We know it’s hard to believe given its recent run of what constitutes success, but Bank of America was once a complete mess. And in its darkest hour, it turned to Warren Buffett for help, which he provided, and the rest is history.
Well, what actually happened was that Buffett saw BofA floundering and so made it an offer it couldn’t refuse, which offer was unsurprisingly quite favorable for Warren Buffett: Berkshire Hathaway fronted Moynihan $5 billion so he wouldn’t have to raise money by selling shares to people not named Warren Buffett in exchange for $300 million a year for 10 years. Oh, yea, and if the whole thing worked out, Berkshire could turn in its preferred shares for real ones—700 million of them, enough to make Buffett & co. BofA’s biggest shareholder.
Now, old Warren could have made that exchange at any point during the last five years and made a whole batch of money off of it. But then he would have been forgoing that $300 million annual coupon payment. And Warren Buffett, well, he doesn’t just forego $300 million annual payments. However, among BofA’s good news this year was a passing stress-test grade, which meant it could bump up its dividend to the point where owning 700 million shares would get one a larger dividend payment than owning $5 billion in preferred shares. Also, Warren Buffett just suffered a somewhat demoralizing defeat at the hands of Paul Singer. And it's his birthday. So the timing was right for Buffett to become BofA’s biggest shareholder for all of $0.
“Berkshire is going to keep every share for a very long time,” Mr. Buffett said in an email to the Journal Tuesday.
Berkshire’s exercise of the warrants, along with dividends the company has received on Bank of America preferred stock, brings its paper gain on its investment in the bank to around $13 billion.