Buffett Cherishes BofA Warrants

Billionaire Warren Buffett said Brian T. Moynihan’s efforts to fix Bank of America Corp. (BAC) will boost the value of Berkshire Hathaway Inc. (BRK/A)’s $5 billion investment in the lender.

“Our warrants to buy 700 million Bank of America shares will likely be of great value before they expire,” Buffett, chairman and chief executive officer of Omaha, Nebraska-based Berkshire, wrote in his Feb. 25 annual letter to shareholders.

Moynihan, 52, announced at least 30,000 job cuts, sold $33 billion in assets and scaled back mortgage lending last year after succeeding Kenneth D. Lewis as CEO of Charlotte, North Carolina-based Bank of America in January 2010. The stock has climbed 42 percent this year, the best performance in the Dow Jones Industrial Average, after posting the biggest decline in the 30-company benchmark in 2011.

“Some huge mistakes were made by prior management,” wrote Buffett, 81. “Brian Moynihan has made excellent progress cleaning these up, though the completion of that process will take a number of years. Concurrently, he is nurturing a huge and attractive underlying business that will endure long after today’s problems are forgotten.”

The investment gave Berkshire perpetual preferred stock that yields $300 million a year, as well as warrants to buy 700 million shares at $7.14 each until they expire in 2021. Bank of America closed at $7.88 a share in New York last week, giving Buffett a paper profit of more than $500 million and 9 1/2 years for those gains to grow.

Goldman Sachs

Buffett has less time to bolster profit from the 43.5 million warrants he acquired through a separate $5 billion investment in Goldman Sachs Group Inc. during the depths of the 2008 financial crisis. The five-year warrants, which expire next year, can be exercised for $115 a share. New York-based Goldman Sachs closed last week at $115.87.

The investment bank last April paid $5.5 billion to redeem Buffett’s preferred stock that had yielded $500 million a year.

“He’s very proud,” David Kass, a professor at the University of Maryland’s Robert H. Smith School of Business, said of Buffett. “His notion here that the 700 million warrants could have great value before they expire, I personally think that’s an understatement.”

Berkshire, in addition to its investment in Bank of America, is the biggest shareholder of Wells Fargo & Co. (WFC) with a stake of more than 7 percent in the San Francisco-based company. Buffett increased his holding in Wells Fargo, the biggest U.S. lender by market value, in the past year.

“The banking industry is back on its feet and Wells Fargo is prospering,” Buffett wrote in his letter to shareholders. “Its earnings are strong, its assets are solid and its capital at record levels.”

To contact the reporters 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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