Warren Buffett invested $ 5 billion in Bank of America during the debt crisis. Here is the story of how the investor helped the bank and made a fortune in the process.

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  • Warren Buffett invested $ 5 billion in Bank of America in August 2011, providing a crucial vote of confidence and a cash cushion for the struggling lender.
  • The famous Berkshire investor and CEO Hathaway came up with the idea of ​​investing while taking a bath, and was first blocked by a call center employee before contacting Bank of America CEO Brian Moynihan.
  • The pair signed a 24-hour deal that centered on Berkshire receiving preferred stock and stock warrants in exchange for its cash.
  • Berkshire exercised the warrants in 2017 and covered the cost by repurchasing its preferred shares, giving it a stake of more than triple its initial investment.
  • Bank of America remains Berkshire’s most valuable stake after Apple.
  • Visit the Business Insider homepage for more stories.

Warren Buffett invested $ 5 billion in Bank of America during the 2011 US sovereign debt crisis, building confidence in the besieged lender and closing one of the most lucrative deals of his career.

Here’s the story of how billionaire investor and CEO of Berkshire Hathaway stepped in to help one of America’s biggest banks and made his fortune in the process.

A bathtub, a call center and a billion dollar transaction

Buffett was taking a bath in late August 2011, reflecting on his investments in American Express and Geico during tough times for both companies, when he came up with the idea to bet on Bank of America, Fortune reported.

The investor tried to contact the bank’s CEO, Brian Moynihan, but was initially blocked by a call center employee.

“Warren asked to speak to me and of course they don’t transfer everyone who calls call centers to the CEO line,” Moynihan told David Rubenstein in an interview with Bloomberg last year.

Buffett eventually got to Moynihan and offered to invest in his business. Moynihan replied that Bank of America did not need the capital.

“I know, that’s why I’m calling,” Buffett replied, adding that accepting his money would give him stability, a stamp of approval and a cushion of money.

Moynihan agreed and the two signed a deal less than 24 hours after speaking for the first time. Buffett’s money hit the Bank of America account a few days later.

Read more: Nancy Zevenbergen has been in the top 1% of investors over the past 5 years. She breaks down what she looks for in young companies – and shares 4 stocks that she thinks could become market leaders in 10 years.

Warren got his warrants

Buffett and Moynihan agreed that Berkshire would turn over $ 5 billion in cash to Bank of America, in exchange for $ 5 billion in preferred stock, redeemable at a 5% premium and paying an annual dividend of 5%.

Berkshire also received share purchase warrants entitling it to purchase 700 million common shares of the bank at a price of $ 7.14 per share. The warrants could be exercised at any time during the next 10 years.

The terms of the deal echoed Buffett’s bailouts from Goldman Sachs and General Electric during the 2008 financial crisis. The investor also demanded preferred shares and warrants in these cases.

Buffett explained his rationale for betting on Bank of America in his 2011 letter to shareholders.

“Big mistakes were made by the previous management,” he said. “Brian Moynihan has made great progress in their cleanup. ”

The head of the bank “had a huge and attractive underlying business that will last long after today’s issues are forgotten,” Buffett continued, adding that Berkshire’s warrants “are likely to be of great benefit. value before their expiration ”.

The investor waited to use the warrants until the dividends from 700 million common shares of the bank exceeded the $ 300 million in annual income from the preferred shares.

He exercised them all in August 2017 and covered the $ 5 billion cost of doing so by repurchasing nearly all of Berkshire’s preferred stock.

Berkshire’s common stock was worth more than $ 20 billion at the end of 2017, more than triple the cost of its initial investment, before even accounting for dividends received.

Buffett has increased the position to over a billion shares since then. Berkshire is the bank’s largest shareholder, while Bank of America is its second-largest stake after Apple.

Since then, the investor pursues another “eureka” moment.

“I have spent a lot of time in the tub since then and nothing has happened to me,” he said at Berkshire’s annual meeting of shareholders in 2017.

“Obviously I need a new tub or we need to enter a different kind of market. ”

Read more: ‘I’m extremely concerned’: Former Goldman Sachs hedge fund chief says troubling flood of signals shows stock market is faltering – and warns small correction could soon turn into something much bigger

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