Bank of America's very recent acceptance of a $5 billion investment by Warren Buffett can be explained by one of only two possible reasons: either the top management at the financial institution is utterly incompetent, or their financial situation is even worse than anyone suspects.
Given Mr. Buffett's stellar success over the past seven decades, I would opt for the first alternative.
Bank of America, how can you agree to shell out a six percent dividend on Berkshire's preferred shares and simultaneously give Mr. Buffett the option to buy 700 million shares at any time in the next 10 years for $7.14 each?
Aren't you a freakin' financial institution that ought to know the subject of lending?
Btw: I wonder why you didn't have to seek approval from existent shareholders....
Update (January 29, 2012): Already now, only five months after their lending deal, Mr. Buffett has -- on paper -- already made a profit: Bank of America's shares traded at $7,30 at the end of last week, i.e. (roughly) two percent more than the price at which he can purchase them.
