Our Terms of Service and Privacy Policy have changed.

By continuing to use this site, you are agreeing to the new Privacy Policy and Terms of Service.

Buffett's one-day win on Bank of America: $357 million

August 26, 2011: 12:41 PM ET
Warren Buffett is making a cool profit (on paper) on his $5 billion BofA bet.

Warren Buffett is making a cool profit (on paper) on his $5 billion BofA bet.

NEW YORK (CNNMoney) -- Warren Buffett earned $357 million in paper profits on Thursday simply on warrants related to his $5 billion equity infusion into Bank of America. Not bad for a day's work.

In exchange for the Buffett brand name and $5 billion, the Charlotte, N.C. financial institution granted Warren Buffett the option to buy up to 700 million of its shares any time in the next 10 years for $7.14. Yesterday those warrants would've reaped the Omaha investor a nine-figure profit.

Such paper profits could be ephemeral should Bank of America (BAC, Fortune 500)'s stock drop dramatically and stay there.

For now, with the bank's stock trading at $7.67 by midmorning Friday, investors are betting that yet again Buffett correctly spotted a long-term safe haven for his and his investors' fortunes.

During the financial crisis, Buffett famously refused to loan money to Lehman Brothers, yet gave Goldman Sachs (GS, Fortune 500) a similar stamp of approval with a $5 billion investment during the financial crisis.

His bets were right: Lehman folded, and the Goldman Sachs investment reportedly generated a $3.7 billion profit for Berkshire Hathaway (BRKA, Fortune 500).

Buffett bets $5 billion on Bank of America

"The question is whether Bank of America gave too many of those warrants away to get Warren Buffett to put the $5 billion preferred investment in the company. In the end that will be the question," says Marty Mosby, a managing director at Guggenheim Securities. The warrants give Buffett the right to purchase up to 6.5% of the company's equity.

As part of the Buffett investment, Bank of America will also pay the famed investor $300 million -- a 6% annual dividend or $821,000 a day -- for a decade, on his $5 billion in preferred shares.

Buffett's dealmaking skills came into play in crafting the warrants on Bank of America, not the dividend, investors say.

Compared to 10-year Treasuries, which currently yield 2.2% annually, investors say this dividend is commensurate with the riskiness of the stock and financial sector. By contrast, Goldman Sachs offered Buffett a 10% dividend on his 2008 investment.

When the investment was announced Thursday, investors were quickly giddy on the news, sending shares up as high as 26% by midmorning. Exuberance subsided, but the stock still closed up 9.4% at $7.65. To top of page

Index Last Change % Change
Dow 16,654.77 369.26 2.27%
Nasdaq 4,812.71 115.17 2.45%
S&P 500 1,987.66 47.15 2.43%
Treasuries 2.17 -0.00 -0.18%
Data as of 2:15am ET
Company Price Change % Change
Bank of America Corp... 16.44 0.38 2.37%
Freeport-McMoRan Inc... 10.19 2.27 28.66%
Apple Inc 112.92 3.23 2.94%
General Electric Co 25.01 1.00 4.16%
Microsoft Corp 43.90 1.19 2.79%
Data as of Aug 27
Overnight Avg Rate Latest Change Last Week
30 yr fixed3.85%3.87%
15 yr fixed2.96%2.98%
5/1 ARM3.14%3.19%
30 yr refi3.96%4.00%
15 yr refi3.06%3.08%
Rate data provided
by Bankrate.com
View rates in your area
 
Find personalized rates: