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Thursday, August 25, 2011

Warren Buffett makes $280m profit on Bank of America stake in just 24 hours

Warren Buffett's $5bn (£3.1bn) lifeline for Bank of America has earned the Sage of Omaha a paper profit of $280m in just 24 hours.

The billionaire investor bought $5bn of preferred stock with 700m warrants that convert into 7pc of the bank's shares, sending them up an initial 25pc to $8.80. They fell back to $7.67 in mid-afternoon trading, up almost 10pc on Wednesday's close.

Mr Buffett's move put some market confidence behind the bank after the hammering given to the shares in recent weeks on talk that it was short of $50bn to $200bn of capital. The bank has been hit by rumours that it may be forced to make massive writedowns on its housing debts and government bonds as well as the possibility it could haemorrhage even bigger legal bills for its mortgage liabilities.

But Mr Buffett, who made $4.5bn in profit from a similar move investing in Goldman Sachs at the height of the financial crisis, said he was impressed by Bank of America's "profit-generating" capabilities. He added he had contacted the bank's beleaguered chief executive Brian Moynihan on Wednesday morning proposing the deal, saying: "Bank of America is a strong, well-led company Brian... I wanted to invest in it." The shares closed up 11pc on Wednesday.

As well as the preference shares that will pay $300m - or 6pc - interest every year, Mr Buffett's investment firm Berkshire Hathaway will receive 700m warrants that convert into ordinary shares at an exercise price of $7.142857 per share. The cash injection raises the bank's total equity by 2pc to $223bn. If the warrants are exercised, core Tier 1 capital will rise 4pc to $120bn, according to brokers' estimates.

Analysts questioned how much Mr Buffett's investment would calm speculation about Bank of America's need for additional capital. more