BOA bought preferred convertible stock though - I don’t know much about that kind of thing, but I thought that was a “can’t lose” proposition.
BofA did buy, as you say, convertable preferred stock, yielding 7.25%, convertable to common stock at $18/share.
A convertible preferred is not a “can’t lose” proposition by any means.
For those who don’t know what a “convertible preferred” is:
Companies can sell many different classes of stock. The largest class of shares is called “the common” and the common stock usually (but not always) has voting rights. It might pay a dividend.
Preferred stock is usually sold to raise additional capital over a defined time period. Think of it like a bond that is sold as stock. Preferred are usually priced at $25/share when they’re issued.
Often preferred shares don’t have voting rights. What they do have (where the “preferred” comes in) is that the dividend on preferred stock is paid before dividends on the common stock. There may be several classes of preferred stock, where the more senior classes are to get their dividends before other, less senior classes of preferred stocks.
Preferred stock might also have more claim to the assets of the company should the company go bankrupt. Owners of the common are last to be paid anything in bankruptcy actions. Bondholders are usually first.
Convertibles: When a company gets into a jam, sometimes they’ll see preferred stock that will convert to the common at a specified price at a future point in time. If the buyer gets a good dividend and the company pulls out of their problems and the common share price is above the conversion price, the buy of the convertible preferred gets a really, really sweet deal.
OK, so BofA was looking for a sweet deal. BofA wanted to buy Countrywide for years - they offered $30 billion for CFC several years back. Because the CEO of BofA was a patient guy, he’s now able to buy up all of CFC for about $6+ billion.
With CFC dropping into the single digits, the convertible preferred becomes a “busted convert” - a convertible where the underlying common price has dropped significantly under the conversion price.
With CFC around (let’s be generous) $8/share, BofA would need a more than 100% increase in the common price to get back to even on the common they’re going to get as a result of the conversion. Assuming CFC could get their situation turned around, we’d be looking at years and years down the line before the common price is back up there.
BofA is now in a position where they thought they were getting a much larger percentage of the company than they’re going to own when the conversion happens.
Busted converts are often great deals for investors - but only for those who come along after the convert has gone bust and they’re getting a high yield and compensated for buying the busted convert. If you were the initial buyer of the convertible preferred, well.... you’ve lost a lot of the opportunity you priced into the conversion price.
OK, that’s bad enough. But when CFC started cratering and it was looking as tho they could go bankrupt, suddenly now the dividend, even on a preferred, is in serious doubt. And a big percentage ownership of a company in bankruptcy isn’t such a great deal; everything you, an angel coming in to buy up the company in bankruptcy, might do to change things is going to have to go through a judge in a bankruptcy court.
So, to protect the first $2B, BofA bought the rest of the assets before someone else swooped in on the common or CFC went belly-up.
As you see, convertible preferred stock is far from a “can’t lose” proposition. ;-)