capeman, I’m confused. Explain to me the “shorting opportunity on their investment.” If BAC wants to hedge their recent debt infusion they can use CDSs. If they wanted to short CFC’s common stock, they would have just shorted it, rather than going long convertible preferreds first. If BAC was truly bearish on CFC, there are much more efficient ways of making money on the situation than infusing debt and converts. I’d like to see your logic here.
That “they get preferred shares so they get the goods first in a liquidation” is factually correct but empirically naive. Go back and review the handful of situations from the last 10 years where a depository has failed and handed the keys over to the FDIC for liquidation, and tell me how much the preferred holders received. I’ll save you the work: less than 20 cents on the dollar on average. If you go back to the early 90s it’s less than 10 cents. Bottom line: preferred shareholders, for the most part, get wiped out when banks fail. BAC knows this. For whatever reason, BAC actually thinks CFC is going to survive and they’ll make money on this deal. I think CFC will survive but my guess is they get re-capped (again) at a lower price.
