NEW YORK - Warren Buffett is coming to the rescue of another fallen giant.
Buffett's Berkshire Hathaway announced Thursday that it would invest US$5 billion in Bank of America Corp., giving a much-needed vote of confidence in the struggling bank.
The bank's stock had plunged 52 per cent in the past 12 months on concerns over the bank's mortgage problems. Investors have also been worried that Bank of America will need to raise large amounts of capital to shore up its balance sheet.
The bank had to pay $12.7 billion earlier this year to settle lawsuits over failed mortgages. Most of the toxic mortgages came from its 2008 purchase of Countrywide Financial Corp. CEO Brian Moynihan has insisted the bank doesn't need to raise money.
The investment is reminiscent of infusions of cash by the billionaire investor into other troubled companies during the 2008 financial crisis. Buffett also lent his credibility to Goldman Sachs Group Inc. and General Electric Co. with investments of $5 billion and $3 billion respectively.
Those investments, which paid annual dividends of 10 per cent, wound up being very lucrative for Berkshire. Berkshire will receive a dividend 6 per cent on his investment in Bank of America.
Buffett said in a statement that he had called Moynihan to ask about investing in Bank of America because he considered it to be a strong, well-led company.
Under the deal, Berkshire Hathaway will get 50,000 of preferred shares in Bank of America and warrants to purchase 700 million shares of common stock at $7.14 per share. Buffett can exercise the warrants at any time in the next 10 years.
An hour after the deal was announced, Buffett had already made a profit on paper of $500 million on the stock warrants thanks to a surge in Bank of America's stock price. After closing at $6.99 Wednesday, the stock jumped 87 cents or 12 per cent to $7.86 in early trading Thursday.
