1 Thing to Know About Warren Buffett’s Investment in Bank of America Corp

Bank of America (NYSE: BAC  )  looked like it almost wouldn't have survived without the $5 billion investment from Berkshire Hathaway (NYSE: BRK-A  ) (NYSE: BRK-B  ) in 2011. But according to the CEO's of both companies, that's not true at all.

The tumultuous times
Many people know through Berkshire Hathaway, Warren Buffett has a $5.25 billion position in Bank of America's preferred stock that pays him a 6% dividend each year as well as the option to buy 700 million shares of Bank of America for $5 billion.

And many also know the initial investment came in 2011 as questions swirled about whether or not Bank of America would continue to simply exist. Just two weeks before the announcement Bank of America's shares plummeted more than 20% in a single day as fears about its future were stoked following the news of another lawsuit coming through.  

Forbes even ran a story titled, "Wall Street's Rumor Of The Day: JPMorgan Taking Over Bank Of America." And through the first 23 days in August, the stock price at Bank of America fell a staggering 36% to $6.30 a share.

When Dealbook reported the $5 billion investment by Berkshire Hathaway in Bank of America, it declared it was "a vote of confidence for the beleaguered financial firm," and the New York Times had its own headline: "Buffett to Invest $5 Billion in Shaky Bank of America."

With all that in mind, it's easy to believe Buffett's investment was, in essence, a bailout of BofA, and without it, Bank of America would've ceased to exist.

Yet it turns out, that simply isn't true.

Brian Moynihan. Source: Bank of America

The truth
In a recent interview with Forbes magazine, Bank of America's CEO, Brian Moynihan, recalled how the investment from Berkshire Hathaway actually happened.

It turns out Buffett called him, and Moynihan insisted Bank of America wasn't in dire straits like the media suggested.

Was this arrogant pride? Utter confusion? Did Buffett have to explain Bank of America wouldn't exist without him and his billions?

Moynihan notes Buffett responded to his assertion "the bank didn't need Berkshire's money," by saying, "I know. I wouldn't be calling you if you did."

The key takeaway
Buffett's investment in Bank of America was not made out of need, but want. In investing, as with any financial decision, there is a critical difference between buying what is wanted versus what is needed.

If Bank of America needed the money from Buffett, it would've meant its management was shaky, its business was floundering, and its future was truly in question.

Things are looking up at Bank of America.

But instead with Buffett wanting a position in Bank of America -- remember, he initiated the conversation -- it means he trusted its management, recognized the success of its businesses, and was optimistic about its future. Buffett believed he would benefit more from holding Bank of America than it would benefit from him.

Berkshire Hathaway can buy 700 million shares of Bank of America for $7.14 each. But even when he would've made a nearly $6 billion profit at the end of last year, he reminded us he can hold onto the option until September 2021, and he plans to do so.

Buffett told us in his most recent letter that "it is important for you to realize that Bank of America is, in effect, our fifth largest equity investment and one we value highly."

Despite what these two says, the investment still may have been something Bank of America needed, but it was also something Buffett wanted.

Warren Buffett just bought nearly 9 million shares of this company
Bank of America and the other big positions Berkshire Hathaway owns grab the headlines, but there are plenty of other ones worth buying. Just imagine a company that rents a very specific and valuable piece of machinery for $41,000 per hour (That's almost as much as the average American makes in a year!). And Buffett is so confident in this company's can't-live-without-it business model, he just loaded up on 8.8 million shares. An exclusive, brand-new Motley Fool report details this company that already has over 50% market share. Just click HERE to discover more about this industry-leading stock... and join Buffett in his quest for a veritable landslide of profits!


Read/Post Comments (2) | Recommend This Article (6)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 02, 2014, at 2:23 PM, spokanimal wrote:

    I can see why you would point out the reality of Buffett's investment as you did.

    What's weird about your article is the idea that any of the REST of us out here in the investment community thought that BAC was in dire straights.

    I bought stock in BAC both before and shortly after Buffett bought his stake, and I can tell you that there was no sense of doom surrounding BAC...

    ... just a big, contrarian-healthy, concern for how many years it would take for BAC to get it all behind them and start doing well again.

    Obviously, Obama and his hatchet-man, Eric Holder, are hell-bent to extract as much surrogate "tax" money as they can out of BAC in the courts.

    then, Obama and Holder are Anti-Capitalism Socialists who LOVE to demonize and punish "evil" corporations... especially if they were able to soften them up with extra demonization during the recession and raise the lawsuit punishment of them from single-digit $Billions to double-digit $Billions as they have, and still are, doing.

    Relief won't come for certain until a new president takes office in 2017. It will be "tepid" relief if Hillary is elected, for while she is not the anti-capitalist that Obama is, she IS, however, a dedicated Socialist.

    A Republican president in 2017, on the other hand, could result in lower taxes, and the end of the current "lock up" of Investment Capital overseas.

    Anybody who doesn't know what that means for potential investment and capital flows in the U.S. hasn't been watching Singapore for the past 40 years!

  • Report this Comment On June 02, 2014, at 8:35 PM, yardomd wrote:

    I bought BOA for $20. My broker told me to sell it when it hit $7. I fired him and held. Today it is at $15. I can wait until $30.

Add your comment.

DocumentId: 2975607, ~/Articles/ArticleHandler.aspx, 7/25/2014 4:57:29 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement