Warren Buffett Won’t Abandon Bank of America

Source: The Motley Fool.

Two years ago, Warren Buffett called Bank of America Corp (NYSE:BAC) CEO Brian Moynihan to suggest a deal.

In exchange for a $5 billion investment, which would serve as a vote of confidence in the nation’s second largest lender, Berkshire Hathaway Inc. (NYSE:BRK.B) received preferred stock that paid a 6% annual dividend and warrants for 700 million shares of common stock with an exercise price of $7.14 a share, the market price at the time.

hedge funds vs. mutual funds

Fast-forward to today, and the warrants alone have earned Berkshire more than $5.1 billion in paper profits.

But is Buffett going to cut and run? Not by the sounds of it.

“We’ll exercise them probably the last month, which would be eight years or so from now. There’s no reason to exercise them sooner,” the Omaha-based billionaire told CNBC’s Becky Quick last week. “There would be if there were a high dividend on the common or something, so it’s conceivable. But basically we love the position of being an owner.”

It’s worth contrasting this with a similar deal that Buffett inked with Goldman Sachs Group, Inc. (NYSE:GS) in late September 2008, at the nadir of the financial crisis.

Like the Bank of America agreement, Berkshire injected $5 billion into the fabled investment bank. But unlike that deal, Berkshire received preferred stock yielding 10% and warrants to purchase $5 billion worth of common stock for $115 per share — an 8% discount to the market price at the time.

Again, fast-forward to today, and Buffett has concluded the transaction. Goldman redeemed the preferred stake for $5.5 billion in April 2011 and, earlier this year, did the same with the warrants. All told, Berkshire earned a $3.2 billion profit on the four-and-a-half-year-old investment, equating to a 64% return.

So is it good for Bank of America’s shareholders that Buffett isn’t pushing for a similar premature conclusion with the bank?

I believe that it is.

In the first case, as Moynihan pointed out during the same interview on CNBC, it gives Bank of America the opportunity to “get 8%, 9% instruments out” of the capital structure first. Remember, Buffett’s preferred stake yields a comparatively cheap 6%.

And in the second case, it delays a dilutive impact on the common shares for at least the foreseeable future. At present, Buffett’s warrants are equivalent to 6.5% of the entire company.

There will be a time when the two sides agree to end this mutually beneficial partnership. But until then, Buffett will keep collecting its preferred dividends and Bank of America can continue basking in the glow of the billionaire’s reputation.

The article Warren Buffett Won’t Abandon Bank of America originally appeared on Fool.com and is written by John Maxfield.

John Maxfield owns shares of Bank of America. The Motley Fool recommends Bank of America, Berkshire Hathaway, and Goldman Sachs and owns shares of Bank of America and Berkshire Hathaway.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

blog comments powered by Disqus
Insider Monkey Headlines
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months. Our beta is only 1.2 (don't click this link if beating the market isn't important to you).

Lists

Shopaholics Rejoice: The 12 Biggest Malls in the World

Fright Night: 10 Horror Movies Based on True Stories

Mach Mania: The 10 Fastest Jets in the World

Military Heavyweights: The 10 Countries with the Most Tanks

All In: The 7 Richest Poker Players in the World

Abracadabra: The 10 Best Magicians in the World

The 10 Richest Asian Countries in the World in 2014

Eyes in the Sky: 10 Things You Need to Know About Drones

Rising Stars: The 6 Best Silicon Valley Startups

Military Muscle: The 5 Most Advanced Armies in South America

All that Glitters: The 7 Most Luxurious Jewelry Brands in the World

5 Things You Didn’t Know About ISIS but Should

Empowering Your Money: The 5 Best Energy Stocks to Invest In

The 11 Best Android Apps You Can’t Get on iOS

The 10 Most Important International Conflicts in 2014

Mood Enhancers: The 20 Most Uplifting Songs of all Time

Lover Beware: The 8 Countries that Cheat the Most

Breath of Fresh Air: The 25 Countries with the Best Air Quality on the Planet

Singles Beware: The 8 Worst Mistakes Made on First Dates

Healthy and Happy: The 10 Countries with Lowest Healthcare Costs

The 6 Best Company Team Building Activities to Build Workplace Camaraderie

Ships Ahoy: The 10 Busiest Shipping Ports in the World

10 Productivity Tips to Save You Time and Help You Do More With Less

Grab a Bite: The Most Popular Fast Food Restaurants in America

Friday Night Thirst: The 10 Most Popular Cocktails in the World

The 6 Greatest Unsolved Mysteries We May Never Figure Out

7 Useless Products You Never Should’ve Bought

The 5 Reasons Why You’re Single and Miserable

The 7 Most Addictive Foods in the World We Can’t Stop Eating (Even Though We Should)

5 Amazing Places You Can Swim with Dolphins

The Top 7 Most Livable Countries In The World

The 10 Most Expensive Baseball Cards Ever Pulled From A Pack

The 5 Easiest Second Languages to Learn for English Speakers

Silver Spoon: The 6 Richest Families in the World

The 20 Countries with the Largest Prison Populations in the World

The Top 10 Richest Actors in the World

The 10 Best Airline Stocks to Invest In Before They Fly Too High

Burger Kings: The 10 Most Expensive Burgers in the World

The 10 Most Ethnically Diverse Countries in the World

The 10 Most Exclusive Credit Cards in the World

The 10 Most Expensive Cruise Ships in the World

The 10 Fastest Supercomputers in the World

The 10 Best Countries for Doing Business 2015

6 Most Expensive Fruits In The World

10 Worst Airlines in the World

The 10 Biggest Tax Havens in the World to Stash Your Money

The 15 Most Murderous Countries in the World

10 Largest Colleges in the World: Bigger Isn’t Always Better

Comedians in Cars Getting Coffee: The 6 Comedians Seinfeld Needs to Interview

Easy Money: The 10 Most Successful Investors in the World Today

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!