Buffett to invest $5 billion in Bank of America
"Bank of America is a strong, well-led company," Buffett said in a statement released by BofA.
"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."
Under the terms of the deal, Buffett's holding company Berkshire Hathaway will buy 50,000 shares of BofA preferred stock at $100,000 apiece, and BofA must pay Berkshire a 6.0 percent annual dividend on the shares.
The investment was a huge vote of confidence in BofA, which has been plagued this year by mounting legal costs stemming from the 2008 financial crisis, as well as doubts about the strength of its capital base.
It was reminiscent of Buffett's $5 billion investment in Goldman Sachs at the peak of the 2008 crisis, which was crucial in helping the investment bank emerge from the financial meltdown in good health.
The news sent Bank of America stock surging 8.4 percent as of 1700 GMT on Thursday. Earlier this week, its share price had fallen to less than half its value at the beginning of the year.
"I remain confident that we have the capital and liquidity we need to run our business," BofA chief executive Brian Moynihan said in the bank's statement.
"At the same time, I also recognize that a large investment by Warren Buffett is a strong endorsement in our vision and our strategy."
The news initially drove sharp gains in other bank stocks, but the rally later lost steam amid a broader market slump.
Citigroup was up 3.5 percent and Morgan Stanley was up 3.3 percent at 1700 GMT, but JPMorgan Chase was approximately flat and Goldman Sachs was down 1.1 percent.
US financial stocks have been battered in recent weeks amid fears of a slowing economy and concerns about US banks' exposure to Europe's sovereign debt crisis.
The $5 billion will help shore up Bank of America's capital base, after it has lagged other top US banks in moving towards the stricter Basel III capital requirements imposed by global regulators after the financial crisis.
"The main concern hanging over Bank of America was capital adequacy," said Erik Oja, a banking industry analyst with Standard & Poor's.
"The $5 billion dollar capital infusion takes away of lot of uncertainty," Oja said, while adding that the bank had "a large way to go" to meet Basel III standards.
Besides the preferred stock, under the terms of the deal Berkshire Hathaway will receive warrants to buy 700 million shares of BofA's common stock at an exercise price of $7.14.
BofA's common shares closed at $6.99 on Wednesday, but they soared to above $7.50 after the Buffett announcement, meaning that Berkshire could already exercise its warrants at a profit of over $200 million.
Buffett, 80, is renowned for buying stock in undervalued companies and reaping profits as their share prices rise.
His contrarian investing strategy has made him the third-richest man in the world, with a fortune of $50 billion, according to Forbes magazine's most recent list of the world's billionaires.
Based in the farm state of Nebraska rather than among the skyscrapers of New York, Buffett has been dubbed the "Sage of Omaha" for his uncanny stock-picking prowess.
In an interview with CNBC on Thursday, he revealed that he had come up with the idea of investing in Bank of America while taking a bath.
When asked why he had decided to invest in the bank now, Buffett told the television channel that its stock had "gone down a lot".
Bank of America is the United States's largest bank in terms of deposits.
Copyright AFP (Agence France-Presse), 2011