> Warren Buffett Blog: How Buffett made a killing from Bank of America

Tuesday, December 31, 2013

How Buffett made a killing from Bank of America

A few years ago, Bank of America was having a stock crisis along. Warren Buffett in August 2011 proposed an investment in Bank of America . Buffett called Mr. Moynihan (CEO at BOA) to discuss a potential deal. At first, his advances were rejected saying the bank didn't need a capital injection. But Mr. Buffett emphasized it would be a long-term investment, not a short-term fix.In the two weeks prior to the announced deal, the following headlines were all circulated:

8/8/2011:    Bank of America stock plunges 20% (CNN)
8/8/2011:    BofA plunges as AIG sues for $10 billion "fraud" (Reuters)
8/18/2011:  BofA Says Some Debit Cards Compromised (Bloomberg)
8/22/2011:  Bank of America's stock takes a beating ... again (CNN)
8/23/2011:  Here's Why Bank Of America's Stock Is Collapsing Again (Business Insider)
8/23/2011:  Wall Street's Rumor Of The Day: JPMorgan Taking Over Bank Of America (Forbes)

In fact, from August 1, 2011 to August 23,2011, Bank of America's stock fell an astonishing 36%, from $9.81 per share to $6.30 per share. The Business Insider story stated plainly that the reason for the dramatic collapse in the stock price was "fears that Bank of America will go bust, taking the whole economy down with it."

New book on Buffett 

Warren Buffett steps in action
Buffett has been quoted saying "be fearful when others are greedy, and be greedy when others are fearful". This probably spurred him to invest $5 billion in Bank of America on August 25, 2011.

Fast forward to 2013, Berkshire Hathaway now collects a $300 million annual dividend from Bank of America as a result of its preferred shares. In addition, Berkshire Hathaway has the option at any time to buy up to $5 billion of Bank of America's stock at a cost of $7.14 per share. At today's prices, the warrants alone would net Berkshire a 120% return -- or $6 billion -- in just 28 months.