LOS ANGELES – Warren Buffett is known on Wall Street
for his Midas touch, and nobody is more thankful for that these days
than Bank of America Corp.
Berkshire Hathaway
Inc., Buffett’s investment company, agreed Thursday to sink $5 billion
into the beleaguered financial giant. The deal helped allay fears that
America’s biggest bank needs a fresh infusion of capital to withstand
mortgage losses and another downturn in the economy.
The
investment casts the Oracle of Omaha in a familiar and favorable light,
tossing a lifeline to an American icon in need. He made similar moves
during the financial crisis for Goldman Sachs and General Electric.
But it also underscores his nose for profit and influence on Wall Street.
Bank
of America shares jumped 9.4 percent to $7.65, handing Buffett a
one-day paper profit of $355 million on just one part of his investment,
a right to buy 700 million shares of Bank of America common stock
during the next 10 years for $7.14 a share.
But a
corporate financial expert said the right to buy the common stock, along
with shares of preferred stock that Buffett received, made the deal
worth far more.
“It looks to me like Berkshire
Hathaway’s $5 billion in investment was worth about $8 billion at the
end of the day,” said Linus Wilson, a University of Louisiana professor
who has studied financial institutions and bank bailouts.
Buffett
called Brian Moynihan, Bank of America’s chief executive, Wednesday
morning to propose the investment. Moynihan, who had adamantly
maintained that he didn’t need additional capital, eventually agreed
because Buffett’s stamp of approval is worth so much.
“I
remain confident that we have the capital and liquidity we need to run
our business,” Moynihan said in announcing the deal. “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 received preferred stock with a face value of $5 billion, paying a 6 percent dividend, or $300 million a year.
By
comparison, when he invested $5 billion in Goldman and $3 billion in
General Electric in 2008 , a vote of confidence at the height of the
financial crisis , the firms agreed to pay him 10 percent annual
dividends on the preferred shares he purchased.
Buffett
has been an enthusiastic investor in major financial companies, often
during time of distress. In addition to Goldman, he previously has taken
major stakes in Wells Fargo&Co., American Express, Bank of New York
Mellon and several regional banks.
His first such investment proved a special challenge.
In
1987, Berkshire Hathaway paid $700 million for a 12 percent stake in
Salomon Inc., then Wall Street’s largest investment bank. Four years
later, when federal authorities accused Salomon of trying to corner
government securities markets, Buffett wound up stepping in as chairman
of the company to save its reputation and get it back on track.
For Bank of America, Buffett’s investment should help put to rest some of its own reputational damage.
The
fear on Wall Street is that problems with mortgages and the economy
posed such a threat to the bank that customers and other banks might
stop doing business with it. In exchange for Buffett’s help, BofA
investors must deal with the company’s shares being diluted by about 6
percent or 7 percent.
“The company can now get
back to addressing the normal course of business issues,” Credit Suisse
analyst Moshe Orenbuch said. “Over time, the increased confidence from
customers and counterparties should allow (the bank) the opportunity to
earn back the impact from the preferred dilution.”
Bank
of America’s biggest problems stem from its acquisition of Calabasas,
Calif.-based Countrywide Financial Corp., once the nation’s largest
mortgage lender, which nearly fell into bankruptcy after trying to
dominate the markets for subprime and other high-risk home loans.
Unable
to quantify its exposure to losses to the satisfaction of investors,
Bank of America became the target of short sellers, who profit when a
stock declines, as Citigroup Inc. had been during the financial crisis.
“There’s
always one bank that becomes the nexus of all the market’s fears,”
independent banking analyst Nancy Bush said. “In 2008 it was Citigroup.
This time it was Bank of America.”
In a statement, Buffett said the attacks on BofA had been unwarranted.
“Bank of America is a strong, well-led company, and I called Brian to tell him I wanted to invest in it,” he 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 is focused on their customers and on serving them
well. That’s what customers want, and that’s the company’s strategy.”
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©2011 the Los Angeles Times
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