Buffett's BAC warrants are currently out of the money even after last week's equity ramp, leaving him with a coupon that doesn't compensate for the risk inherent in BAC's toxic assets. These bets are sometimes losers.
I agree with your assessment that the terms of Soros' MF Global deal were likely arm's length.
Most likely. I was trying to cobble up and overstate / stretch the potential total return, including high coupon rate and market discount and potential for capital gains in fast market, by giving all the benefits of the doubt I could find - urgency, eurozone market volatility, real and headline sovereign risk, deal size...
And still, in the end, to paraphrase some T-shirts, "... all I had left was the 'lousy' 10 percent."
This is not an easy money without risk, and the total returns are not outsized in percentage terms (often, higher return can only be achieved through high leverage, which only magnifies risk, as LTCM and MFGH, among others, have shown). The numbers, in percentage terms are never as "impressive" for lay people as absolute numbers in dollars (or other currencies) and that's what I tried to show with the Soros' "breaking Bank of England" example.
The fact is, were the deal any more lucrative, adjusted for risk, it probably wouldn't be left on the table for Soros to pick up.
Bond market is liquid, players are very sophisticated, plenty of available cash is looking for deployment, and credit is cheap and easy enough for qualified investors and deals.
Buffett's BAC warrants are currently out of the money even after last week's equity ramp, leaving him with a coupon that doesn't compensate for the risk inherent in BAC's toxic assets.
Buffett is usually willing to be patient, even adding to his positions if he thinks that the "market" is wrong, and he sees no better use for cash. In the meantime he is pretty happy with clipping BAC coupon. The biggest problems for BoA are not financial, but political, though these are by no means trivial and should not be understated.
These bets are sometimes losers.
Yes, anybody can buy BAC preferreds, it's not limited to the likes of Buffett, but few will either have the knowledge, understanding, guts or decide that there are no better risk-reward opportunities somewhere else.
But that's how more money can be made (or lost) - by correctly differentiating, and exploiting market inefficiencies while avoiding most value traps. Bill Miller of Legg Mason was doing it for almost two decades, but then the "streak" snapped, in part because of the fund size, in part because of reversion to the mean.
Few investment are without risk (sovereign debt mess in Europe is one prime example), especially with huge sums of money to allocate - many markets are crowded or simply not available, while there are some advantages which they have to be willing to exploit to put capital to work.
People are overlooking many of these issues because the absolute "dollar" amounts are big enough to obscure the risk or total percentage returns. So quite often people tend to suspect or see something nefarious where it doesn't exist, in normal market trades or strategies.