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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 17,813.39 1.20 0.01%
Nasdaq 5,116.14 13.34 0.26%
S&P 500 2,088.87 -0.27 -0.01%
Treasuries 2.23 -0.01 -0.49%
Data as of 9:49pm ET
Company Price Change % Change
Pfizer Inc 32.87 0.90 2.82%
HP Inc 12.64 -2.00 -13.66%
General Electric Co 30.36 -0.30 -0.98%
Bank of America Corp... 17.44 -0.03 -0.17%
Freeport-McMoRan Inc... 8.10 -0.20 -2.41%
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