Buffett gives Bank of America a hand

Berkshire Hathaway will invest $5 billion in Bank of America, and could become a major stakeholder if all warrants are exercised.

By Kim Peterson Aug 25, 2011 4:20PM
Warren Buffett to the rescue -- again.

Berkshire Hathaway (BRK.A) has agreed to invest $5 billion in Bank of America (BAC), reviving the stock price and giving investors more faith in the financial sector's future. Shares of the bank rose 15% early Thursday, but by the close had settled to a 9% gain at $7.61.

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Buffett reportedly came up with the idea while sitting in the bathtub. So that's what billionaires think about while bathing. And it's a very sweet deal indeed: Berkshire gets 50,000 preferred shares at a 6% dividend, redeemable at a 5% premium. The company also gets warrants to buy 700 million bank shares at $7.14 a piece over the next decade.

If Berkshire exercises those warrants in full, it would own nearly 7% of the bank and become the biggest shareholder, The Wall Street Journal reports. Berkshire shares closed down more than 2% to $103,452.

Berkshire likely already earned more than $1 billion on the investment in the first day, Bloomberg reports. That's because, based on a $7.85 share price for the bank, the preferred shares Berkshire bought were worth $3.53 billion while the warrants were worth about $2.87 billion.

The share price dropped to $7.61 at the close, but the gain was still significant.

Bank of America was left in the awkward position of accepting the investment while insisting that it didn't really need the money. "I remain confident that we have the capital and liquidity we need to run our business," chief executive Brian Moynihan said, according to the Journal.

So why did he accept it? Because everyone thought that Bank of America was on its last legs, and no one's better than Warren Buffett at injecting some confidence into a company. "I also recognize that a large investment by Warren Buffett is a strong endorsement in our vision and our strategy," Moynihan added.

Buffett's been here before. In the financial crisis in 2008, he invested $5 billion in Goldman Sachs (GS) at a 10% dividend and a 10% premium. He also got warrants to buy $5 billion of common stock at a $115 strike price within five years. Goldman shares closed Thursday at just under $110.

Analysts felt better about Bank of America after the news. UBS took the stock off of its "least preferred" list, saying Berkshire's investment is likely to restore confidence in the shares. Wells Fargo analysts said there's a smaller chance now for Bank of America to raise money by offering common shares, which had worried shareholders.



2Comments
Aug 26, 2011 7:31AM
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I hate BofA. Between Countrywide and them, they are some serious crooks...right along with our other TARP fund babies.  I am disappointed that Buffet seemed to feel a need to buttress BofA; I have been hoping BofA will implode under its own weight as it loses regular, average families as depositors.  Repeatedly, BofA shows that it is more commercial bank than consumer bank. Their latest "skim" opportunity is receiveing the CA Unemployment Benefits debit card program. Those folks may get fee'd to death when they can least afford it. Direct Deposit is not yet offered, but once the Texas program allowed it, it works so much better for those receiving benefits...no more hassles with Chase trying to get to the money without a bunch of fees.

Honestly, the healthiest thing for our economy is healthy competition, and letting BofA pay for its choices is needed. Account holders need to vote with their feet, and take their money to a regional bank or credit union. The big banks have their hands in every piece of the pie, and now large institutional investors have the capacity to manipulate markets, including oil and gas futures. That isn't a free market, and the average investor will pay for that. BofA and the other big banks need to be tamed.

Aug 25, 2011 9:08PM
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Warren Buffett has made the bold move .. it now is to be seen if the fed and Congress will follow suit and bring the American economy back from the double dip recession.  Of equal importance, it is yet to be seen if corporate America will make the move to invest in jobs growth before they are playing catch up to the rest of the world.
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