In this file photo taken Oct. 5, 2010, Warren Buffett, chairman and chief executive officer of Berkshire Hathaway at Fortune's Most Powerful Women Summit in Washington. NEW YORK (AP) -- Warren Buffett is coming to the rescue of another fallen giant.
Buffett's Berkshire Hathaway announced Thursday that it would invest $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 percent in the past year 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 even worse. On Aug. 8, American International Group Inc. sued Bank of America for more than $10 billion, saying the bank deceived AIG by selling it overvalued mortgage-backed securities.
Much of the Charlotte, N.C. bank's problems stem from its 2008 purchase of Countrywide Financial Corp., the country's largest mortgage lender. Bank of America has been under heavy pressure from investors for selling them securities based on mortgages that later lost value.
The bank paid a total of $12.7 billion earlier this year to settle claims that it sold investors faulty mortgage investments. Investors have become worried that the bank would have to pay out even more to settle future claims.
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. His 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. He also invested $3 billion in General Electric Co.
Those investments, which paid annual dividends of 10 percent, wound up being lucrative. Berkshire made $2 billion from the Goldman investment alone. Unlike the Bank of America deal, those companies approached Berkshire seeking financial help and 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 his investment in Bank of America. Berkshire will get 50,000 preferred shares 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. If he does, it would make him the banks largest shareholder with a stake of 7 percent.
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 percent to $7.86 Thursday. Bank of America's stock traded as high as $15 in January, before its mortgage woes worsened.
Buffett's investment in Bank of America sent the stocks of other banks higher too. Citigroup Inc. rose 2.7 percent and Morgan Stanley rose 3.4 percent.
Berkshire also holds investments in several other banks. One of Berkshire's biggest stock investments is a 16 percent stake in Wells Fargo & Co. Berkshire also holds stakes in US Bancorp, M&T Bank Corp. and the Bank of New York Mellon Co.
» Stocks slide as Buffett/BofA rally fades [MSNBC]
» Has Warren Buffett just called the bank bottom? [CNN]
» BofA says Berkshire will invest $5 billion [Bloomberg]