Bank of America Share Price

Bloomberg Bank of America’s stock doesn’t seem to mind getting a $5 billion cash injection from Warren Buffett, but there is plenty of doubt out there about whether the bank got a good deal.

Along comes Doug Kass, never shy with the emails, who writes that it flat-out got fleeced (while admitting he’s long Bank of America stock):

By my calculation, Berkshire Hathaway is receiving an annual rate of interest on its $5 billion investment of about 10.5%, when incorporating the value of the attached call options on top of the 6% annual dividend on the preferred and the redemption premium of 5%.

Assuming BAC’s share price is at $7.72/share and a 45 vol, a 10-year option on 700 million shares of BAC that mature on Sept. 1, 2021, that are exercisable at $7.14/share is valued at about $3.40/share (times 700 million shares), or about $2.4 billion! Add another $250 million of redemption premium — that makes $2.650 billion in value (or immediate profits today!) incurring to Berkshire.

In other words, the current value of the warrants — taken over the 10-year period — provides an additional 4.5%-per-year return on top of the 6% dividend on the preferred, for a total cost of capital per year to Bank of America of nearly 10.5%. (Taken another way, deducting from the exercise price of $7.14/share the value of the call option ($3.40/share) means that Berkshire Hathaway may be paying, if exercised, less than $4/share for BAC!)

If Bank of America didn’t need the extra capital (as CEO Brian Moynihan reportedly told Warren Buffett), was the imprimatur of Berkshire Hathaway really that valuable?