareholders' happy.