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Buffett investing $5 billion in Bank of America

Struggling Bank of America is getting a $5 billion shot in the arm from the Oracle of Omaha.
Image: Berkshire Hathaway Chairman Warren Buffett wanders the company trade show before his company's annual meeting in Omaha
Billiionaire investor Warren Buffett's Berkshire Hathaway plans to inject $5 billion into struggling Bank of America.Rick Wilking / X00301
/ Source: staff and news service reports

Struggling Bank of America is getting a $5 billion shot in the arm from the Oracle of Omaha.

Billionaire Warren Buffett plans to invest in Bank of America by buying 50,000 shares of cumulative perpetual preferred stock with a 6 percent annual dividend, the bank said on Thursday.

The deal proved again that Buffett has become something of a lender of last resort to the financial system, as he did with Goldman Sachs in the 2008 financial crisis. 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.

"This proves to the market that if the bank needs additional capital, which we don't believe they do, but if they needed to calm the market by raising capital, they could do it within 30 minutes with a quick call to Uncle Warren," said Sean Egan, managing principal of Egan-Jones Ratings.

Buffett told CNBC that the BofA investment was his idea and came to him while taking a bath earlier this week. Asked why he would invest now, Buffett said BofA's shares "have gone down a lot." An hour after the deal was announced, Buffett had already made a profit on paper of $500 million on the stock warrants thanks to a surge in Bank of America's stock price.

Bank of America can buy back the investment at any time by paying Buffett a 5 percent premium. Berkshire also will get warrants to buy 700 million Bank of America shares at an exercise price of just over $7.14 a share, with the ability to exercise any time in the next 10 years.

Investors have battered Bank of America's stock on fears that the largest U.S. bank by assets has yet to overcome billions of dollars in problem mortgage loans.

In recent weeks, investors have sold shares, worrying that the bank might need to raise outside capital -- as much as $50 billion by some estimates -- to cope with losses and meet new industry capital rules.

Bank of America shares have lost roughly a third of their value in August, and have lost half their value since the beginning of the year.

"Perhaps even more than the capital, the imprimatur of Buffett will build confidence in BofA. This investment will encourage other similar investors, who may have been staying away, to take a closer look," said independent banking analyst Nancy Bush of NAB Research.

Buffett called Bank of America Chief Executive Brian Moynihan this week and offered to make the investment, a Bank of America spokesman said, adding that the deal was negotiated and consummated in a couple of days.

"Bank of America is a strong, well-led company, and I called Brian to tell him I wanted to invest in it," Buffett said in a statement posted on BofA's website. "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."

The $5 billion investment was the same amount that Buffett injected into Goldman Sachs during the financial crisis in September 2008. That deal helped soothe investor anxiety about the banking sector after a week of the worst turmoil Wall Street had seen in decades.

Thursday's news likely stirred memories for shareholders of General Electric Co too.

It was almost three years ago that the largest U.S. conglomerate turned to Buffett for a $3 billion infusion that the famed investor had hashed out with GE Chief Executive Jeff Immelt in an early-morning phone call that the Omaha, Nebraska-based investor took in his bathrobe.

Buffett's investment helped Fairfield, Connecticut-based GE sell another $12 billion in common stock, a critical capital infusion at a time when the overnight debt market that GE had relied heavily on had frozen up, investors said.