Buffett is also stressing the investment was his idea, perhaps to downplay any fears that Bank of America is desperate for a cash infusion.
This morning, Bank of America announced that Berkshire will use cash to buy 50,000 shares of preferred stock with a liquidation value of $100,000 per share in a private offering.
That is, in effect, a loan to the bank, in which it will pay around $300 million in dividends each year to Berkshire. BofA can pay back that loan at any time, but it will have to make an additional 5 percent dividend payment to do so.
Goldman paid back its $5 billion loan in April of this year, sending Berkshire roughly $1.6 billion in dividends over the 2-1/2 year life of the deal. That's an annualized return on investment of 12.6 percent. Warrants that came with that deal are out of the money, with Goldman trading a few dollars below the $115 strike price. Current price: [GS 109.84 -0.47 (-0.43%) ]
Buffett had said he didn't want Goldman to buy back its preferred shares, because it cut off the stream of $500 million a year going from Goldman to Berkshire. He's also indicated he doesn't plan to exercise the Goldman warrants until just before they expire in 2013.
General Electric has said it will pay off its $3 billion loan this October. Berkshire will pocket a total of $1.2 billion in dividends over that deal's three years for an annual return on investment of 11.1 percent. Like Goldman, warrants in that deal are also out of the money, with GE trading almost seven dollars below the $22.25 strike price. Current price: [GE 15.45 -0.27 (-1.72%) ]
In today's deal, Berkshire gets warrants to buy up to $5 billion of BofA's common stock, 700 million shares at an exercise price of just over $7.14 a share. It can make those purchases at its discretion anytime in the next 10 years.
That gives Berkshire the potential to become BofA's largest shareholder. State Street is currently at the top of that list with 460.5 million shares, about 4.5 percent of the bank's outstanding shares. (Berkshire sold a 5 million share stake in BofA during 2010's fourth quarter. It had been purchased by the now-retired GEICO stock picker Lou Simpson.)
Buffett's deal with Bank of America sent its shares as high as $8.80 this morning, for a gain of almost 26 percent. That put the stock well above the strike price of the warrants. At that high, Berkshire's warrants had an instant "paper profit" of $1.16 billion.
BofA shares have been giving back some of those gains. As of 10:50a ET, they're around $7.85, reducing the warrants' paper profits to 'just' $500 million.
BofA closed yesterday at $6.99.
Current price: [BAC 7.65 0.66 (+9.44%) ]
As was the case with GE and Goldman, Bank of America also gets a strong endorsement from Buffett. He calls the investment a vote of confidence in both BofA and the United States.
In the release, Buffett says, "Bank of America is a strong, well-led company, and I called Brian to tell him I wanted to invest in it. I am impressed with the profit-generating abilities of this franchise, and that they are acting aggressively to put their challenges behind them. Bank of America is focused on their customers and on serving them well. That's what customers want, and that's the company's strategy."
Buffett tells us he came up with the idea of an investment while taking a bath earlier this week, and he asked BofA CEO Brian Moynihan yesterday if Berkshire could do the deal.
Why now? Buffett tells Becky that BofA's shares "have gone down a lot" and the bank is "certain to be around" for a long time.
He says Wells Fargo [WFC 24.76 0.33 (+1.35%) ], a large Berkshire holding, and BofA have the best deposit franchises in the country, and compares today's investment to Berkshire's past deals for GEICO and American Express [AXP 48.09 0.01 (+0.02%) ].Read the full transcript of the March 2 Squawk Box Interview with Warren Buffett
Download the 2010 Berkshire Hathaway Annual Report
Download the 1977 - 2010 Warren Buffett Letter's to Berkshire Hathaway Shareholders
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