Warren Buffett, Berkshire Hathaway make $5 billion investment in Bank of America

A day on Wall Street wouldn’t be complete without Warren Buffett investing $5 billion.

Yesterday, Warren Buffett’s conglomerate holding company, Berkshire Hathaway, announced that Bank of America was selling it 50,000 preferred stock shares at $100,000 a piece, a hefty chunk of change to invest in a bank that’s stock is down nearly 40 percent on the year.

But when Buffett makes moves on Wall Street, the market is quick to feel the effects.

Share values of the struggling Bank of America were up nearly nine percent during afternoon trading, while other struggling banks such as Wells Fargo, Citigroup and JPMorgan Chase also saw their stock increase.

Banks have been hit particularly hard during the recent economic downturn as investors who are afraid of a looming recession have been skeptical of buying stock.  Many banks are still dealing with the fallout from lawsuits regarding the loan crisis of 2008 and, of course, banks either being bailed out by the government or bought out by other banks has become all to commonplace these days for investors to be confident.

However, where Buffett differs from the rest is that this is exactly what makes him confident to invest.  He knows that the government is not going to let the largest banking institution in the United States fail.  So why not make a long-term investment that will sit and make money while waiting for the bank to eventually recover?

Oh, you didn’t actually think that Buffett wasn’t making money off this deal, did you?

The preferred stock that Berkshire Hathaway owns pays an annual dividend of six percent.  Using simple math, knowing that financial math is anything but simple, that equates to roughly $300 million a year that it would make off the investment.  Just to get an idea, common shares bought by the average person pay an annual dividend of around 0.5 percent.

But that’s not all.   According to CNN Money, Berkshire also receives warrants to purchase an additional 700 million shares of Bank of America over the next 10 years at a premium price of $7.14 per share.  The banks stock is currently trading around the level of $8.15 per share so if Buffett were to activate those warrants today, he would already have made over a $1 billion profit on his investment.  And that’s with the bank struggling.

If someone hasn’t yet coined the phrase, “it takes money to make money,” there’s not much better proof than this.

To Buffett’s credit though, at least he wants to give some of it back.

Last week, Buffett wrote an editorial piece printed in the New York Times calling for the government to raise taxes on the wealthy in order to help reduce the federal deficit.

“My friends and I have been coddled long enough by a billionaire-friendly Congress,” Buffett wrote.  “It’s time for our government to get serious about shared sacrifice.”

As to whether that logic will actually work, or whether other extremely wealthy citizens, namely Congress, agree with him enough to take action, has yet to be seen.

photo courtesy of Medill DC via flickr