Buffett wants to forgive and forget Bank of America blunder

“That error they made does not bother me,” he said at Berkshire Hathaway's annual meeting.

May 5, 2014 @ 9:20 am

Warren Buffett, Bank of America Corp., Berkshire Hathaway
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(Bloomberg News)

Warren Buffett, who invested $5 billion in Bank of America Corp., said he's confident the lender will overcome an accounting mistake that forced the firm to suspend an increased payout to shareholders.

“That error they made does not bother me,” he said on Saturday at Berkshire's annual meeting in Omaha, Nebraska. “You do the best you can.”

Bank of America halted $4 billion of share repurchases and a boost to its common-stock dividend on April 28 after finding the mistake in a stress-test submission to the Federal Reserve. The Charlotte, N.C., based bank's error, which had gone undetected since 2009, didn't affect earnings.

“It doesn't change my feeling about Bank of America or its management,” said Mr. Buffett, 83.

His Berkshire Hathaway Inc. made the $5 billion investment in Bank of America in 2011, receiving preferred stock and warrants to buy 700 million shares for $7.14 apiece. That effectively makes the bank Berkshire's fifth-largest equity position, “and one we value highly,” Mr. Buffett wrote in his annual letter to shareholders.

The bank, the No. 2 U.S. lender by assets, said its revised submission to the Fed probably will mean lower payouts, without giving the figures.

Mr. Buffett's paper profit on the Bank of America warrants stands at about $5.7 billion. The lender slumped 6.3% on the day of its disclosure about the botched accounting, erasing the stock's gain for the year. The firm, led by Chief Executive Officer Brian T. Moynihan, 54, ended last week at $15.25, 2.1 percent lower than the close on Dec. 31.

NEW TERMS

Bank of America announced a deal with Mr. Buffett in February to change the terms for the preferred stake so that the investment is treated more favorably by the bank's regulators.

The amendment, which is subject to approval by Bank of America shareholders at a meeting this week, would force the bank to wait at least five years before redeeming the preferred stock. Under the initial terms, Mr. Moynihan's company could redeem the stake at any time by paying a 5% premium.

In exchange, Mr. Buffett agreed to give up a provision that let his firm recover missed dividend payments. Omaha, based Berkshire gets 6% annual interest on the securities. With interest rates near record lows, Mr. Buffett said he took the risk to extend the period of time Berkshire could collect the payments.

“I was very willing to make that trade-off,” he said at the meeting.

Mr. Buffett's track record of expanding Berkshire over the last five decades from a textile maker into a company valued at more than $300 billion has made him one of the most respected investors in the world. Money managers flock to Omaha each May to hear his thoughts on the company, markets and economy.

Berkshire's 2011 investment “was a significant vote of confidence” in the lender, said Tony Plath, a finance professor at the University of North Carolina in Charlotte. To get that seal of approval from one of the world's most respected investors, Mr. Moynihan had “to pay dearly,” Plath said.

The billionaire Berkshire chairman and CEO counts financial firms as the largest portion of his holdings of more than $100 billion in stocks. Berkshire owned 483.5 million Wells Fargo & Co. shares valued at about $22 billion as of Dec. 31, making the San Francisco bank the biggest holding by market value. Mr. Buffett also has stakes in banks including Goldman Sachs Group Inc. and U.S. Bancorp.

GOLDMAN SACHS

The investment in New York-based Goldman Sachs stems from a deal similar to the initial Bank of America agreement, designed to shore up capital and bolster investor confidence. In 2008, Mr. Buffett paid $5 billion for a preferred stake in Goldman Sachs and warrants to buy $5 billion of stock for $115 a share.

Goldman Sachs redeemed the preferred shares in 2011 at a profit for Berkshire, and Mr. Buffett exercised the warrants in a cashless transaction last year. That gave Berkshire 13.1 million shares of the bank, worth $2.3 billion as of Dec 31.

The billionaire also stood behind Goldman Sachs during Berkshire's 2010 annual-meeting weekend when he said the investment bank shouldn't be blamed for clients' losses on mortgage bets at issue in a fraud lawsuit filed by regulators.

Goldman Sachs settled the Securities and Exchange Commission's suit months later, agreeing to pay $550 million while conceding it made a mistake in disclosing “incomplete information” to investors. Berkshire got 10% a year on its Goldman Sachs preferred investment.

“With Goldman and Bank of America, they've been able to get paid a lot for using their brand,” Richard Cook, co-founder of Cook & Bynum Capital Management LLC, said of Mr. Buffett and his company.

(Bloomberg News)

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