NEW YORK/CHARLOTTE, (Reuters) – Warren Buffett will invest $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.
Bank of America shares rose 15 percent to $8.03 in early trading, erasing a large part of the stock’s August losses. The jump also makes the warrants for Bank of America shares that Buffett gets in the deal instantly profitable.
Buffett and Bank of America 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 Bank of America 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 U.S. government and the Federal Reserve to stimulate demand.
Buffett’s Berkshire Hathaway will in many ways make out even better financially than Bank of America did in the deal. Berkshire had a position in the bank that he sold in the fourth quarter of 2010 when the stock had an average price of $12.24.
The warrants to buy 700 million shares of common stock he gets in this deal are priced at just over $7.14 per share, with an unusually long 10-year exercise period.
Bank of America will also sell Berkshire 50,000 shares of cumulative perpetual preferred stock with a 6 percent annual dividend, it said. Bank of America 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 $15 a second in dividends until Goldman bought Buffett out earlier this year.