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Will Bank of America's Nightmares Scare Away Warren Buffett?

Bad news piled on in April for Bank of America (NYSE: BAC  ) , but the calendar turning to May brought a welcome endorsement of optimism from Warren Buffett and Berkshire Hathaway (NYSE: BRK-A  ) (NYSE: BRK-B  ) .

The no good, very bad week
Bank of America had a difficult final week in April. On April 24th, Bloomberg News reported the U.S. government was seeking $13 billion in additional settlements from Bank of America -- on top of the $9.5 billion reached in March -- for the sale of its mortgage bonds before the financial crisis.

Then on Monday the 28th the bank itself announced it had misstated "regulatory capital amounts and ratios due to an incorrect adjustment," in its latest submission to the Federal Reserve, and it would suspend its plan to boost its dividend and buyback $4 billion worth of its shares. Bank of America's stock plummeted 6%.

All of this resulted in Bank of America's market capitalization falling by $15 billion in just the span of 3 trading days.

The critical endorsement
Five days later, a glimmer of hope shined on Bank of America.

At the recent annual meeting for Berkshire Hathaway, the head of the Financial Bureau at the Motley Fool, Matt Koppenheffer, noted Buffett's remarks when discussing the troubles at Bank of America:

He went on to affirm "it doesn't change my feeling about Bank of America or its management," and while there will be consequences as a result, his perception of Bank of America hasn't changed "one iota." 

The key takeaway
Berkshire Hathaway has the option to buy 700 million shares of B of A any time between now and 2021, which would give it a position 40% larger than the next closet institution, Vanguard.  Buffett is carefully watching the progress of the company which would equal his fifth largest investment, with a value of more than $11 billion.

The misteps in 2014 are troubling both for Bank of America and its CEO Brian Moynihan, and this mistake will blemish the résumé of both. 

However, the true earnings potential of the bank coupled with shares trading at just a 10% premium to tangible book, should give investors assurance these short-term difficulties won't affect its long-term returns.

Remember Buffett said his position in Bank of America was "one we value highly," and even despite the troubles, it is encouraging to know that still remains the case.

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Patrick Morris

After a few stints in banking and corporate finance, Patrick joined the Motley Fool as a writer covering the financial sector. He's scaled back his everyday writing a bit, but he's always happy to opine on the latest headline news surrounding Berkshire Hathaway, Warren Buffett and all things personal finance.

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Related Tickers

9/3/2015 4:01 PM
BAC $15.94 Up +0.09 +0.57%
Bank of America CAPS Rating: ****
BRK-A $199665.00 Up +305.00 +0.15%
Berkshire Hathaway… CAPS Rating: ****
BRK-B $132.15 Down -0.07 -0.05%
Berkshire Hathaway CAPS Rating: *****