Buffett’s BofA Investment Is Latest to Capitalize on Wall Street Weakness

Berkshire Hathaway Inc. (BRK/A)’s $5 billion investment in Bank of America Corp. (BAC) is Chief Executive Officer Warren Buffett’s latest attempt to capitalize on weakness at one of Wall Street’s biggest firms.

The deal follows Buffett’s investments in Goldman Sachs Group Inc. (GS) in 2008 and Salomon Inc. in 1987. In the Bank of America agreement, Berkshire gets preferred shares with a yield that’s more than 10 times greater than the lender’s common stock dividend and warrants that allow Buffett to profit from gains in the share price. Bank of America jumped 9.4 percent yesterday.

“It’s Warren Buffett, that’s how it works,” said Robert Chapman, founder of hedge fund Chapman Capital LLC, which holds shares of Charlotte, North Carolina-based Bank of America. “This is the price Bank of America pays to have Warren Buffett on this year’s Christmas card.”

Buffett, 80, is scouting deals as profits boost cash at Omaha, Nebraska-based Berkshire. His biggest transactions of the last two years came in the public securities market with the takeover of Burlington Northern Santa Fe and the agreement to acquire Lubrizol Corp. The deal with Bank of America, as with Salomon and Goldman Sachs, was made with the special issuance of preferred stock not offered to all other investors.

“He’s gotta put cash to work,” said Tom Lewandowski, an analyst at Edward Jones & Co., who has a “hold” rating on Berkshire shares. Buffett’s “competitive advantage is that he can do transactions that no one else can.”

Salomon, Goldman Sachs

Buffett came to the rescue of Salomon in 1987 with $700 million as the investment bank, led at the time by John Gutfreund, was fending off overtures from corporate raider Ronald O. Perelman. The $5 billion Goldman Sachs deal came a week after the bankruptcy of Lehman Brothers Holdings Inc. and the emergency takeover of Merrill Lynch & Co. by Bank of America. As of June 30, Berkshire had $47.9 billion of cash.

Bank of America CEO Brian T. Moynihan got Buffett’s offer in a phone call on Aug. 24, two weeks after telling investors for at least the second time this year that his bank didn’t need to raise capital. In a statement yesterday, Moynihan, 51, touted the Berkshire investment as a “strong endorsement” of Bank of America, while reiterating that the lender has adequate funding.

“It’s a sign of weakness,” said Jeff Matthews, Berkshire shareholder and author of “Secrets in Plain Sight: Business and Investing Secrets of Warren Buffett.” “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.’”

BofA’s Decline

Berkshire owned Bank of America’s common stock in the three and a half years ended in last year’s fourth quarter. The bank declined by more than two-thirds in that span as it recorded losses during the recession and faced claims from mortgage investors who accused the firm of issuing faulty loans. Moynihan took over as CEO for Kenneth D. Lewis in January 2010.

Berkshire’s Bank of America preferred stock will pay a 6 percent dividend, while the warrants give Buffett the option to buy 700 million common shares at any time in the next 10 years for $7.14 each. Bank of America pays a quarterly common-stock dividend of 1 cent, or an annual yield of about 0.52 percent, according to Bloomberg data.

The lender fell 12 cents to $7.53 at 10:13 a.m. in New York Stock Exchange composite trading. Berkshire has a paper profit of $273 million on its warrants at that price.

“There’s one Warren Buffett, and when Warren Buffett calls and says he wants to invest in your company, you take it seriously,” said Jerry Dubrowski, a spokesman for Bank of America. Buffett didn’t respond to an interview request e-mailed to his assistant, Carrie Kizer.

Shareholders Pressured

Bank of America had dropped 48 percent this year before the announcement of Buffett’s investment, pressuring shareholders including Bruce Berkowitz’s Fairholme Capital Management LLC. Berkowitz, who was named Morningstar Inc.’s domestic stock manager of the decade in January 2010, has presided over a decline of about 26 percent this year at his Fairholme Fund. (FAIRX)

“Berkowitz and other shareholders are off the cold linoleum floor,” said David Rolfe, chief investment officer of Berkshire investor Wedgewood Partners Inc.

“It’s been brutal” for Bank of America investors, Rolfe said. “And we’re shareholders of Goldman, so trust me, I know what it feels like.”

Goldman Sachs dropped 35 percent from Dec. 31 through yesterday, compared with the 7.8 percent slide in the Standard & Poor’s 500 Index. The bank repurchased Berkshire’s preferred stake in the second quarter. Berkshire received warrants to buy $5 billion of Goldman Sachs common stock at $115 a share as part of the 2008 deal, and Buffett’s firm still holds those options. The New York-based firm fell $1.56, or 1.4 percent, to $108.28. Berkshire declined $681 to $102,810.

Bump From Buffett

Bank of America was the biggest of four advancers yesterday in the 24-company KBW Bank Index. (BKX) Buffett’s endorsement helped Goldman Sachs on Sept. 24, 2008, to a 6.4 percent increase.

The Bank of America cash injection may have little impact on capital and doesn’t resolve mounting legal claims linked to mortgages. The investment will “modestly improve” Bank of America’s Tier 1 capital ratio and won’t boost the Tier 1 common ratio, Edward Najarian, head of bank research at International Strategy & Investment Group Inc., wrote in a note to clients.

“It seems like Moynihan paid up just to get the headline that Buffett was investing,” said Peter Tchir, founder of hedge fund TF Market Advisors. “It’s better than nothing, but it’s not to me a rousing endorsement.”

Buffett got legal advice on the transaction from Robert Denham, who also worked for the billionaire on the Goldman Sachs and Salomon transactions. Denham, a partner at Munger, Tolles & Olson LLP, was tapped by Buffett in 1992 to be CEO of Salomon. Buffett had taken over as CEO of the investment bank in 1991 after Gutfreund resigned.

To contact the reporter on this story: Andrew Frye in New York at afrye@bloomberg.net.

To contact the editor responsible for this story: Dan Kraut at dkraut2@bloomberg.net.

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