Warren Buffett makes $280m profit on Bank of America stake in just 24 hours
By Helia Ebrahimi, and Harry Wilson
The billionaire investor bought $5bn of preferred stock with 700m warrants that convert into 7pc of the bank's shares, sending them up an initial 25pc to $8.80. They fell back to $7.67 in mid-afternoon trading, up almost 10pc on Wednesday's close.
Mr Buffett's move put some market confidence behind the bank after the hammering given to the shares in recent weeks on talk that it was short of $50bn to $200bn of capital. The bank has been hit by rumours that it may be forced to make massive writedowns on its housing debts and government bonds as well as the possibility it could haemorrhage even bigger legal bills for its mortgage liabilities.
But Mr Buffett, who made $4.5bn in profit from a similar move investing in Goldman Sachs at the height of the financial crisis, said he was impressed by Bank of America's "profit-generating" capabilities. He added he had contacted the bank's beleaguered chief executive Brian Moynihan on Wednesday morning proposing the deal, saying: "Bank of America is a strong, well-led company Brian... I wanted to invest in it." The shares closed up 11pc on Wednesday.
As well as the preference shares that will pay $300m - or 6pc - interest every year, Mr Buffett's investment firm Berkshire Hathaway will receive 700m warrants that convert into ordinary shares at an exercise price of $7.142857 per share. The cash injection raises the bank's total equity by 2pc to $223bn. If the warrants are exercised, core Tier 1 capital will rise 4pc to $120bn, according to brokers' estimates.
Analysts questioned how much Mr Buffett's investment would calm speculation about Bank of America's need for additional capital.
Mike Mayo, a New York-based analyst at CLSA, called the deal a "vote of confidence", but said it would not "alleviate concerns about the stock".
"The possibility of a common raise [ordinary share sale] is not eliminated, and the investment reinforces the status quo despite recent failures by the company to put behind it issues related to expenses, legal, management and guidance," Mr Mayo said.
One analyst who asked not to be named called the deal an "expensive public relations disaster" for the bank, seeing that it proved it needed fresh capital but left questions over whether it was enough.
Mr Moynihan said: "I remain confident we have the capital and liquidity we need. I also recognise that a large investment by Warren Buffett is a strong endorsement."
The investment recalled September 2008, when just a week after Lehman Brothers collapsed Mr Buffett pumped $5bn into Goldman Sachs. While the 6pc coupon being paid by Bank of America is lower than the juicy 10pc interest rate then extracted from Goldman, it will still represent a significant drain on the lender's financial resources.
Mr Mayo estimates the coupon alone will cost the bank's shareholders five cents per share a year in lost earnings. At the end of September the bank will make its first quarterly dividend payment of $75m to Berkshire plus $25m of "accretion expenses", taking the total quarterly bill to $100m. To buy out the preferred stock the bank will have to pay a hefty 5pc premium to the value of Mr Buffett's investment, which would cost it a further $250m.