Buffett to Bank of America: I’ve Got Your Back

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Scott Eells / Bloomberg / Getty Images

Warren Buffett has offered to invest $5 billion in Bank of America.

Before Warren Buffett poured $5 billion into one of the market’s worst performing stocks, he reportedly called CEO Brian Moynihan personally and said he wanted to invest in Bank of America, calling it a “strong, well-led company.”

That’s one man’s opinion, even if it is the Sage of Omaha, and it’s not widely held these days. Bank of America’s stock price is down 52% in the last year, as investors have grown anxious about the financial giant’s toxic mortgage holdings. On top of that, American International Group sued Bank of America for $10 billion on Aug. 8, citing the purchase of mortgage-backed securities that AIG claims the bank had significantly over-valued. (Bank of America will likely dispute those claims in court.)

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So given the bank’s recent troubles, what’s in it for Buffet?

He’s been down this road before – Don’t forget that Buffett funneled $5 billion into Goldman Sachs back in the teeth of the economic crisis in 2008 (and $3 billion into General Electric, too). With a 10% annual dividend contributing to the cause, Buffett wound making $2 billion on the Goldman Sachs investment.

It’s a good deal for Buffett – What’s not to like if you’re a Berkshire Hathaway investor today? Yes, the company’s stock price took an immediate hit (down 2.6% in midday trading), but Buffet gets a lot out of the deal:

  • An annual 6% dividend
  • 50,000 preferred shares in Bank of America
  • Warrants to purchase 7 million shares of common stock at $7.14 per share. Remember, Bank of America’s stock sold as high as $15 only last January. And right out of the box, Buffett’s in the money on those warrants, as Bank of America stock was up more than 7.5% in trading Thursday.

What’s good for Buffett isn’t so good for investors – Should regular investors follow Buffett into the water? History says maybe not. With the big dividend yield, the preferred shares, and the warrants, Buffett struck a deal that the regular investor can’t get. Those deals with GE and Goldman Sachs were buffered by incentives exclusively for Buffett, so he could prosper even if the share prices of both companies fell, as they have. GE was selling at $22.50 when it struck a deal with Berkshire Hathaway. On Thursday it traded near $15. The same for Goldman Sachs – its stock has fallen from $123 per share to $109 since the Buffett deal was inked.

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Bank of America’s stock did well Thursday, up close to 9%. All in all, the Bank of America deal looks like a winner for Buffett, but we’ll see if it’s a winner for investors.