In a recent poll, consumers rated Bank of America as the second “absolute worst company in America.” How could so many people hate a bank which has provided generations of Americans with financing to build homes and businesses across America?
Even as Bank of America seemed like it was headed into the arms of the FDIC and politicians across the nation were blaming the Bank for the financial crisis, Warren Buffett saw things differently. As Bank of America’s stock price was plunging to new lows during the middle of 2011, Buffett showed his faith in the company by buying $5 billion of preferred stock.
Bank of America gratefully responded to Warren Buffett’s vote of confidence with a generous deal that has put billions of dollars of profits into the pockets of one of the world’s wealthiest men. The preferred stock purchased by Buffett pays a generous 6% dividend yield for a profit of $300 million per year. In addition, Bank of America granted Buffett a whopping 700 million warrants that gave the Oracle of Omaha the right to convert to common stock at $7.15 per share any time over the next nine years.
At today’s closing price of $12.03, Warren Buffett is sitting on a profit of over $3.4 billion on the warrants. Including the 6% dividend on the preferred, Buffett is well on his way towards doubling his original $5 billion investment.
After the ridiculous deal in which Bank of America purchased Countrywide at a wildly inflated price, it should come as no surprise that Buffett moved in on a soft target and made a killing. Buffett has to love Bank of America and their management at this point more than anyone else in the world. It may take a while longer before the average stockholder and customer share Buffett’s warm feelings about Bank of America.