Bank of America Corp., the biggest U.S. lender, said Warren Buffett’s Berkshire Hathaway Inc. will invest $5 billion to bolster the company after losses tied to subprime mortgages drained capital. Bank of America led a rally of U.S. lenders in New York trading.
The lender will sell cumulative perpetual preferred stock to Berkshire, the Charlotte, North Carolina-based bank said today in a statement. The preferred stock pays an annual dividend of 6 percent, and Omaha, Nebraska-based Berkshire gets warrants to buy 700 million shares at about $7.14 each.
Bank of America lost almost half its value on the New York Stock Exchange through yesterday as investors speculated the lender would have to access the public markets to raise capital. Chief Executive Officer Brian T. Moynihan, 51, has said the company won’t need to issue shares to comply with new international capital standards and to settle claims surrounding defective mortgages.
“Bank of America is a strong, well-led company, and I called Brian to tell him I wanted to invest in it,” Buffett said in the statement. “I am impressed with the profit- generating abilities of this franchise, and that they are acting aggressively to put their challenges behind them.”
The lender surged 21 percent to $8.49 in New York Stock Exchange composite trading at 9:31 a.m., leading the KBW Bank Index higher. Berkshire climbed 0.8 percent to $107,232.
Buffett helped prop up Goldman Sachs Group Inc. during the credit crisis in 2008 with a $5 billion investment that was repaid this year. The Goldman Sachs investment paid a 10 percent dividend. Berkshire is the largest stock investor in Wells Fargo & Co., the only U.S. home lender larger than Bank of America.
Banking can “still be plenty profitable,” Buffett told Bloomberg Television’s Betty Liu on the “In the Loop” program on July 8.
The cost to protect against a default by Bank of America plunged. Credit-default swaps on the bank, which surged to a record this week, dropped 98 basis points to 275 basis points as of 9:14 a.m. in New York, according to broker Phoenix Partners Group.
Moynihan agreed to sell the bank’s Canadian card unit, with about $8.6 billion in loan balances, and plans to leave the U.K. and Irish card markets, Bank of America said this month. The bank has been forced to write down credit-card and mortgage units acquired by Moynihan’s predecessor, Kenneth D. Lewis. Bank of America has sold more than 20 assets or units since Moynihan took over last year.