Warren Buffett's Berkshire Hathaway will invest $5 billion in Bank of America, stepping in to shore up the company in the same way he helped prop up Goldman Sachs during the financial crisis.
Bank of America [BAC 7.65 0.66 (+9.44%) ]shares jumped as high as $8.80 in Thursday trading before dropping later in the day. Shares rose 9.44 percent to close at $7.65 on Thursday.
"This helps with the credibility gap that I think has existed in the minds of some shareholders. It reiterates the point that the balance sheet is healthy. They needed an endorsement in the market and they got it," said Jon Finger, managing partner of Finger Interests in Houston.
Bank of America will sell Berkshire [BRK.A 103491.00 -2859.00 (-2.69%) ]50,000 shares of cumulative perpetual preferred stock with a 6 percent annual dividend, it said in a statement Thursday. Bank of America can buy back the investment at any time by paying Buffett a 5 percent premium.
Berkshire also will get warrants to buy 700 million Bank of America shares at an exercise price of just over $7.14 a share, with the ability to exercise any time in the next 10 years.
It is virtually a mirror of the deal Berkshire did with Goldman Sachs [GS 109.84 -0.47 (-0.43%) ] in the depths of the crisis in fall 2008, except in this case the dividend is less. The Goldman deal paid Berkshire $15 a second in dividends until Goldman bought Buffett out earlier this year.
In an interview with CNBC on Thursday, Buffett said the loan was his idea and that "this isn't 2008," and that is why Bank of America is getting better terms for its loan from Berkshire than what GE and Goldman paid for similar loans during the financial crisis.
Market watchers said the deal proved again that Buffett had become something of a lender of last resort to the financial system, as he did with Goldman and also GE [GE 15.45 -0.27 (-1.72%) ].
(GE is a minority owner of NBC Universal, the parent of CNBC and CNBC.com.)
"This proves to the market that if the bank needs additional capital, which we don't believe they do, but if they needed to calm the market by raising capital, they could do it within 30 minutes with a quick call to Uncle Warren," said Sean Egan, managing principal of Egan-Jones Ratings.
Buffett called Bank of America Chief Executive Brian Moynihan this week and offered to make the investment, a Bank of America spokesman said, adding that the deal was negotiated and consummated in a couple of days.
Investors have battered Bank of America's stock on fears that the largest U.S. bank by assets has yet to overcome billions of dollars in problem mortgage loans.
In recent weeks, investors have sold shares, worrying that the bank might need to raise outside capital—as much as $50 billion by some estimates—to cope with losses and meet new industry capital rules.
Bank of America shares lost roughly a third of their value in August before this deal, and half their value since the beginning of the year.