WARREN Buffett will invest US$5 billion in Bank of America, stepping in to shore up the company in the same way he helped prop up Goldman Sachs and General Electric during the financial crisis.
BofA shares rose 15 percent to US$8.03 in early trading yesterday, erasing a large part of the stock's August losses. The jump also makes the warrants for BofA shares that Buffett gets in the deal instantly profitable.
Buffett and BofA yesterday said he made an unsolicited call to the bank on Wednesday morning, offering to make an investment. Even though the bank has said it did not need to raise capital, investors widely believed it needed more money and to show it could raise funds easily.
The deal proved again that Buffett has become something of a lender of last resort to the financial system, as he did with Goldman and also GE. Buffett's role in aiding the economy and the financial system has become symbolically important given the lack of policy options left for the United States government and the Federal Reserve to boost demand.
"This proves to the market that if the bank needs additional capital, which we don't believe they do, but if they needed to calm the market by raising capital, they could do it within 30 minutes with a quick call to Uncle Warren," said Sean Egan, managing principal of Egan-Jones Ratings.
Buffett's Berkshire Hathaway will in many ways make out even better financially than BofA did in the deal. Berkshire had a position in the bank that Buffett sold in the fourth quarter of 2010 when the stock had an average price of US$12.24.
The warrants to buy 700 million shares of common stock he gets in this deal are priced at just more than US$7.14 per share, with an unusually long 10-year exercise period.
BofA will also sell Berkshire 50,000 shares of cumulative perpetual preferred stock with a 6 percent annual dividend, it said. The bank can buy back the investment at any time by paying Buffett a 5 percent premium.
It is virtually a mirror of the deal Berkshire did with Goldman in the depths of the crisis in fall 2008, except in this case the dividend is less. The Goldman deal paid Berkshire US$15 a second in dividends until Goldman bought Buffett out earlier this year.
Source:shanghaidaily