by dan fitzpatrick warren buffet bofa

8/4/2019 By Dan Fitzpatrick Warren Buffet Bofa

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By DAN FITZPATRICK

Bank of America Corp. said it will get a $5 billion infusion from Warren Buffett, givingthe nation's biggest bank a desperately needed jolt of confidence at a time wheninvestors are questioning its health.

Warren Buffett's Berkshire Hathaway will invest $5 billion in Bank of America, givingthe nation's biggest bank a key vote of confidence. As Colin Barr tells us on The NewsHub, the move could save the bank's foundering chief executive, Brian Moynihan.

The deal allies the bank with a billionaire investor known as an astute judge of value,who emerged during the financial crisis as an outspoken advocate of investing inAmerica's future.

But Mr. Buffett's investment won't necessarily ease the pressure on the bank to boostprofits amid a softening economy and growing mortgage-related costs. And it comes at

a steep price. Mr. Buffett will get a large stream of cash dividends and the right to buymore stock near its two-year low, which could turn him into the bank's largestshareholder.

The transaction came about after Mr. Buffett's administrative assistant placed a callWednesday to the Midtown Manhattan office of Bank of America's chief executive,Brian Moynihan. When Mr. Moynihan returned the call shortly after 11 a.m., Mr.Buffett proposed the investment.

At first, Mr. Moynihan was skeptical, telling the Berkshire Hathaway Inc. chief that "we

really have the capital we need," according to someone familiar with the conversation.But Mr. Buffett persisted. The two reached an agreement following more conversations,this person says. The bank's board, after meeting by phone, approved the agreementaround 8:30 a.m. Thursday, according to a person familiar with the meeting.

Reaching out to Bank of America is a somewhat unusual move for Mr. Buffett, whosometimes professes to find deals mainly by answering unsolicited calls to his Omaha,

Neb., offices. During the 2008 financial crisis, for example, representatives of GoldmanSachs Group Inc. and General Electric Co. came to him seeking capital, along with hisstamp of approval. This time, Mr. Buffett reached out to Bank of America.

His decision to invest temporarily quieted questions about the Charlotte, N.C., bank,whose shares have fallen 43% this year. Mr. Buffett implicitly endorsed Mr. Moynihanon Thursday, calling the bank a "well-led" company. "I am impressed with the profit-generating abilities of the franchise and that they are acting aggressively to put theirchallenges behind them," he said in a statement released by the bank.

WSJ's David Reilly discusses Warren Buffet's $5 billion investment in Bank of Americathrough his Berkshire Hathaway company.

The news sent Bank of America shares up 10% and boosted the stock of other bigbanks, including Citigroup Inc. and Wells Fargo & Co., on a day when the broader

stock market was down 1.5%.
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"This is a vote of confidence by a savvy investor," Bank of America's chairman, ChadHolliday, said in an interview Thursday afternoon. "We've got some work to do. Weunderstand that. He understands that."

The deal is structured in two parts. Berkshire will spend $5 billion on "cumulative

perpetual" preferred stock in the company. Those shares aren't convertible into Bank ofAmerica common stock, but pay a 6% annual dividend.

Berkshire also will get warrants granting it the right to buy $5 billion worth of Bank ofAmerica common stock at $7.14 a share, which is below the stock's closing priceThursday of $7.63. If Mr. Buffett exercises those warrants, which expire in a decade, hecould end up with a 6.5% stake in the bank.

Bank of America said it won't go to market to sell more stock in the wake of the deal.Both Goldman Sachs and GE raised additional funds in public offerings at the time theyannounced their deals with Berkshire.

The preferred-share investment agreement doesn't restrict Mr. Moynihan or Bank ofAmerica executives from selling stock, unlike the Goldman deal, which limitedexecutive share sales.

Although Mr. Moynihan called the investment "a strong endorsement in our vision andour strategy," he still faces a mountain of challenges.

No U.S. bank is more closely tied to the performance of an ailing U.S. economy andnone has more exposure to mortgage-related losses and lawsuits. Mr. Moynihaninherited those problems when he became chief executive last year, and they havegotten worse with U.S. economy's recent weakening.

Mr. Moynihan told investors he would be able to raise the bank's dividend in this year'ssecond half, but the bank's request was rejected by the Federal Reserve. He also wasforced to revise estimates that he had made about mortgage-related losses.

A bank spokesman said Mr. Moynihan "has been making steady progress against arange of activities that he laid out for investors when he first became CEO."

