Billionaire Warren Buffett threw a lifeline to the Bank of America (BofA) on Thursday, announcing he would invest $5-billion in the beleaguered United States banking giant, a move that sent its stock price soaring.
“Bank of America is a strong, well-led company,” Buffett said in a statement released by BofA, the US’s largest bank in terms of deposits.
“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.”
Under the terms of the deal, Buffett’s holding company Berkshire Hathaway will buy 50 000 shares of BofA preferred stock at $100 000 apiece, with BofA paying Berkshire a 6% annual dividend on the shares.
The investment was a huge vote of confidence in BofA, which has been plagued this year by mounting legal costs stemming from the collapse of the US housing market, as well as doubts about the strength of its capital base.
Buffett’s move was reminiscent of his $5-billion investment in Goldman Sachs at the peak of the 2008 financial crisis, which was crucial in helping the investment bank emerge from the global meltdown in good health.
Bank of America stock surged after the deal was announced, closing 9.4% higher. Earlier this week, the bank’s share price had fallen to less than half its value at the beginning of the year.
“I remain confident that we have the capital and liquidity we need to run our business,” BofA chief executive Brian Moynihan said in the bank’s statement.
“At the same time, I also recognise that a large investment by Warren Buffett is a strong endorsement in our vision and our strategy.”
News of the deal lifted other bank stocks too, with Citigroup gaining 4.9% for the day, while Morgan Stanley was up 2.7%.
US financial stocks have been battered in recent weeks amid fears of a slowing economy and concerns about US banks’ exposure to Europe’s sovereign debt crisis.
Hard price to pay
The $5-billion will help shore up Bank of America’s capital base, after it has lagged other big US banks in moving towards the stricter Basel III capital requirements imposed by global regulators after the financial crisis.
“The main concern hanging over Bank of America was capital adequacy,” said Erik Oja, a banking industry analyst with ratings firm Standard & Poor’s.
“The $5-billion capital infusion takes away of lot of uncertainty,” Oja said.
But other analysts said Bank of America had paid dearly for Buffett’s capital infusion, noting the steep 6% dividend rate and a separate deal that gave Buffett warrants to buy BofA’s common stock.
“The investment by Warren Buffett and the stiff interest rate terms he has extracted are all signs that BofA is under severe financial duress,” said Mark Williams, a former US Federal Reserve official who teaches at the Boston University School of Management.
Besides the preferred stock, under the terms of the deal Berkshire Hathaway will receive warrants to buy 700-million shares of BofA’s common stock at an exercise price of $7.14.
‘Sage of Omaha’
BofA’s common shares closed at $7.65 on Thursday, meaning that Berkshire could already exercise its warrants at a profit of over $300-million.
Berkshire Hathaway’s shares lost more than 2%.
Buffett (80) is renowned for buying stock in undervalued companies and reaping profits as their share prices rise.
His contrarian investing strategy has made him the third-richest man in the world, with a fortune of $50-billion, according to Forbes magazine’s most recent list of the world’s billionaires.
Based in the farm state of Nebraska rather than among the skyscrapers of New York, Buffett has been dubbed the “Sage of Omaha” for his uncanny stock-picking prowess.
He told CNBC on Thursday that he had come up with the idea of investing in Bank of America while taking a bath.
When asked why he had decided to invest in the bank now, Buffett told the TV channel that its stock had “gone down a lot.”. — Sapa-AFP