Bank of America’s stock is now up 11.6% on the leak that the Charlotte bank is selling $5 billion of 6% cumulative perpetual preferred and in the money warrants ($7.14 strike price), again $5 billion in total
This is an admission of weakness, not strength. Bank of America had maintained it didn’t need equity as recently as yesterday and of course before that too, then does a sweetheart deal to build confidence (FT Alphaville has a nice summary of the terms, hat tip Richard Smith).
This preferred stock sale does not boost the Charlotte bank’s tangible common equity. It does not come close to filling the a smidge under $50 billion of overvaluation of its second liens, nor does it stop the continuing bleed of litigation, which will only increase over time. And a Buffett does not have enough firepower to rescue a Bank of America if this confidence boosting con fizzles.
The bulls’ hope is that BofA will have enough time to earn its way out of this mess. But if a Eurocrisis hits, and this looks like a sooner rather than later event, investors will avoid risk first and think critically later. The real determinant is whether this gambit does much to bring in Bank of America’s CDS spreads, which were trading at higher-than-Lehman-before-its-failure levels.
The enthusiasm for this move seems to be fading a tad. The stock was up nearly 12% when I started this post and it is now up only 7.7-8.0% (oh, now back up to up 9%). Admittedly, some of the rally yesterday may have been due to a leak of this investment. And don’t kid yourself: if there is any rescue of BofA, just as with the Goldman TARP infusion, the public will get a worse deal than the Sage of Omaha just extracted.
Tom Adams noted by e-mai:
This is being spun as good news for BofA but it is really a sign of just how much trouble they are in. This is step one of their rescue. The powers that be felt they could not wait any longer with BofA so damaged, and that a run or crisis was one bad news day away (earlier this week I predicted some rescue action within 2-3 weeks). Step two, some additional lifeline will show up in September. Step three will be a sale of Merrill.
Update: We aren’t alone in our dim view of this deal. From Nicholas Santiago:
Here are a few key reasons that tell us this deal is forecasting problems ahead.
1. It was just a few day’s ago that Bank of America stated that they did not need any capital, now we know that was not true. The second largest bank in the United States needed capital and they needed it bad. We can only wonder how long this deal will help to lift the market. Just look at 2008, this could be a repeat of things to come.
2. The Warren Buffett investment in BAC stock also tells us that the European banks are not the only banks in serious trouble. The leading banks in the United States are in serious trouble as well. If there is one cockroach there is usually a million.
3. Warren Buffett has made a career of investing in troubled companies for the sake of the economy. The last time he made an investment such as this one was back in 2008 with Goldman Sachs Group Inc.(NYSE:GS). It is important to remember that Goldman Sachs was bailed out by the tax payer in what was called the TARP program. Buffett knows that the U.S. taxpayer will bail him out if he is wrong and Bank of America stock does go belly up.