BILLIONAIRE investor Warren Buffett rode to the rescue of America’s biggest lender yesterday with a $5bn (£3bn) investment in the beleaguered Bank of America Merrill Lynch (BofA).
Buffett’s investment provides a much-needed vote of confidence in BofA, which has seen its share price halve this year as it has fought to convince investors it had enough capital to handle a series of legal battles and tough new capital requirements.
BofA’s share price surged as much as 25 per cent in heavy trading as markets saw the deal as a huge vote of confidence in the bank, before paring gains to close up 9.4 per cent at $7.65.
“I remain confident that we have the capital and liquidity we need to run our business. At the same time, I also recognise that a large investment by Warren Buffett is a strong endorsement in our vision and our strategy,” said BofA chief executive Brian Moynihan.
Buffett said he called Moynihan to offer him the investment early yesterday morning after coming up with the idea while taking a bath.
The deal was sealed less than 24 hours later.
“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.
The surprise move by the octogenarian “Sage of Omaha” echoes two previous rescue deals he struck with Goldman Sachs and General Electric in 2008 and 2009, providing capital and restoring market faith in them when they struggled during the financial crisis.
Buffett’s investment vehicle Berkshire Hathaway bought 50,000 preferred shares with a liquidation value of $100,000 per share paying a six per cent annual dividend. It also purchased warrants to buy 700m further BofA common shares at just over $7.14 per share, with an unusually long 10-year exercise period.
The deal virtually mirrors the terms of Berkshire’s Goldman Sachs investment, which paid as much as $15 per second in dividends until Goldman bought it out this year.
One Berkshire shareholder said the warrants were by far the best part of the deal. “He could well make a 100 per cent return on his investment in a few years,” said Berkshire shareholder James Armstrong, president of Henry H Armstrong Associates.
The capital will give BofA fresh firepower as it fights a mass of lawsuits over the sale of mortgages and securitised sub-prime bonds by mortgage lender Countrywide Financial, which it acquired in the financial crisis.
The bank fell to a record $8.8bn loss in the second quarter of the year after settling one large claim and may face up to $50bn more according to some estimates.
But some critics warned that the dividend on the equity was a high price for BofA to pay at a time when it already faced large losses.