Buffett Tells CNBC 'This Isn't 2008' As Bank of America Gets $5B Loan at Just 6%

Warren Buffett tells CNBC's Becky Quick "this isn't 2008" and that's why Bank of America is getting better terms for its $5 billion loan today from Berkshire Hathaway, compared to what General Electric and Goldman Sachs paid for similar loans almost three years ago at the height of the credit crisis.

Bank of America shares [BAC  Loading...      ()   ] jumped more than 9 percent to close at $7.65 in trading on Thursday.

Buffett is also stressing the investment was his idea, perhaps to downplay any fears that Bank of America is desperate for a cash infusion.

This morning, Bank of America announced that Berkshire will use cash to buy 50,000 shares of preferred stock with a liquidation value of $100,000 per share in a private offering. 

That is, in effect, a loan to the bank, in which it will pay around $300 million in dividends each year to Berkshire.  BofA can pay back that loan at any time, but it will have to make an additional 5 percent dividend payment to do so.

The interest rate on the loan is 6 percent, well below the 10 percent that Buffett got from GE and Goldman almost three years ago, but not at all bad with 10-year Treasuries just above 2.2 percent.

Goldman paid back its $5 billion loan in April of this year, sending Berkshire roughly $1.6 billion in dividends over the 2-1/2 year life of the deal.  That's an annualized return on investment of 12.6 percent.  Warrants that came with that deal are out of the money, with Goldman trading a few dollars below the $115 strike price. Current price: [GS  Loading...      ()   ]  

Buffett had said he didn't want Goldman to buy back its preferred shares, because it cut off the stream of $500 million a year going from Goldman to Berkshire.  He's also indicated he doesn't plan to exercise the Goldman warrants until just before they expire in 2013.

General Electric has said it will pay off its $3 billion loan this October.  Berkshire will pocket a total of $1.2 billion in dividends over that deal's three years for an annual return on investment of 11.1 percent.  Like Goldman, warrants in that deal are also out of the money, with GE trading almost seven dollars below the $22.25 strike price.  Current price: [GE  Loading...      ()   ]

In today's deal, Berkshire gets warrants to buy up to $5 billion of BofA's common stock, 700 million shares at an exercise price of just over $7.14 a share.  It can make those purchases at its discretion anytime in the next 10 years.

That gives Berkshire the potential to become BofA's largest shareholder.  State Street is currently at the top of that list with 460.5 million shares, about 4.5 percent of the bank's outstanding shares.  (Berkshire sold a 5 million share stake in BofA during 2010's fourth quarter.  It had been purchased by the now-retired GEICO stock picker Lou Simpson.)

As was the case with GE and Goldman, Bank of America also gets a strong endorsement from Buffett.  He calls the investment a vote of confidence in both BofA and the United States.

In the release, Buffett says, "Bank of America is a strong, well-led company, and I called Brian to tell him I wanted to invest in it.  I am impressed with the profit-generating abilities of this franchise, and that they are acting aggressively to put their challenges behind them. Bank of America is focused on their customers and on serving them well. That's what customers want, and that's the company's strategy."

Buffett tells us he came up with the idea of an investment while taking a bath earlier this week, and he asked BofA CEO Brian Moynihan yesterday if Berkshire could do the deal.

Why now?  Buffett tells Becky that BofA's shares "have gone down a lot" and the bank is "certain to be around" for a long time.

He says Wells Fargo [WFC  Loading...      ()   ] , a large Berkshire holding, and BofA have the best deposit franchises in the country, and compares today's investment to Berkshire's past deals for GEICO and American Express [AXP  Loading...      ()   ] .

Current Berkshire stock prices:

Class B: [BRK.B  Loading...      ()   ]

Class A: [BRK.A  Loading...      ()   ]

For more Buffett Watch updates follow alexcrippen on Twitter.

Email comments todocument.write("");document.write("buffettwatch"+"@"+"cnbc.com");document.write('');

General Electric has a 49 percent stake in NBCUniversal, CNBC's parent company.

© 2011 CNBC, Inc. All Rights Reserved

View the original article here

Bank Of America Capital Scramble Continues With Alleged Closure Of China Construction Bank Stake Sale

We are not sure how this is news, since it was announced weeks ago, but according to CNBC the bank that did not need capital, is following up yesterday's $5 billion capital raise with another $10 or so billion by selling "at least half of its 10% stake in CCB." That said, back on August 11, the FT came out with a report titled, "BofA faces struggle to sell CCB stake" in which we learn that "Bank of America is facing difficulties in selling its 10 per cent stake in China Construction Bank, partly because potential investors are expecting a deluge of rights issues, share sales and new listings from Chinese banks. But it might now raise less than than it had hoped. The BofA stake, once valued at $20bn, is now believed to be worth several billion dollars less, according to bankers. The US bank has approached sovereign wealth funds and other investors in the Middle East and in Asia, according to people familiar with the matter. The Kuwait Investment Authority was one potential buyer BofA approached, these people add, but the sovereign wealth fund already holds large stakes in ICBC and Agricultural Bank of China. “Right now, the KIA does not want to do anything more,” says one person with knowledge of the matter. “They think they have enough exposure to Chinese banks.” The KIA expects the two banks in which it already has shares to launch rights offers and the KIA intends to support those banks. "They will only look at CCB if the discount is high enough,” the person added...Potential buyers say the timing for BofA is particularly sensitive because, if CCB does launch a rights offer – as is widely expected – and BofA is still a main shareholder, it will be obliged to participate, using capital it can ill afford to part with." Stated otherwise, this must be one of those, "this time it's different" occasions. Next up: Bank of America does not, repeat NOT, need to sell its employee's blackberrys, but it will. Just because.

View the original article here