Today I made an interesting trade - it's not really a new investment but rather a different flavor of an old one. The company I'm talking about is Bank of America, and what I did was buy the class "A" TARP warrants ("BAC-WTA" on yahoo finance) while at the same time selling my 2000 shares of BAC common stock. I purchased the TARP warrants for $4.52 (costing me $18,085) and sold the common for $9.76 (netting me $19,516). In other words, I simply exchanged the common for the warrants.
For those of you not familiar with TARP warrants I suggest reading the following as a quick primer: http://www.choufunds.com/pdf/SA10%20pdf.pdf (the relevant commentary is on pages 2-5). As you can see the terms for BAC-WTA are really quite interesting - the warrants don't expire until Jan. 2019, the strike price is $13.30, and if BAC starts paying a dividend the strike price is adjusted down dollar-for-dollar so long as the dividend exceeds $0.01 per quarter.
So why'd I make this exchange? Well I've been following the big banks and TARP warrants for over a year now, but only recently has the price fallen to the point where I THINK the risk/reward favors the warrants. Prior to this I preferred to be conservative and just own the regular stock. Keep in mind this is a levered investment, so if BAC does well the warrants will be a home run, but if the economy falls off a cliff and BAC flounders I'll end up with egg on my face.
Lastly, Bruce Berkowitz just gave a great interview in which he discusses BAC, which can be found here: http://www.fairholmefunds.com/pdf/amaii2011.pdf.
Questions? Comments? Email mevsemt@gmail.com
