Warren Buffett’s Berkshire Hathaway Inc. will invest $5 billion in Bank of America (NYSE:BAC) to keep the company afloat after subprime mortgage-related losses left the lender low on capital. Bank of America announced the investment Thursday, saying it would sell Buffett cumulative perpetual preferred stock, which pays an annual dividend of 6%, and give him a warrant to buy 700 million shares at roughly $7.14 each.
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Despite huge market losses over the last year, Buffett says Bank of America (NYSE:BAC) is still a “strong, well-led company,” and that he is “impressed with the profit-generating abilities of [the] franchise.” Investors have speculated that the lender would have to access the public markets to raise capital, but CEO Brian Moynihan now says the company won’t need to issue shares in order to comply with new international capital standards, or to settle claims around soured mortgages.
Buffett’s $5 billion investment in Goldman Sachs (NYSE:GS) in 2008 was fully repaid this year, and paid a 10% dividend. Berkshire is also the largest investor in Wells Fargo (NYSE:WFC), the only U.S. mortgage lender larger than Bank of America. No wonder Buffett has said banking can “still be plenty profitable”.