Buffett gives $5B vote of confidence to BofA

NEW YORK (AP) — Warren Buffett is coming to the rescue of another fallen giant.

Buffett’s Berkshire Hathaway Inc. announced Thursday that it would invest $5 billion in Bank of America Corp., giving a much-needed vote of confidence to the beleaguered bank. The news sent the bank’s stock soaring 9 percent.

“Buffett is Bank of America’s white knight,” said Glenn Schorr, bank analyst at Nomura equity research.

As recently as Tuesday, the bank’s stock had plunged 50 percent from a year ago on concerns over the bank’s mortgage problems and worries that it would have to sell large amounts of stock to shore up its balance sheet.

Investors’ confidence in the bank took another blow this month as its mortgage headaches got worse. On Aug. 8, American International Group Inc. sued Bank of America for more than $10 billion, saying the bank deceived the insurer by selling it faulty mortgage investments. The bank has already paid a total of $12.7 billion this year to settle similar claims. The AIG lawsuit amplified worries that more investors would sue the bank and drain its coffers.

The slide in the stock intensified, falling as much as 36 percent in just the last month. The sell-off was seen as a major challenge for the bank and its CEO Brian Moynihan, who has been at the helm since January 2010. In an effort to calm investors, the embattled CEO took to the airwaves, giving an interview on CNBC on Aug. 9 and answering questions from shareholders in a conference call on Aug. 10.

It didn’t help. Investors became even more impatient with the bank, which is the largest in the U.S. by assets.

Much of the Charlotte, N.C. bank’s problems stem from its 2008 purchase of the country’s largest mortgage lender Countrywide Financial Corp., but it faces a litany of other challenges.

The bank has lost $15.3 billion in the last four quarters. Its revenue fell 34 percent in the first half of the year from the same period a year ago, to $40 billion, after new regulations prevented the bank from collecting fees from checking account overdrafts and credit cards. Half of all American households have an account or do business with Bank of America, making it even more exposed than its rivals to weakness in the economy.

Moynihan, the CEO, has been trying to engineer a turnaround by selling assets, cutting expenses and closing branches. That hasn’t been enough to calm jittery investors, but the Buffett investment should buy him time.

“The investment eliminates the big credibility gap that management had with investors,” said Jonathan Finger, partner of Houston-based Finger Interests Ltd. His company is a long-time shareholder that owns 1.1 million shares. “It’s time now to demonstrate they have a plan to grow the business.”

Buffett, one of the most successful and respected investors of all time, has lent his credibility to several other icons of American business at times when investors’ confidence in them was waning. Buffett is the third-richest man in the world with a net worth valued at $50 billion, according to Forbes. Known for his folksy style, Buffett who lives in Omaha, Neb., is closely followed by millions of investors around the world.

Buffett’s investments have usually proven to be both prescient and profitable. Buffett pumped $5 billion into Goldman Sachs Group Inc. at the height of the 2008 financial crisis, helping to reverse a crisis of confidence in the investment bank and the U.S. banking system in general after the collapse of investment bank Lehman Brothers. He also invested $3 billion in General Electric Co.

Buffett’s blessing has also sent the stocks of other companies sharply higher. In late 2008, before Buffett made his investment in the company, Goldman Sachs’ stock had fallen nearly 50 percent from its peak of $247.92. It jumped 5 percent immediately after the deal was announced.

Buffett’s investments in Goldman and GE paid annual dividends of 10 percent, and wound up paying off. Berkshire made close to $1.8 billion from the Goldman investment alone. Unlike the Bank of America deal, those companies approached Berkshire, seeking financial support as well as the stamp of approval that came with the endorsement of the legendary investor.

Buffett said in a statement Thursday he called Bank of America’s CEO Moynihan to ask about investing because he considered the bank a strong, well-led company.

Berkshire will receive a dividend of 6 percent on its investment in Bank of America. Berkshire will get 50,000 preferred shares in the bank and warrants to purchase 700 million shares of common stock at $7.14 per share. Buffett can exercise the warrants any time in the next 10 years. If he does, it would make him the bank’s largest shareholder with a stake of 7 percent.

Buffett already made a profit, on paper, of $350 million thanks to a surge in Bank of America’s stock price after the deal was announced. After closing at $6.99 Wednesday, the stock jumped 64 cents, or 9 percent, to $7.63 Thursday. Bank of America’s stock traded as high as $15 in January, before its mortgage woes worsened.

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