Bank of America: Buffett Deal Loser

NEW YORK ( TheStreet) -- Bank of America ( BAC) was the loser among major U.S. financial names on Tuesday, with shares declining 1% to close at $12.28.

The broad indexes all saw 1% gains, after the U.S. Census bureau said that new orders for durable goods in the United States increased by 5.7% during February, which was a major recovery from a decline of 3.8% in January. The rise in orders in February from January exceeded the average estimate of a 3.8% increase, among economists polled by Thomson Reuters.

Total durable goods orders have increased in five of the last six months.

The big driver in the overall increase in orders for manufactured durable goods was a 21.7 month-over-month increase in transportation equipment orders, to $74.4 billion in February. Transportation orders had declined by 17.8% in January, to $61.1 billion. The February increase in transportation orders was "led by nondefense aircraft and parts, which increased $9.0 billion," according to the Census Bureau.

Deutsche Bank analyst Greg Poole said in an earlier report that "of the various indicators scheduled for release, durable goods are the most important in our view, because they are the most forward-looking of the releases. Moreover, durable goods tell us about the state of capital spending, a key input of corporate decision-making that over time tends to be highly correlated with hiring."

The Census Bureau and the Department of Housing and Urban Development jointly announced that February sales of new single-family homes declined 4.6% from January to seasonally adjusted annual pace of 411,000 in February.

Buffett, Goldman and Bank of America


Goldman Sachs ( GS) announced early Tuesday that it had amended the terms of a warrant issued to Warren Buffett's Berkshire Hathaway ( BRK.B) in October 2008, in connection with Berkshire's purchase of $5 billion worth of Goldman preferred shares, which had a coupon of 10%.

The original five-year warrant allowed Berkshire to purchase up to 43,478,260 Goldman shares at a price of $115 a share. Under the terms of the amended warrant, Berkshire will only be able to exercise the warrant on Oct. 1, and will be granted a number of Goldman shares, "based on the amount by which the average closing price of the Company's common stock over the 10 trading days preceding October 1, 2013 exceeds the exercise price of $115."

In other words, rather than putting up $5.0 billion in cash to purchase a stake in Goldman approaching 10%, Berkshire will be handed a roughly 2% stake in Goldman's common shares, without coughing up any cash at all. Based on Goldman's closing share price of $146.11 on Monday, Buffett was "in the money" by $31.11 a share on the Goldman warrant, or $1.353 billion.

That's a pretty nifty return, considering that when Goldman redeemed the $5.0 billion in preferred shares held by Berkshire in March 2011, it paid Berkshire an additional dividend of $1.64 billion, which was "the difference between the carrying value and the redemption value of the preferred stock."

Goldman's shares rose slightly on Tuesday, closing at $146.54, as investors were apparently pleased that the company had limited the potential dilution from Berkshire's warrant.

Berkshire's investment in Goldman at the height of the credit crisis was the type of shrewd move that has enabled Berkshire to do "better when the wind is in our face," according to Buffet's 2012 letter to shareholders.

TheStreet's Antoine Gara on Tuesday explained why the conversion of Buffett's Goldman warrant could be a game change for Wall Street.

Another opportunistic deal for Buffett was Berkshire's $5.0 billion investment in Bank of America preferred shares in September 2011. As part of the investment, Berkshire was handed a warrant allowing it to purchase up to 700 million Bank of America shares by Sept. 2, 2021, at a price of $7.142857 a share. That's a significant amount of potential dilution for Bank of America's common shareholders.

Based on Bank of America's closing price on Tuesday, Berkshire has an unrealized profit of $3.596 billion on the warrant.

Of course, Bank of America's shares may have quite a lot more room to run, even after rising 110% in 2012, and rising another 6% so far this year. So Buffett may be in no hurry for conversion of the Bank of America warrant.

-- Written by Philip van Doorn in Jupiter, Fla.

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Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.