Warren Buffett, a billionaire investor, helped to bolster Bank of America (BofA) last week by taking a $5 billion (£3 billion) stake in the lender’s shares and options.
BofA’s stock rose 25% when the New York Stock Exchange opened on Thursday after Buffett’s Berkshire Hathaway agreed to buy 50,000 preferred shares with a liquidation value of $100,000 a share. The stock ended the day 9.44% ahead.
The preferred shares pay a dividend of 6% a year and are redeemable by the bank at any time at a 5% premium. (article continues below)
It was reported that Buffett could have earned up to $1.3 billion within a day of the deal.
In addition to the preferred stock, Berkshire Hathaway received Billionaire investor warrants to buy 700m shares of the bank’s common stock at about $7.14 per share. This can be exercised in whole or in part within 10 years of the transaction.
The deal came as BofA copes with a falling stock price and costs linked to subprime mortgages.
From the start of the year to the day before the deal, the lender’s shares had fallen 48% – with the most recent declines being based on concerns over its finances.
Last month, BofA posted an $8.8 billion net loss, the largest it has seen in a single quarter, after finalising a multi-billion dollar settlement linked to Countrywide residential mortgage-backed securities.
The bank proposed an $8.5 billion settlement to 22 institutional investors in 530 Countrywide bonds, after it was claimed false or missing information was used to create mortgages that went on to default.