Buffett Buys $5 Billion in Bank of America Shares
Bank of America shares jumped Thursday on news that the bank was getting a $5 billion lifeline from Warren Buffett.
After sliding for years, the stock had lost 30 percent in August alone on fears that its huge portfolio of bad real estate loans threatened the company's existence.
Buffett's company, Berkshire Hathaway, is buying 50,000 shares of preferred stock that pay a 6% dividend and are redeemable by the company at any time at a 5% premium. Buffett also has the option to purchase 700 million shares of BofA at $7.14 each for 10 years.
While the vote of confidence is a big deal for Bank of America, it's also a sweet deal for Buffett and his shareholders.
BofA shares were up about 15% in mid-morning trading, at $8.06 after closing at $6.99 on Wednesday night. Given the value of his warrants, Buffett has made a cool $700 million on paper already.
The deal is reminiscent of Buffett's arrangement with Goldman Sachs at the height of the financial crisis: The Oracle of Omaha bought $5 billion in preferred shares of Goldman, paying 10 percent interest, giving the firm his much-needed stamp of approval shortly after Lehman Bros. filed for bankruptcy.
CNBC's Becky Quick reported this morning that Buffett told her he'd come up with the plan in the bathtub.
"Bank of America is a strong, well-led company, and I called [CEO Brian Moynihan] to tell him I wanted to invest in it," said Buffett in a press release.
The nation's largest bank, BofA has been plagued recently by worries about its capitalization. Analyst turned blogger Henry Blodget has suggested that the financial giant's value has been inflated by some $100 billion to $200 billion in overvalued assets, although other analysts have argued that Bank of America has plenty of cash to meet any obligations.
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