Warren Buffet may have netted $1.4 billion today on his $5 billion investment in troubled Bank of America. Meanwhile the Charlotte, N.C.- based institution saw its stock price surge 9.44 percent, to $7.65 a share, after falling earlier this week to less than half its value at the beginning of the year.
BofA Chairman and CEO Brian Moynihan proferred Buffet – whose $50 billion personal fortune makes him the world’s third richest man – what many on Wall Street call a sweetheart deal to ease concerns by investors that the bank was operating on unsound financial footing.
Indeed, America’s largest bank, in terms of deposits, has lagged behind the nation’s other major banks in moving toward stricter capital requirements imposed by global regulators in the wake of the financial meltdown.
“Bank of America is a strong, well-led company,” said Buffett, 80, in a statement posted on BofA’s website. “I called Brian and told him I wanted to invest in it.”
In return for Buffet’s vote of confidence, his Omaha, Neb.-based company, Berkshire Hathaway, received 50,000 preferred shares with a liquidation value of $100,000 each. Those shares reaped a 24 percent first day return, which works out to more than 10,000 percent on an annualized basis.
Buffet’s deal with BofA brings to mind his similar $5 billion investment in Goldman Sachs during the depths of the 2008 financial crisis. His rescue did much to enable the investment bank to survive the crisis intact, unlike such once-formidable financial institutions as Lehman Bros. and Merrill Lynch (which now is owned by BofA).
Meanwhile, Buffett profited handsomely from bailing out Goldman, posting a reported 70 percent gain on his investment after the financially healthier bank paid him out this past March.
It remains to be seen if the lifeline Buffet has thrown BofA’s way will turn out as successful as his Goldman bailout. The bank still faces billions of dollars in losses on its portfolio of troubled mortgages. And that liability is unlikely to improve any time soon what with the continuing depressed state of the nation’s housing market.
BofA also faces lawsuits from any number of plaintiffs, including American International Group, which sued the bank for $10 billion this month, claiming that two of its acquisitions – Merrill and Countrywide – misrepresented the quality of mortgage-backed securities they sold to investors.
At the same time, the bank is trying to settle similar complaints by 22 other aggrieved investors, including the Federal Reserve Bank of New York.