Buffett invests US$5b in Bank of America

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 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 August 8, American International Group Inc sued Bank of America for more than US$10 billion, saying the bank deceived AIG by selling it overvalued mortgage-backed securities.

The bank paid a total of US$12.7 billion earlier this year to settle claims that it sold investors faulty mortgage investments.

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.

Buffett pumped US$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 US banking system in general. He also invested US$3 billion in General Electric Company.

Those investments, which paid annual dividends of 10 per cent, wound up being lucrative. Berkshire made US$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 six per cent 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 US$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 bank's largest shareholder with a stake of seven per cent.

An hour after the deal was announced, Buffett had already made a profit on paper of US$500 million on the stock warrants thanks to a surge in Bank of America's stock price.

After closing at US$6.99 Wednesday, the stock jumped 87 cents, or 12 per cent, to US$7.86 Thursday. Bank of America's stock traded as high as US$15 in January, before its mortgage woes worsened.

Berkshire also holds investments in several other banks: 16 per cent in Wells Fargo, US Bancorp, M&T Bank Corp and the Bank of New York Mellon Company.