Bank Of Berkshire America: Warren Buffett To Buy $5 Billion In Preferred Stock In Bank Of America

Bank Of Berkshire America: Buffett To Buy $5 Billion In Preferred Stock In Bank Of America (ZeroHedge, Aug 25, 2011):

Goldman bailout part 2 is here. And so the Octogenarian of Omaha doubles down on another taxpayer bailout. At least we can put aside all the lies that Bank of America did not need capital. It needed capital: $5 billion of it. It also confirmed it was completely locked out of both debt and equity public capital markets – the bank’s only recourse was a private raise with a crony capitalist who is once again doubling down on the global ponzi.

From the press release:

Bank of America Corporation announced today that it reached an agreement to sell 50,000 shares of Cumulative Perpetual Preferred Stock with a liquidation value of $100,000 per share to Berkshire Hathaway, Inc. in a private offering. The preferred stock has a dividend of 6 percent per annum, payable in equal quarterly installments, and is redeemable by the company at any time at a 5 percent premium.

In conjunction with this agreement, Berkshire Hathaway will also receive warrants to purchase 700,000,000 shares of Bank of America common stock at an exercise price of $7.142857 per share. The warrants may be exercised in whole or in part at any time, and from time to time, during the 10-year period following the closing date of the transaction. The aggregate purchase price to be received by Bank of America for the preferred stock and warrants is $5 billion in cash.

We are building the best franchise in financial services and we have laid out a clear plan to deliver long-term shareholder value,” said Bank of America Chief Executive Officer 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.”

Bank of America is a strong, well-led company, and I called Brian to tell him I wanted to invest in it,” said Berkshire Hathaway Chairman and Chief Executive Officer Warren Buffett. “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.”

Warren Buffett to invest $5 billion in Bank of America (Reuters, August 25, 2011):

NEW YORK/CHARLOTTE (Reuters) – Warren Buffett will invest $5 billion in Bank of America, stepping in to shore up the largest bank in the United States in the same way he helped prop up Goldman Sachs and General Electric during the financial crisis.

Bank of America shares rose 12.3 percent to $7.85, erasing some part of the stock’s August losses. The jump also makes the warrants for Bank of America shares that Buffett gets in the deal instantly profitable.

Buffett and Bank of America said he made an unsolicited call to the bank on Wednesday morning, offering to make an investment. Even though the bank has said it did not need to raise capital, investors widely believed Bank of America needed more money and to show it could raise funds easily.

Bank of America has been plagued by fears that bad mortgage loans and legal liabilities from loans packaged into bonds by its Countrywide unit could drag it into tens of billions of dollars in fresh losses that would stretch its capital.

The deal proved again that Buffett has become something of a lender of last resort to the financial system, as he did with Goldman and also GE. 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.

INSTANT RETURN

Buffett’s Omaha-based Berkshire Hathaway could make out even better financially than Bank of America did in the deal. Berkshire had a position that he sold in the fourth quarter of 2010 when the stock had an average price of $12.24.

The warrants to buy 700 million shares of common stock he gets in this deal are priced at just over $7.14 per share, with an unusually long 10-year exercise period. One Berkshire holder said the warrants were the best part of the deal by far.

“He could well make a 100 percent return on his investment in a few years,” said James Armstrong, president of Henry H. Armstrong Associates. “It’s amazing how much a little hug from Buffett is worth these days.”

Bank of America will also sell Berkshire 50,000 shares of cumulative perpetual preferred stock with a 6 percent annual dividend, it said. Bank of America can buy back the investment at any time by paying Buffett a 5 percent premium.

It is virtually a mirror of the deal Berkshire did with Goldman in the depths of the crisis in fall 2008, except in Goldman’s case it paid a 10 percent dividend. The Goldman deal paid Berkshire $15 a second in dividends until Goldman bought Buffett out earlier this year.

“It’s a reasonably priced deal for Buffett. It’s opportunistic,” said Tom Russo, a portfolio manager at Gardner, Russo & Gardner who holds Berkshire shares.

Buffett told CNBC he had never spoken to Bank of America CEO Brian Moynihan before Wednesday, and that he dreamed up the idea while taking a bath.

BANK’S WOES

Earlier this month, a $10 billion lawsuit over soured mortgage securities by AIG helped spur fears about Charlotte-based Bank of America’s liabilities, as well as questions around how it would pay for more losses.

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

For shareholders who have watched the bank take two government bailouts and also seen the government step in earlier this year to block a planned dividend raise, further dilution would have been a bitter pill to swallow.

Moynihan said on an August 10 conference call the bank could add to its capital through earnings and asset sales. The call, organized by Fairholme Funds, one of the bank’s largest investors, came two days after shares plunged by 20 percent.

But many were not convinced. On Tuesday, blogger Henry Blodget said the bank could face $100 billion to $200 billion in write-offs and balance sheet issues, a claim the bank denied, but one which pushed shares to early 2009 lows.

“This helps with the credibility gap that I think has existed in the minds of some shareholders. It reiterates the point that the balance sheet is healthy. They needed an endorsement in the market and they got it,” said Jon Finger, managing partner of Finger Interests in Houston. Finger’s family sold its bank to Bank of America years ago.

Moynihan has said the bank is targeting a 6.75 to 7 percent tier 1 common capital ratio by the end of 2013 under the new Basel III rules. Currently, the bank has $400 billion in total excess liquidity, and the company could meet all of its unsecured debt obligations within 22 months.

The cost of insuring Bank of America debt against default has also been rising, but contracted on Thursday after the Buffett deal, narrowing 68 basis points to 305 basis points. That means it would cost $305,000 a year for five years to insure $10 million in debt.

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