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.
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.
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.