- Warren Buffett invested $ 5 billion in Bank of America in August 2011, giving an important vote of confidence and cash cushion to the struggling lender.
- The famous investor and Berkshire Hathaway CEO had the idea to invest while bathing, and was first blocked by a call-center worker before passing through Bank of America CEO Brian Moynihan.
- The pair signed a 24-hour Berkshire-centered agreement that accepts preferred shares and stock warrants in exchange for its cash.
- Berkshire used the warrants in 2017 and covered the cost by redeeming its preferred shares, giving it a stake worth more than triple the initial investment.
- Bank of America remains the most important Berkshire holding after Apple.
- Visit the Business Insider homepage for more stories.
Warren Buffett plowed $ 5 billion into Bank of America during the US sovereign debt crisis in 2011, building confidence in the struggling lender and attracting one of the most lucrative agreements in his career.
Here is the story of how millionaire investor and Berkshire Hathaway CEO helped to help one of America’s largest banks and make huge amounts in the process.
A bathtub, a call center, and a billion dollar deal
Buffett took a bath in late August 2011, reflecting his investment in American Express and Geico in difficult times for both companies, when he came up with the idea to bet on Bank of America, Fortune reported.
The investor tried to go through the bank’s CEO, Brian Moynihan, but was initially blocked by a call-center worker.
“Warren asked to speak to me and of course they did not move everyone who calls call centers to the CEO line,” Moynihan told David Rubenstein in an interview with Bloomberg last year.
Buffett later went to Moynihan and proposed an investment in his company. Moynihan replied that the Bank of America does not need capital.
“I know, so I’m calling,” Buffett replied, adding that receiving his money would provide stability, an approval stamp, and a cash cushion.
Moynihan agreed, and the pair signed an agreement less than 24 hours after speaking for the first time. Buffett’s cash hit a Bank of America account a few days later.
Read more: Nancy Zevenbergen has been in the top 1% of investors over the past 5 years. He shares what he is looking for with young companies – and shares 4 stocks that he thinks could be market leaders 10 years from now.
Warren got his warrants
Buffett and Moynihan agreed that Berkshire would provide $ 5 billion in cash to Bank of America, in exchange for a $ 5 billion share of the preferred share, which could be obtained at a 5% premium and pay a 5% annual dividend.
Berkshire also received stock warrants granting it the right to purchase 700 million of ordinary bank shares at a cost of $ 7.14 per share. Warrants can be used at any point over the next 10 years.
The terms of the deal echoed Buffett’s bailouts of Goldman Sachs and General Electric during the financial crisis of 2008. The investor requested preferred stock and warrants in those cases as well.
Buffett stated his justification for betting on Bank of America in his 2011 shareholder letter.
“Some major mistakes were made by the previous administration,” he said. “Brian Moynihan has made great progress in cleaning them up.”
The head of the bank is “nurturing a massive and attractive underlying business that will endure long after forgetting today’s problems,” Buffett continued, adding that Berkshire’s warrants “could have cost a lot before they did. expire. “
The investor waited to use the warrants until the dividends from 700 million of the bank’s average shares exceeded $ 300 million in annual revenue from preferred stock.
He used all of them in August 2017, and covered $ 5 billion in doing so by surrendering almost all of Berkshire’s preferred shares.
Berkshire’s average shares were worth more than $ 20 billion by the end of 2017 – more than triple the cost of the initial investment, even before the dividends it received were considered.
Buffett has boosted the position to more than 1 billion shares since then. Berkshire is the bank’s largest shareholder, while Bank of America is its second largest shareholder after Apple.
Investors are chasing another “eureka” moment ever since.
“I’ve spent a lot of time in the bathtub since then and no one came to me,” he said at Berkshire’s annual shareholder meeting in 2017.
“Obviously, I need a new bathtub or we’ve landed in a different kind of market.”
Read more: ‘I’m very worried’: A former head of Goldman Sachs’ hedge-fund says a flood of disturbing signals shows the stock market is exploding – and warned a small correction could morph into something bigger