Legendary investor Warren Buffett made a phone call to Bank of America Corp. (NYSE: BAC) CEO Brian Moynihan on Aug. 24 and offered to invest a staggering $5 billion in the bank.
The Bank of America shares had been in doldrums amid questions over its liquidity situation and rumors that it would need a massive capital injection.
Buffett is known for some legendary investment decisions in the past, attributed to his altruistic gesture towards American icons in trouble. And, the Bank of America is indeed one of those icons, being the largest bank in the United States in terms of assets. So was the $5 billion investment in the bank, which immediately lifted its shares sky-high, an altruistic gesture in line with Buffett's stated commitment toward American icons? Probably not, say analysts.
"He's not doing it out of charitable motive or even out of a concern for the safety and soundness of the financial system.. He's got a lot of shareholders and they depend upon him to maximize the value of their investments," said Robert Reich, a public policy professor at the University of California Berkeley, Reuters reported.
This is how Buffett's strategy works, according to the Reuters report: With the $5 billion investment Buffett is buying preferred shares and receiving warrants, guaranteeing his company Berkshire Hathaway $300 million a year in dividends. Moreover, the terms of his investment are linked to future performance of the Bank of America stocks, enabling Berkshire to benefit directly from the stock's appreciation.
And look again, Buffett's strategy apparently paid off immediately. On Thursday, the Bank of America shares rose 25.8 percent at one point before settling at a near 10 percent rise. With that Berkshire had amassed a paper profit of nearly $3 billion.
Moynihan had repeatedly said in recent days that the Bank of America was not in need of any cash injection, but his response to Buffett's offer to invest $5 billion apparently brought out the underlying weakness.
“It’s a sign of weakness ... Moynihan didn’t say, ‘You know what, Warren? I really appreciate the call, you’re a wonderful guy, love to have you as a shareholder. You’re welcome to buy our stock just like everyone else," said Jeff Matthews, Berkshire shareholder and author of “Secrets in Plain Sight: Business and Investing Secrets of Warren Buffett,” according to Bloomberg.
The 80-year-old investor, who started investing when he was 13, had said once that his only regret was that he had not started investing earlier! Now, armed with a cash balance of $49 billion, Omaha, Nebraska-based Berkshire has returned to the art of swooping down on the most opportune investment targets, and thereby maximizing profits.
Buffett has a history of generating profits in financial stocks, which actually started in a risky way, with his investment of $700 million in Salomon in 1987. Following his investment, Buffett took over the chairmanship of Salomon which was tainted by a trading scandal. The investment did return profits but he had a roller coaster ride as at a time it looked like Salomon was running into bankruptcy.
During the last financial meltdown, Buffett sensed opportunities in two other American icons, Goldman Sachs and the General Electric. He invested $5 billion in Goldman Sachs and $3 billion in General Electric Co, making away with a 10 percent dividend on both. Goldman said in March it would buy back its preferred stock from Buffett at the agreed upon 10 percent premium, according to Reuters. In the GE deal, Buffet would get a 10 percent redemption premium when GE buys buy back its shares in October.
"Mr. Buffett is a very shrewd investor and is not altruistic at all. The terms he gets are very favorable to him," said Richard Bernstein, former chief investment strategist at Merrill Lynch and current CEO of investment advisory Richard Bernstein Advisors, reported Reuters.