The biggest question weighing on investors is whether the bank has sufficient capital to

meet future regulatory requirements and cover mortgage liabilities. Investors worry thatif the bank issues new stock to raise capital, it will dilute the value of existing shares.Mr. Moynihan has said he can raise enough with sales of noncore assets.

Some analysts said the Berkshire deal could help silence calls to raise more capital, andthat the bank doesn't need to sell more stock at the moment.

"BofA may not be out of the woods and could take a while to put its troubled balancesheet behind it, but this may be a turning point for it," said Whitney Tilson, managing

partner of T2 Partners LLC, which owns shares in Berkshire Hathaway and recentlylooked closely at Bank of America.


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But the preferred-stock sale won't help the bank's most important capital ratio, known asTier 1 common capital, because regulations don't permit counting proceeds from suchsales.

Analysts at Keefe, Bruyette & Woods said in a note Thursday that the $5 billion "will

most likely not change the view of the bears that believe [the bank] needs significantlymore capital."

For now, Mr. Moynihan is sticking to a strategy of selling noncore holdings, trying toclean up mortgage-related problems stemming from the 2008 acquisition ofCountrywide Financial Corp., and repositioning the balance sheet to withstand futureeconomic shocks. He agreed this month to sell the bank's Canadian card portfolio to TDBank Group and to exit the credit-card businesses in the U.K. and Ireland. He alsoannounced 3,500 job cuts and is working on a larger restructuring that may slice at least10,000 more this fall.

"We've just got to put our heads down and grind it out," said one executive. "That ishow we are going to get it fixed. There is no silver bullet."

From the time Mr. Moynihan interviewed for the CEO job in the fall of 2009, he hashad to fight questions about whether he was the right choice. His predecessor, KenLewis, recommended someone else, and board member William Boardman held out forhours during a final board meeting, saying an outsider was needed.

Mr. Moynihan appears to be listening to the criticism about his management style. In acall with investors, he admitted to a misstep earlier this year when he hinted to investorsthey could expect a dividend increase in the second half of 2011. He later backed awayfrom the idea.


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Getty Images

Berkshire Hathaway Chief Executive Warren Buffett

As the bank's stock plunged this month, dropping as much as 20% in one day, he calledhis board together several times in consecutive days to talk through issues and strategy,not wanting any directors to feel they were out of the loop. He now understands the

"optics" of keeping his board "over informed," said a person close to him.

Amid all the scrutiny, however, Mr. Moynihan has grown "frustrated" at being blamedfor issues that he sees as largely out of his control, such as the fallout from theCountrywide acquisition, this person said.

Serena Ng contributed to this article.

Write to Dan Fitzpatrick at [email protected]

Mr. Buffett to the Rescue: A Look at Berkshire Hathaway's Crisis-Driven

Deals

Thursday's announcement by Bank of America Corp. of a $5 billion investment bybillionaire Warren Buffett's Berkshire Hathaway Inc. pushed the struggling bank'sshares up 9.4%.

In 2008 and 2009, Berkshire Hathaway invested more than $21 billion in Goldman,General Electric Co., Swiss Reinsurance Co., Dow Chemical Co. and Wm. Wrigley Jr.Co. in the form of preferred equity, bonds or other capital instruments.

Here are details about some of Mr. Buffett's infusions made during the crisis.

Goldman Sachs Group Inc.: As the financial crisis was raging in 2008, Berkshirebought $5 billion of preferred shares in Goldman.

The investment was a big winner for Mr. Buffett. This spring, Goldman paid Berkshire$5.5 billion to redeem the shares, after already handing over $1 billion in dividends.

Goldman common shares are down 12% since the 2008 announcement.

General Electric Co.: During the crisis, GE sold $3 billion worth of preferred stock to

Berkshire to boost liquidity.
mailto:[email protected]:[email protected]


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GE is expected to repay Berkshire's investment this fall at a premium similar to whatBerkshire got on its Goldman deal.

GE shares have slid 37% since the preferred-share purchases were announced in 2008.

Swiss Reinsurance Co.: Berkshire made a rescue loan in March 2009 to insurer SwissRe, which got $2.6 billion to rebuild its capital.

In return, Berkshire got a rich 12% annual payout on securities it purchased, andinvestors who bought Swiss Re common shares in Frankfurt the day of the deal haveseen their investment nearly double.

Swiss Re has repaid Berkshire.

At Bank of America, Mr. Buffett will get smaller dividends than those from Goldmanand GEbut twice as long to exercise warrants to buy $5 billion in common stock.

--Serena Ng

by dan fitzpatrick warren buffet bofa

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