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Buffett's $5 billion blessing boosts bank stock 9 percent

| Friday, Aug. 26, 2011

NEW YORK -- Warren Buffett comes to the rescue again. Buffett's Berkshire Hathaway Inc. announced on Thursday that it would invest $5 billion in Bank of America Corp., a much-needed vote of confidence that sent the beleaguered bank's stock soaring 9 percent.

The legendary investor said in a prepared statement that he reached out to Bank of America CEO Brian Moynihan to say he wanted to invest because he considered the bank a "strong, well-led company."

Lately, the market has rendered a different verdict.

As of Tuesday, Bank of America's stock had plunged 50 percent from a year ago on concerns over its mortgage problems and worries that it would have to sell large amounts of stock to shore up its balance sheet.

While Buffett's $5 billion investment is like a drop in the bucket at the largest U.S. bank with $2.2 trillion in assets, it comes with an imprimatur of confidence that is worth a lot more. In that sense, Buffett's investment is largely symbolic.

Much of the Charlotte, N.C., bank's problems stem from its 2008 purchase of the nation's largest mortgage lender, Countrywide Financial Corp., but it faces a litany of other challenges.

The bank lost $15.3 billion in the last four quarters. Its revenue fell 34 percent in the first half of 2011 from the same period a year ago, to $40 billion, when new regulations on checking account overdraft and credit card fees went into effect.

Half of all U.S. households have an account or do business with Bank of America, making it more vulnerable than rivals to weakness in the economy.

On Aug. 8, American International Group Inc. sued the bank for more than $10 billion, saying it deceived the insurer by selling it faulty mortgage investments. The bank has 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.

On Wednesday, Buffett, the folksy billionaire, got his idea for investing in the bank while sitting in the bathtub, he told CNBC. Buffett's assistant called Moynihan's office, asking that the CEO contact Buffett on his personal number.

One of the most successful and respected investors of all time, Buffett has lent his credibility to several other icons of American business at times when investors' confidence in them was waning.

His moves are followed closely by millions of investors worldwide.

Buffett pumped $5 billion into the blue-chip investment bank Goldman Sachs Group Inc. at the height of the 2008 financial crisis, helping to reverse a crisis of confidence in the bank and the U.S. banking system in general.

Around the same time, he invested $3 billion in General Electric Co., the iconic American company founded by light bulb inventor Thomas Edison.

Those investments paid annual dividends of 10 percent and wound up paying off. Berkshire made close to $1.8 billion from the Goldman investment alone.

Though Buffett's investment is symbolic, it will cost Bank of America $300 million in annual dividend payments.

Buffett already made a profit, on paper, of $357 million thanks to a surge in Bank of America's stock price after the deal was announced. After closing at $6.99 Wednesday, the stock jumped 66 cents, or 9.4 percent, to $7.65 Thursday.

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