Bank of America
Company Overview
Bank of America is the second-largest bank in the United States, serving approximately 68 million consumer and small business clients through roughly 4,000 retail banking centers and 16,000 ATMs. Berkshire's Bank of America relationship exemplifies Buffett's pattern of providing strategic capital during moments of maximum institutional distress.
Investment Story
2011: $5 billion preferred investment. In August 2011, Bank of America's stock had fallen to multi-year lows amid investor concerns about mortgage-related legal liability from the Countrywide Financial acquisition. Buffett called CEO Brian Moynihan directly — having been inspired to act while shaving one morning, reading about the bank's situation. Berkshire committed $5 billion in preferred stock at 6% annually plus warrants to purchase 700 million common shares at $7.14 per share.
The terms. The preferred pays $300 million annually to Berkshire regardless of market conditions. The warrants to purchase 700 million BofA shares at $7.14 were exercisable for 10 years. When BofA's stock subsequently recovered to $24+, the warrants became worth approximately $11+ billion — a return of over $6 billion on a $5 billion investment, plus $300 million annually in preferred income during the interim.
2017: Warrant exercise. Berkshire exercised its Bank of America warrants in 2017, converting to 700 million common shares without paying cash — instead surrendering a portion of the preferred stock value. The transaction made Berkshire Bank of America's largest shareholder at approximately 10% of the bank.
2023: Berkshire's third-largest equity holding. Bank of America remained one of Berkshire's top three equity positions, generating approximately $900 million annually in dividends. The combined return (preferred dividends 2011-2017 + warrant profit + ongoing common dividends) has been extraordinary.
Buffett's Own Words
(1) a $5 billion 6% preferred stock of Bank of America that came with warrants allowing us to buy 700 million common shares at $7.14 per share any time before September 2, 2021; and (2) 63.9 million shares of IBM that cost us $10.9 billion. Counting IBM, we now have large ownership interests in four exceptional companies: 13.0% of American Express, 8.8% of Coca-Cola, 5.5% of IBM and 7.6% of Wells Fargo. (We also, of course, have many smaller, but important, positions.) We view these holdings as partnership interest
We can buy 700 million shares of Bank of America at any time prior to September 2021 for $5 billion. At yearend these shares were worth $10.9 billion. We are likely to purchase the shares just before expiration of our option. In the meantime, it is important for you to realize that Bank of America is, in effect, our fifth largest equity investment and one we value highly. In addition to our equity holdings, we also invest substantial sums in bonds. Usually, we’ve done well in these. But not always. Most of you have
We can buy 700 million shares of Bank of America at any time prior to September 2021 for $5 billion. At yearend these shares were worth $12.5 billion. We are likely to purchase the shares just before expiration of our option. In the meantime, it is important for you to realize that Bank of America is, in effect, our fourth largest equity investment – and one we value highly. * * * * * * * * * * * * Attentive readers will notice that Tesco, which last year appeared in the list of our largest common stock investments
We can buy 700 million shares of Bank of America at any time prior to September 2021 for $5 billion. At yearend these shares were worth $11.8 billion. We are likely to purchase them just before expiration of our option and, if we wish, we can use our $5 billion of Bank of America 6% preferred to fund the purchase. In the meantime, it is important for you to realize that Bank of America is, in effect, our fourth largest equity investment – and one we value highly. Productivity and Prosperity Earlier, I told you how
Bank of America. This stock, which pays us $300 million per year, also carries with it a valuable warrant allowing Berkshire to purchase 700 million common shares of Bank of America for $5 billion at any time before September 2, 2021. At yearend, that privilege would have delivered us a profit of $10.5 billion. If it wishes, Berkshire can use its preferred shares to satisfy the $5 billion cost of exercising the warrant. If the dividend rate on Bank of America common stock – now 30 cents annually – should rise abov
Investment Lessons
Shock absorber capital commands exceptional terms. Bank of America needed capital in 2011 not because it was insolvent but because market confidence had collapsed. Berkshire's public commitment — impossible to replicate by institutional investors who lack both the capital and the credibility — restored confidence at a moment when that restoration was uniquely valuable. The terms (6% preferred plus valuable warrants) reflected the scarcity of willing large-scale capital providers.
The patient holding of crisis investments. The Bank of America warrants were worth very little at issuance (the stock was at $7; exercise price was $7.14 — essentially worthless warrants). Berkshire held them for six years into eventual deep profitability. The patience to hold long-dated options granted at moments of crisis is as important as the analytical insight to make the initial investment.