Warren E. Buffett's Berkshire Hathaway Inc. announced Thursday that it would invest $5 billion in Bank of America Corp., a much-needed vote of confidence that sent the beleaguered bank's stock soaring 9 percent.
"Buffett is Bank of America's white knight," said Glenn Schorr, bank analyst at Nomura equity research.
The legendary investor said in a prepared statement that he had contacted Brian Moynihan, Bank of America's CEO, to say he wanted to invest because he considered the bank a "strong, well-led company."
Lately, the market has rendered a different verdict.
As recently as Tuesday, Bank of America's stock had plunged 50 percent from a year ago on fears over its mortgage problems and worries that it would have to sell large amounts of stock to shore up its balance sheet.
The sell-off was seen as a major challenge for the bank and Moynihan, who has been at the helm since January 2010.
While Buffett's $5 billion investment is like a drop in the bucket at the largest U.S. bank with $2.2 trillion in assets, it comes with an imprimatur of confidence that is worth a lot more. In that sense, Buffett's investment is largely symbolic.
"The investment eliminates the big credibility gap that management had with investors," said Jonathan Finger, partner of Houston-based Finger Interests Ltd., a longtime BofA shareholder that owns 1.1 million shares.
"It's time now to demonstrate they have a plan to grow the business," he said.
Bank of America had cash and cash-equivalent securities of $402 billion at the end of the second quarter. Its cash level is at the highest level in the bank's history, said Jerry Dubrowski, the bank's spokesman.
Much of the Charlotte, N.C., bank's problems, however, stem from its 2008 purchase of Countrywide Financial Corp., the nation's largest mortgage lender, but it faces a litany of other challenges.
The bank lost $15.3 billion in the last four quarters. Its revenue fell 34 percent in the first half of 2011 from the same period a year ago, to $40 billion, after new regulations prevented it from collecting fees from checking-account overdrafts and credit cards.
Moynihan, the CEO, has been trying to engineer a turnaround by selling assets, cutting expenses and closing branches. In an effort to calm investors, the embattled chief executive took to the airwaves to say that the bank will not need to raise more capital.
It didn't help. Investors became even more impatient with the bank.
Then, Buffett, the folksy billionaire and chairman of The Buffalo News, turned his eyes toward Bank of America.
Buffett told CNBC that he got his idea for investing in the bank while sitting in a bathtub Wednesday. Buffett's assistant called Moynihan's office, asking that the CEO contact Buffett on his personal number.
Though Buffett's investment is symbolic, it will cost Bank of America $300 million in annual dividend payments.
Berkshire, which owns The Buffalo News, will receive a dividend of 6 percent on its investment. Berkshire will get 50,000 preferred shares in the bank and warrants to purchase 700 million shares of common stock at $7.14 per share.
Buffett can exercise the warrants any time in the next 10 years. If he does, it would make him the bank's largest shareholder with a stake of 7 percent.
Buffett already made a profit, on paper, of $357 million thanks to a surge in Bank of America's stock price after the deal was announced. After closing at $6.99 Wednesday, the stock jumped 66 cents, or9.4 percent, to $7.65 Thursday.