Berkshire Hathaway to report huge Q3 gain – July 12 comment

On June 28th Berkshire announced:

On June 28, 2017, Bank of America Corporation announced that it plans to
increase its quarterly dividend to $0.12 per common share. When this occurs, Berkshire will exercise its warrants to acquire 700,000,000 shares of Bank of America Common Stock at the exercise price of $7.142857 per common share. Pursuant to the terms of the warrants, Berkshire expects to use its $5 billion of Bank of America Corporation 6% Preferred Stock that it currently owns as the consideration to acquire the common shares.

Bank of America closed today at $24.35. Therefore Berkshire / Buffett is looking at a pre-tax gain of about $17.21 per share or a staggering $12 billion dollars. This will NOT change Berkshire’s book value per share since that already reflects the market value of the these stock options. I am fairly certain however that it WILL lead to a reported pre-tax gain of an “extra” $12 billion pretax and perhaps $8 billion after tax in Q3. I don”t think it will hit the upcoming Q2 report.

This gargantuan gain came as a sort of “kicker” over and above the 6% return that Berkshire earned by investing $5 billion in preferred shares of Bank of America. This deal was done in 2011 when Bank of America was still very much struggling with the impacts of the financial crisis.

Many will “sniff” that only Buffett could get such a deal. But the fact is that the Bank of America shares were trading right around $7.00 as Buffett made that deal. And they closed 2011 at $5.56 even after Buffett had thrown his support behind the company. (At year end his options were under water). But it is true that Berkshire / Buffett were among the very few entities that could have given Bank of America that fast $5 billion equity. Still, any of us could have gained by following Buffett and buying BAnk of America at under $8 and even unde $6. In fact I made a large investment that year which for some time after that (and especially at the end of 2011) looked like a mistake but which turned out very nicely. Looking back I bought not long before the Buffett announcement and indicated I did so without fully analysing the company. (August 2, and July 26 comments). Bank of America was later added to the site as a Speculative Strong Buy on March 11, 2012 at $8.05. By the start of 2017 it was rated (lower) Buy at $22.10.

With this settlement of the options Berkshire will no longer own the 6% preferred. I suspect they would have liked to keep those but if he paid cash for the options Bank of America would likely have used the money to redeem the preferred shares in any case which I believe they have the right to do.

This whole episode is just one more in a huge series of brilliant moves that Buffett has made over the years. I truly believe that he has one of the most brilliant financial minds in history and that he is fact overall a remarkable genius. At the time of the financial crisis and for several years after there were many investors and analysts who screamed that the big U.S. banks were technically broke. They were wrong.

Notice the weird $7.152857 exercise price on this options. Buffett did that so that his investment $5 billion and particularly the resulting number of shares 700 million would come out to such nice round numbers. He memorizes an enormous amount of data and does most of the math in his head. Having a round 700 million shares makes the math and the memory easier. Buffett did something similar in his recent Home capital deal buying enough shares to own a round 20% of Home Capital after accounting for the new shares to be issued. At 86, the man still has it, believe me.