Buffett’s New Banking Deal

Warren Buffett Buys Bank of America Stock

Warren Buffett is a canny investor and seems to be something of a Svengali, as he has manage to convince Bank of America to take money from him that they do not need and to pay him 6% for the privilege, whereas Joe Bloes like everyone else has to make do with 0.5%. The man is truly a genius !

Warren Buffett may have earned $1.3 billion in one day on his $5 billion investment in Bank of America Corp.

The 25 percent first-day return — more than 9,000 percent on an annualized basis — shows the premium Bank of America Chief Executive Officer Brian T. Moynihan was willing to pay to attract Buffett as an investor. As Berkshire’s CEO, Buffett has garnered a reputation as one of the world’s best investors, with shareholder returns over the past decade that are more than double those of the Standard & Poor’s 500 Index.

Under the terms of the deal, Omaha, Nebraska-based Berkshire will invest $5 billion in Bank of America, the Charlotte, North Carolina-based bank said today in a statement.

Preferred Dividend

In exchange, Berkshire will receive 50,000 perpetual preferred shares with a liquidation value of $100,000 each, according to the statement. The preferred shares pay a dividend of 6 percent per year, and are redeemable at any time by Bank of America at a 5 percent premium. The dividends are cumulative, meaning Bank of America would have to catch up if it skipped any payments.

Berkshire also will get warrants — a type of options — to buy 700 million common shares at a strike price of $7.14 each. Investors who value warrants weigh a company’s stock price, share volatility and the expiration date.

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