Warren Buffet shows $5 billion confidence in Bank of America
In a surprise move, famed investor Warren Buffet has invested $5 billion into Bank of America.
Berkshire Hathaway, run by Mr. Buffett, has agreed to buy 50,000 preferred shares that will pay a 6% annual dividend.
Bank of America has the option to buy back the shares at any time for a 5% premium.
By buying these shares at a time when confidence in Bank of America has fallen as has its stock price, Buffet is giving BoFA a morale-boosting vote of confidence.
BoFA did badly in the Great Recession, after doubling down with risky bad mortgages when it bought Countrywide, a subprime lender that preyed on low-income home buyers and whose mortgages turned out to be toxic.
“I remain confident that we have the capital and liquidity we need to run our business,” Bank of America chief executive Brian Moynihan said in his statement. “At the same time, I also recognize that a large investment by Warren Buffett is a strong endorsement in our vision and our strategy.”
Malcom Polley, Chief Investment Officer at Stewart Capital added, “I think he’s being pretty opportunistic but that’s classic Buffett. He’s not going to make a preferred investment in a company he doesn’t think is going to be around. This gives him a pretty certain return.“
Buffet seems to believe that BoFA has put the worst of its problems behind it by his investment. BoFA is also going through massive layoffs of almost 5,000 employees, hoping to become more streamlined and efficient.
BoFA share prices initially climbed by almost $2, but fell back by a dollar to $8 by 11.00am. It is still a far cry from the $19 share price Bank of America commanded last year, but perhaps Buffet sees things we don’t. It would be wise then to keep an eye on Bank of America in the coming months.
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