"Bank of America is a strong, well-led company," Warren Buffett… (Davis Turner / Getty Images )
Warren Buffett is known on Wall Street for his Midas touch, and nobody is more thankful for that these days than Bank of America Corp.
Berkshire Hathaway Inc., Buffett's investment company, agreed Thursday to sink $5 billion into the beleaguered financial giant. The deal helped allay fears that America's biggest bank needs a fresh infusion of capital to withstand mortgage losses and another downturn in the economy.
The investment casts the Oracle of Omaha in a familiar and favorable light, tossing a lifeline to an American icon in need. He made similar moves during the financial crisis for Goldman Sachs and General Electric.
But it also underscores his nose for profit and influence on Wall Street.
Bank of America shares jumped 9.4% to $7.65, handing Buffett a one-day paper profit of $355 million on just one part of his investment, a right to buy 700 million shares of Bank of America common stock during the next 10 years for $7.14 a share.
But a corporate financial expert said the right to buy the common stock, along with shares of preferred stock that Buffett received, made the deal worth far more.
"It looks to me like Berkshire Hathaway's $5 billion in investment was worth about $8 billion at the end of the day," said Linus Wilson, a University of Louisiana professor who has studied financial institutions and bank bailouts.
Buffett called Brian Moynihan, Bank of America's chief executive, Wednesday morning to propose the investment. Moynihan, who had adamantly maintained that he didn't need additional capital, eventually agreed because Buffett's stamp of approval is worth so much.
"I remain confident that we have the capital and liquidity we need to run our business," Moynihan said in announcing the deal. "At the same time, I also recognize that a large investment by Warren Buffett is a strong endorsement in our vision and our strategy."
Buffett received preferred stock with a face value of $5 billion, paying a 6% dividend, or $300 million a year.
By comparison, when he invested $5 billion in Goldman and $3 billion in General Electric in 2008 — a vote of confidence at the height of the financial crisis — the companies agreed to pay him 10% annual dividends on the preferred shares he purchased.
Buffett has been an enthusiastic investor in major financial companies, often during time of distress. In addition to Goldman, he previously has taken major stakes in Wells Fargo & Co., American Express, Bank of New York Mellon and several regional banks.
His first such investment proved a special challenge.
In 1987, Berkshire Hathaway paid $700 million for a 12% stake in Salomon Inc., then Wall Street's largest investment bank. Four years later, when federal authorities accused Salomon of trying to corner government securities markets, Buffett wound up stepping in as chairman of the company to save its reputation and get it back on track.
For Bank of America, Buffett's investment should help put to rest some of its own reputational damage.
The fear on Wall Street is that problems with mortgages and the economy posed such a threat to the bank that customers and other banks might stop doing business with it. In exchange for Buffett's help, BofA investors must deal with the company's shares being diluted by about 6% or 7%.
"The company can now get back to addressing the normal course of business issues," Credit Suisse analyst Moshe Orenbuch said. "Over time, the increased confidence from customers and counterparties should allow [the bank] the opportunity to earn back the impact from the preferred dilution."
Bank of America's biggest problems stem from its acquisition of Calabasas-based Countrywide Financial Corp., once the nation's largest mortgage lender, which nearly fell into bankruptcy after trying to dominate the markets for subprime and other high-risk home loans.
Unable to quantify its exposure to losses to the satisfaction of investors, Bank of America became the target of short sellers, who profit when a stock declines, as Citigroup Inc. had been during the financial crisis.
"There's always one bank that becomes the nexus of all the market's fears," independent banking analyst Nancy Bush said. "In 2008 it was Citigroup. This time it was Bank of America."
In a statement, Buffett said the attacks on BofA had been unwarranted.
"Bank of America is a strong, well-led company, and I called Brian to tell him I wanted to invest in it," he said.
"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."