NEW YORK — Warren Buffett is coming to the rescue of another fallen giant.
Buffett's Berkshire Hathaway announced Thursday it would invest $5 billion in Bank of America, giving a much-needed vote of confidence to the beleaguered bank. The news sent the bank's stock soaring 9 percent.
"Buffett is Bank of America's white knight," said Glenn Schorr, bank analyst at Nomura equity research.
As recently as Tuesday, the bank's stock had plunged 50 percent from a year ago on concerns over the bank's mortgage problems and worries that it would have to sell large amounts of stock to shore up its balance sheet.
Investors' confidence in the bank took another blow this month as its mortgage headaches got worse. On Aug. 8, American International Group sued Bank of America for more than $10 billion, saying the bank deceived the insurer by selling it faulty mortgage investments. The bank has already paid $12.7 billion this year to settle similar claims. The AIG lawsuit amplified worries that more investors would sue the bank and drain its coffers.
The slide in the stock intensified, falling as much as 36 percent in just the past month. The selloff was seen as a major challenge for the bank and CEO Brian Moynihan, who has been at the helm since January 2010. In an effort to calm investors, the embattled CEO took to the airwaves, giving an interview on CNBC on Aug. 9 and answering questions from shareholders in a conference call on Aug. 10.
It didn't help. Investors became even more impatient with the bank, which is the largest in the U.S. by assets.
Much of the Charlotte, N.C., bank's problems stem from its 2008 purchase of the largest U.S. mortgage lender Countrywide Financial Corp., but it faces a litany of other challenges.
The bank has lost $15.3 billion in the past four quarters. Its revenue fell 34 percent in the first half of the year from the same period a year ago, to $40 billion, after new regulations prevented the bank from collecting fees from checking account overdrafts and credit cards.
Half of all American households have an account or do business with Bank of America, making it even more exposed than its rivals to weakness in the economy.
Buffett, one of the most successful and respected investors of all time, has lent his credibility to several other icons of American business at times when investors' confidence in them was waning. Buffett's investments have usually proven to be both prescient and profitable. He pumped $5 billion into Goldman Sachs Group at the height of the 2008 financial crisis, helping to reverse a crisis of confidence in the investment bank and the U.S. banking system in general after the collapse of investment bank Lehman Brothers. He also invested $3 billion in General Electric.
Buffett's investments in Goldman and GE paid annual dividends of 10 percent, and wound up paying off. Berkshire made almost $1.8 billion from the Goldman investment alone.
Berkshire will receive a dividend of 6 percent on its investment in Bank of America. Berkshire will get 50,000 preferred shares in the bank and warrants to buy 700 million shares of common stock at $7.14 per share. Buffett can exercise the warrants any time in the next 10 years. If he does, it would make him the bank's largest shareholder with a stake of 7 percent.