* Buffett's paper profits on Bank of America warrants jump
* Bank of America warrant profit is $2.94 bln -- Najarian
* Paper profit on Goldman warrants is now $1.53 bln
By Lauren Tara LaCapra
NEW YORK, Aug 25 Warrants attached to Warren
Buffett's $5 billion preferred stock investment in Bank of
America Corp (BAC.N) were worth nearly twice as much as his
existing warrants in Goldman Sachs Group Inc (GS.N) just hours
after the deal was announced on Thursday.
Jon Najarian, co-founder of options trading firm
optionMONSTER, said the 700 million options Bank of America
granted to Buffett's Berkshire Hathaway Inc (BRKa.N), at a
strike price of just over $7.14 are now worth $5.49 apiece, or
$3.84 billion in total.
The 43.5 million Goldman options Berkshire received as part
of a 2008 investment, with a strike price of $115, are worth
$35.30 apiece, or $1.53 billion in total, Najarian said.
The options values "are indeed moving targets," Najarian
said, because of recent market volatility and uncertainty about
future interest rates.
"Just slight moves to either cause rather dramatic pricing
differentials," he said.
Warrants offer an investor the right to purchase a security
within a designated period of time at a particular price.
Valuing options involves two different factors: the current
value of the options, if they are currently trading above the
strike price and the so-called "time value."
The further out an option date extends, the more
opportunity for the price to appreciate.
The Bank of America options extend for 10 years and the
Goldman options expire in 2013. Since June 30, Bank of America
shares have bounced around in a range of $6.01 to $11.14.
Goldman shares have ranged from $103.16 to a high of $139.25.
News of the Buffett deal restored confidence in Bank of
America's financial well-being, after weeks of investor concern
over losses from its troubled mortgage division. Bank of
America's shares soared as much as 25.9 percent on news of the
deal on Thursday morning and were up 9 percent at $7.62 in
LONG, HAPPY LIFE
"I'm very happy on the long life of the warrants because I
wouldn't roll the dice on the next 12 months," said James
Armstrong, president of Henry H. Armstrong Associates, which
manages around $400 million and has almost a quarter of that in
"The warrants are the key (to the deal) and the 10-year
life is really great. If it was a three-year warrant, a
two-year warrant, I'd be a little less confident."
Linus Wilson, an assistant professor of finance at the
University of Louisiana at Lafayette, who has studied the
pricing of warrants for large bank stocks, calculated the value
of Buffett's Bank of America options somewhat differently than
Najarian. He came up with a value of $3.17 billion.
Wilson said the announcement of Buffett's investment sent
the value of his warrants soaring 18.3 percent and the value of
his preferred stake up 4.7 percent.
"Thus, Berkshire was sitting on a paper profit of $3.42
billion from the investment," said Wilson.
Dan Plettner, an individual investor who recently added to
his positions in Bank of America preferred shares, said the
Berkshire investment sent the value of his floating rate,
noncumulative preferred stock holdings up more than 14 percent.
Yet the issues he holds are trading at $14.20 and $16.65, steep
discounts to their issue price of $25.
"Both are still very attractive in my estimation at current
prices, particularly considering Berkshire's comfort with the
preferred's safety profile," Plettner added.
(Additional reporting by Ben Berkowitz and Andre Grenon)