In August 2011, Warren Buffett’s Berkshire Hathaway made a much-needed investment in an ailing Bank of America. Nearly six years later, the famed investor is set to reap a tidy profit for his trouble.
Berkshire Hathaway disclosed plans Friday to activate a provision in that deal that allows the company to buy 700 million shares of the bank’s common stock via warrants at $7.14 per share. For regular investors, those shares trade for a little more than $24, giving Buffett a paper profit of about $12 billion.
The decision also means Berkshire Hathaway is poised to become the biggest shareholder in Bank of America, a welcome stamp of approval for a bank that is looking to grow again after working to resolve years of mortgage-related problems.
“We appreciate Mr. Buffett’s continued support for the long-term value we are delivering through responsible growth and we welcome his decision,” Bank of America said in a statement Friday.
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Buffett’s deal traces to 2011, when he injected $5 billion into the bank as it was reeling from the crisis and after insurer American International Group filed a lawsuit seeking $10 billion in damages from it. At the time, the bank’s shares were in danger of falling below $6, as investors worried the bank might not have enough capital to cover legal expenses and meet regulatory requirements.
Buffett told CNBC at the time that he got the idea for the investment while in the bathtub. He hadn’t talked to Bank of America CEO Brian Moynihan before and didn’t have his phone number, but an assistant set up the call.
During the financial crisis, Buffett offered much-needed lifelines to other struggling companies, including Goldman Sachs and General Electric – often at highly favorable terms for himself.
Berkshire Hathaway’s move at Bank of America had been expected after the Charlotte bank passed the second phase of the Federal Reserve’s stress tests this week and received the green light to bump its annual dividend to 48 cents per share.
In February, Buffett had signaled that he would make financial sense to convert the preferred shares he owned in Bank of America to common stock if the bank’s annual dividend rose above 44 cents. That’s because he would then be making more than the $300 million annual payout from his preferred shares.
Berkshire Hathaway was already the biggest shareholder at the third-biggest U.S. bank, San Francisco-based Wells Fargo. Now it’s set to become the biggest investor in the second-biggest bank, Bank of America.
Berkshire’s stake in Bank of America would equal roughly 7 percent of the bank’s common shares, according to a bank calculation in a March regulatory filing. That’s larger than stakes of asset-management giants BlackRock (6.7 percent) and Vanguard Group (6.3 percent), the filing shows.
In a statement Friday, Omaha, Neb.-based Berkshire said it will exercise the warrants to acquire all 700 million shares once the annual dividend is increased to 48 cents from 30 cents beginning in the third quarter. The Federal Reserve approved the 60 percent higher payout Wednesday as part of its annual examinations of the largest banks to determine if they’re resilient enough to weather another downturn.
In exercising the warrants, Buffett’s firm will swap its preferred shares into common stock.
On a mostly down day for bank stocks, Bank of America’s shares closed down less than 1 percent Friday at $24.26. Since the presidential election, however, they are up more than 42 percent, joining other banks boosted by the prospects of reduced regulation under a Donald Trump administration.