Warren Buffett Gives Bank Of America $5 Billion Confidence Boost
Famed investor Warren Buffett, the third-richest person in the world, injected Bank of America with a $5 billion investment Thursday, a move widely interpreted as a vote of confidence to break the bank's stock slide.
Bank of America recently announced a staff-reduction of 3,500 worldwide, leaving open the possibility of up to 10,000 layoffs in a broad cost-reduction plan. Bank of America's exposure to bad mortgage-backed securities and its disastrous purchase of Countrywide after the 2008 financial crisis is blamed for much of its troubles. A lawsuit from American International Group (A.I.G.), the U.S.'s largest insurance company, hasn't helped.
Bank of America's stock jumped after the announcement of Buffett's investment and ended the day up well over 9 percent. Analyst Richard Bove told Bloomberg News that Bank of America is "buying credibility."
Buffett made a similar $5 billion move to help bolster Goldman Sachs in 2008.
For many analysts, questions remain about the efficacy of Buffett's move. One thing seems fairly certain, as the Wall Street Journal reports: Buffett will make a lot of money from the deal.
The warrants to purchase 700 million shares at $7.14 could prove highly lucrative. With shares in late-afternoon trading in New York at $7.75, up 11%, the warrants have already made a paper gain of $427 million.
Some interpret it as a time-buying tactic, giving Bank of America some room to get itself back in shape. Some observers do not have high hopes. Writes Yves Smith:
This is an admission of weakness, not strength. Bank of America had maintained it didn’t need equity as recently as yesterday and of course before that too, then does a sweetheart deal to build confidence.
The bulls’ hope is that BofA will have enough time to earn its way out of this mess. But if a Eurocrisis hits, and this looks like a sooner rather than later event, investors will avoid risk first and think critically later. The real determinant is whether this gambit does much to bring in Bank of America’s CDS spreads, which were trading at higher-than-Lehman-before-its-failure levels.
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