Buffett-run Berkshire Hathaway announced plans to invest $5 billion in the Bank of America, a vote of confidence for the beleaguered financial firm.The conglomerate has agreed to buy 50,000 preferred shares that will pay a 6 per cent annual dividend. The Bank of America has the option to buy back the shares at any time for a 5 per cent premium. According to CNBC, Buffett approached the Bank of America early Wednesday about a potential deal.
The investment by Berkshire should help allay market concerns about the bank. Shares of the financial firm have been battered of late over fears the company lacks sufficient capital. The stock has fallen nearly 30 per cent since the beginning of August.
"I remain confident that we have the capital and liquidity we need to run our business," Bank of America chief executive Brian Moynihan said. "At the same time, I also recognise that a large investment by Warren Buffett is a strong endorsement of our vision and our strategy."
Investors cheered the deal, sending shares of most big bank stocks higher on Thursday morning. While JP Morgan was up 4 per cent, Citigroup rose 7 per cent. Stocks of the Bank of America jumped 17 per cent.
The Berkshire investment comes at a pivotal time for the bank. Its troubled mortgage division has racked up billions of dollars in legal bills, and the financial firm faces investigation into its foreclosure practices. Last quarter, the Bank of America reported an $8.8 billion loss, owing in large part to a settlement with mortgage investors.
Moynihan has taken steps to cut costs and improve its capital cushion. He put the European credit card operation for sale and sold off the Canadian card division.
Last week, the bank announced plans to cut 3,500 jobs.
But the embattled chief stopped short of raising capital, reiterating that the financial firm was on solid footing. The assertions did little to soothe investors.
"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 a statement.
The investment by Berkshire should help allay market concerns about the bank. Shares of the financial firm have been battered of late over fears the company lacks sufficient capital. The stock has fallen nearly 30 per cent since the beginning of August.
"I remain confident that we have the capital and liquidity we need to run our business," Bank of America chief executive Brian Moynihan said. "At the same time, I also recognise that a large investment by Warren Buffett is a strong endorsement of our vision and our strategy."
Investors cheered the deal, sending shares of most big bank stocks higher on Thursday morning. While JP Morgan was up 4 per cent, Citigroup rose 7 per cent. Stocks of the Bank of America jumped 17 per cent.
The Berkshire investment comes at a pivotal time for the bank. Its troubled mortgage division has racked up billions of dollars in legal bills, and the financial firm faces investigation into its foreclosure practices. Last quarter, the Bank of America reported an $8.8 billion loss, owing in large part to a settlement with mortgage investors.
Moynihan has taken steps to cut costs and improve its capital cushion. He put the European credit card operation for sale and sold off the Canadian card division.
Last week, the bank announced plans to cut 3,500 jobs.
But the embattled chief stopped short of raising capital, reiterating that the financial firm was on solid footing. The assertions did little to soothe investors.
"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 a statement.
