New York: Warren Buffett comes to the rescue again. Buffett's Berkshire Hathaway Inc. announced on Thursday that it would invest $5 billion (Dh18.3 billion) in Bank of America Corp., a much-needed vote of confidence that sent the beleaguered bank's stock soaring 9 per cent.
"Buffett is Bank of America's white knight," said Glenn Schorr, bank analyst at Nomura equity research.
The legendary investor said in a prepared statement that he reached out to Bank of America CEO Brian Moynihan to say he wanted to invest because he considered the bank a "strong, well-led company."
Lately, the market has rendered a different verdict. As recently as Tuesday, Bank of America's stock had plunged 50 per cent from a year ago on concerns over its mortgage problems and worries that it would have to sell large amounts of stock to shore up its balance sheet.
The selloff was seen as a major challenge for the bank and Moynihan, who has been at the helm since January 2010.
While Buffett's $5 billion investment is like a drop in the bucket at the largest US bank with $2.2 trillion in assets, it comes with an imprimatur of confidence that is worth a lot more. In that sense, Buffett's investment is largely symbolic.
"The investment eliminates the big credibility gap that management had with investors," said Jonathan Finger, partner of Houston-based Finger Interests Ltd., a long-time shareholder that owns 1.1 million shares.
"It's time now to demonstrate they have a plan to grow the business," he said.
Bank of America had cash and cash-equivalent securities of $402 billion at the end of second quarter. Its cash level is at the highest level in its history, bank's spokesman Jerry Dubrowski said.
Much of the Charlotte, North Carolina bank's problems, however, stem from its 2008 purchase of the nation's largest mortgage lender, Countrywide Financial Corp., but it faces a litany of other challenges.
The bank lost $15.3 billion in the last four quarters. Its revenue fell 34 per cent in the first half of 2011 from the same period a year ago, to $40 billion, after new regulations prevented it from collecting fees from checking account overdrafts and credit cards.
Half of all US households have an account or do business with it, making it more exposed than rivals to weakness in the economy.Investors' confidence in the bank took another blow this month as its mortgage headaches got worse.
Moynihan, the CEO, has been trying to engineer a turnaround by selling assets, cutting expenses and closing branches. In an effort to calm investors, the embattled chief executive took to the airwaves to say that the bank will not need to raise more capital. It didn't help. Investors became even more impatient with the bank. Then, on Wednesday, Buffett got his idea for investing in the bank while sitting in a bathtub, he told CNBC. Buffett's assistant called Moynihan's office, asking that the CEO contact Buffett on his personal number.
Buffett has lent his credibility to several other icons of American business.
He pumped $5 billion into the blue-chip investment bank Goldman Sachs Group Inc. at the height of the 2008 financial crisis, helping to reverse a crisis of confidence in the bank and the US banking system in general. Around the same time, he also invested $3 billion in General Electric Co., the iconic American company founded by light bulb inventor Thomas Edison.
Buffett's investments in Goldman and GE paid annual dividends of ten per cent, 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 and Buffett's stamp of approval.
Though Buffett's investment is symbolic, it will cost Bank of America $300 million in annual dividend payments. Berkshire will receive a dividend of 6 per cent on its investment. 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 ten years. If he does, it would make him the bank's largest shareholder with a stake of seven per cent. He has already made a profit, on paper, of $357 million thanks to a surge in Bank of America's stock price after the deal was announced.
- $2.2tr: value of Bank of America's assets
- 50%:fall in the bank's shares on Tuesday
- $15.3b: bank's losses in the last four quarters
