Bank of America Corp, currently the largest bank in the U.S. by assets, announced on Thursday that it would receive a $5 billion investment from Warren Buffett’s Berkshire Hathaway. The investment announcement had an impact on Bank of America’s shares, which had been dropping on concerns that it might need more capital.
Buffett to Buy Preferred Shares
As a part of the deal between the two major companies, Buffett will buy preferred shares and receive warrants. His investment will guarantee Berkshire $300 million a year in dividends and offer a chance for major returns if the bank’s stock climbs.
In the short time after the deal was announced on Thursday, shares did indeed jump. According to reports, shares climbed a whopping 25.8 percent, but then fell back to 9.4 percent by the market’s close. The final gain was still profitable to Berkshire, which had earned an amazing $3 billion paper profit in one day.
Why Buffett is Investing in BofA
Warren Buffett has long been considered a great investment resource for major companies. While he has been reliable in this sense, experts say he’s not looking to add to his philanthropic credits. Instead, he’s using his investment savvy to turn a hefty profit for his company and investors.
As noted by Robert Reich, public policy professor at the University of California Berkeley, in a Reuters story, “He’s got a lot of shareholders and they depend upon him to maximize the value of their investments.”
The good news is investors in Bank of America, as well as other banks, have benefited from the deal. As of Thursday, BofA, Morgan Stanley, Citigroup and American Express Co. all saw gains.
Experts say Buffett’s investment is really a drop in the bucket compared to the $2.2 trillion in assets Bank of America currently carries, but with growing fears that the bank needed to raise capital to offset liabilities related to subprime mortgages, investors may be able to continue celebrating gains–at least for the time-being.