Bank of America receives $5bn from Buffett
Bank of America (NYSE:BAC) said Thursday that Warren Buffett's Berkshire Hathaway will invest $5 billion into the company, providing a boost to capital that in recent days, has become evidently necessary to investors.
The move is reminiscent of Buffett's investment into Goldman Sachs and General Electric to help the two companies during the financial crisis.
The Charlotte, North Carolina-based bank, the largest US bank by assets, will sell 50,000 shares of cumulative perpetual preferred stock, with a dividend of 6% per year, redeemable by Bank of America at any time at a 5% premium.
In addition, Buffett will also receive warrants to purchase 700.0 million shares of common stock at a price of just over $7.14 per share, exercisable at any time over an unusually long 10-year period.
"I am impressed with the profit-generating abilities of this franchise, and that they are acting aggressively to put their challenges behind them," said Buffett.
Already, the bank's shares rose as high as $8.70 on the news, but fell back down to trade at $7.61, late on Thursday. In recent days, the company's stock has traded as low as $6.01 a share, as many investors were worried the bank would need more cash to deal with billions of dollars of problem mortgage loans.
Mortgage loans have been a big source of difficulty for the bank, who recently agreed on an $8.5 billion settlement to cover 530 toxic residential mortgage-backed securities that mortgage lender Countrywide Financial issued between 2004 and 2008 to several investors. Bank of America acquired Countrywide in 2008.
"We are building the best franchise in financial services and we have laid out a clear plan to deliver long-term shareholder value," said CEO of Bank of America, Brian Moynihan.
"I remain confident that we have the capital and liquidity we need to run our business. At the same time, I also recognize that a large investment by Warren Buffett is a strong endorsement in our vision and our strategy."
Last week, Bank of America said it plans to cut 3,500 jobs by September, on top of the 2,500 job losses seen earlier in the year.
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