Thread: Buffett invests $5 BILLION in Bank of America, shares soar

Warren Buffett invests $5 billion in Bank of America

August 25, 2011 | 7:05am

Bank of America, under fire from shareholders and analysts, is getting a $5-billion investment from Warren Buffett's investment company. The banking giant's stock soared this morning on the news.

The investment by Berkshire Hathaway is reminiscent of a $5-billion investment Buffett made in Goldman Sachs in September 2008 in the depths of the financial crisis. That injection of capital helped restore confidence in Goldman and helped the Wall Street firm attract other investments.

As with the Goldman infusion, Buffett negotiated extremely favorable terms from Bank of America. He is set to receive BofA preferred shares that will pay Berkshire a 6% dividend each year. If the bank wants to redeem the shares it has to pay Buffett a 5% premium.

In a statement, Buffett called Bank of America a "strong, well-led company" and said he phoned Chief Executive Brian Moynihan "to tell him I wanted to invest in it."

The move may help boost confidence in the Bank of America -- the nation's largest bank -- but it underscores how dire the Charlotte, N.C., company's situation has become in recent days as analysts have questioned whether the bank has enough capital and investors have worried about continued losses from the bank's mortgage holdings.

Many of the questions about the bank have arisen from its 2008 purchase of troubled mortgage lender Countrywide Financial Corp.

This week, the bank's stock fell to its lowest price since March 2009. The final drop came after a blogger wrote that the company might need as much as $200 billion in new capital. The bank took the unusual step of publicly rebutting the blogger.

On Wednesday a few analysts came to the bank's defense and the stock rallied, ending the day up 69 cents, or 11%, at $6.99. After BofA disclosed Buffett's investment early Thursday, the shares shot up as high as $8.80. They were recently trading at $8.19, up $1.20, or 17% from Wednesday's close.

http://latimesblogs.latimes.com/money_c ... erica.html

AUGUST 25, 2011, 11:05 A.M. ET.2nd UPDATE:

Buffett Invests $5B In Bank Of America; Shares Soar

(Updates with more details on deal in paragraphs 9-10, background on Buffett's investments in paragraphs 15-18, recent share prices in paragraph 6)


By David Benoit and Erik Holm
Of DOW JONES NEWSWIRES
NEW YORK (Dow Jones)--Warren Buffett's Berkshire Hathaway Inc. (BRKA, BRKB) will invest $5 billion in Bank of America Corp. (BAC), giving the nation's biggest bank a much-needed vote of confidence amid questions about the credibility of its management.

The investment, similar to Buffett's move with Goldman Sachs Group Inc. (GS) three years ago, comes as Wall Street has wondered if Bank of America would be able to raise enough capital to meet new global standards. The news sent Bank of America shares soaring Thursday and provided a general lift to financial stocks.

Bank of America Chief Executive Brian Moynihan had proclaimed the bank would not need to issue shares to raise capital, as it was already ahead of requirements and had noncore assets to sell. But with shares of the bank falling to new two-year lows, investors voiced uncertainty and braced for a potential share sale.

An investment by Buffett, one of the world's most revered investors, assuaged those fears nearly immediately. The so-called Oracle of Omaha wasted no time in backing Moynihan.

"Bank of America is a strong, well-led company, and I called Brian to tell him I wanted to invest in it," Buffett said. "I am impressed with the profit-generating abilities of this franchise, and that they are acting aggressively to put their challenges behind them."

Bank of America jumped 15% to $8.01, while the KBW Bank Index soared 2.2%. Berkshire's Class A shares slipped $234 to $106,116.

Credit default swaps, which had been soaring as investors worried, tightened dramatically Thursday, with the cost to protect $10 million of BofA debt over five years falling by $68,000 to $305,000.

Under the deal's terms, Berkshire will get 50,000 preferred shares that carry a dividend of 6% a year and are redeemable at a 5% premium. The investment also includes warrants to purchase 700 million Bank of America shares at $7.14 each over the next 10 years.

If the warrants were fully exercised, Berkshire would own about 6.5% of the bank, which would make it the bank's biggest shareholder. Berkshire is the top holder in Wells Fargo & Co. (WFC), with a 6.7% stake.

Buffett called Moynihan on Wednesday, a person familiar with the matter said, but was told the bank didn't need the capital. Buffett agreed with the assessment and said that's why he wanted to make the deal, the person said.

"I remain confident that we have the capital and liquidity we need to run our business," Moynihan said Thursday. "At the same time, I also recognize that a large investment by Warren Buffett is a strong endorsement in our vision and our strategy."

Buffett's investment in Bank of America mirrors a stake he took in Goldman Sachs during one of the darkest moments of the 2008 financial crisis. Just after the September failure of Lehman Brothers Holdings Inc. and the emergency takeover of Merrill Lynch & Co. by Bank of America, Berkshire was able to demand 10% interest from Goldman in exchange for Berkshire's funds and Buffett's stamp of approval.

Goldman redeemed Berkshire's preferred stake earlier this year. Buffett's company still holds warrants to buy 43.5 million Goldman shares--which would give him a 7.9% stake in the company's outstanding common stock--at $115 a share. Goldman shares traded this morning at $112.52, up 2%.

Other companies that received Berkshire funds in 2008 and 2009 include General Electric Co. (GE), Swiss Reinsurance Co. (RUKN.VX) and Harley-Davidson Inc. (HOG).

Buffett, one of the world's richest people, has built Berkshire over four decades into a massive conglomerate with more than 70 discrete units, including Dairy Queen, Fruit of the Loom and car insurer Geico Corp. The operating companies spin off enormous sums of cash for Buffett to invest, and he said early this year he was hungry for major deals. Berkshire had $47.9 billion in cash at the end of the second quarter.

But Buffett has repeatedly warned Berkshire shareholders he'll be unable to find new investments that would provide the same returns he got from Goldman.

Berkshire had taken a stake in Bank of America in 2007, but the investment was a small one by Berkshire standards, and it was made by another manager and unloaded late last year.

The doubt around Bank of America shares is traced by many investors back to a pledge Moynihan had made earlier this year to "modestly" raise the dividend in the second half. Soon after, the bank disclosed the Federal Reserve had rejected its capital plan, putting any dividend on ice.

Shares this year had dropped 48% through Wednesday's close, including a 39% slump over the previous three months.

-By David Benoit and Erik Holm, Dow Jones Newswires; 212-416-2458; david.benoit@dowjones.com

--Lauren Pollock and Katy Burne contributed to this article

http://online.wsj.com/article/BT-CO-201 ... 11609.html