Warren Buffett, the biggest investor in the world, has just become the biggest shareholder of one of the world’s biggest banks, Bank of America.
Well, back in 2011, the bank wasn’t doing too well.
Buffett’s investment vehicle, Berkshire Hathaway, ploughed in $5bn. At the same time, he secured an agreement that by 2021, he could buy an additional 700m shares at $7.14. This turned out to be a bargain because their value today is almost 3 times that amount.
So the deal hasn’t just made him the biggest shareholder but it’s also made him a bumper $11bn profit.
In 2011, the bank was still dealing with the effects of the subprime mortgage crisis that preceded the global recession. It also needed a big investor like Buffett to create market and government confidence in the firm’s leadership and strategy.
Yet a few months ago, it managed to pass “stress tests” set by the Federal Reserve (Fed), America’s central bank. These tests are simulations that the Fed will set a financial institution, to see if it can survive a worst case scenario, such as another financial crisis.
It was the passing of these tests that allowed the bank to up its dividend payout and pushed Buffett to exercise his share acquisition right.
And he’s not going anywhere
“It will be a long, long time before we sell Bank of America shares,” Buffett commented.
His long term commitment helped push shares in the bank up 0.5%.