Shaw Capital Management: Bank of America Saved by Buffett

http://shawcapitalmanagementfinancialnews.com/2011/10/12/shaw-capital-management-bank-of-america-saved-by-buffett/

Berkshire Hathaway, run by Warren Buffett, announced on Thursday its plans to invest $5 billion in the Bank of America, giving a boost for the embattled financial company.

While the investors formerly cheered resulting in the bidding up of banks stocks earlier today, the sector calmed down in the afternoon as the general market comprehend the deal.

Bank of America’s stocks, which increased over 25% on Thursday, are now at $7.55, up only by 8%. Morgan Stanley and Citigroup, both of which have increased almost 10% in the morning revert to their original prices almost as quick.

The reduction only reflects the continued agitation concerning the industry that is racked by economic problems, legal liabilities and regulatory uncertainty.

Still, the investment of Berkshire has aided in allaying concerns regarding the Bank of America. Stocks of the financial company have suffered as of late because of the fears that it is lacking in enough capital. The share has fallen by almost 30% since early August.

This investment from Berkshire has come in a crucial time for the Bank of America. Its own mortgage department has accumulated billions of dollars in legal expenses and it even faces a national investigation about its practices in foreclosure.

Last week, the bank reported of plans to lay off 3,500 workers. Shaw Capital Managementlearned that Mr. Moynihan addressed the employees in a memo, telling them that the company answers to the stockholders and customers first, hence, they need to be cost-efficient and competitive.

However, it was decided that the company needs no capital increase, insisting that the company is well on financial aspects. Such assertions did very little to placate or gain the confidence of investors.

Following the terms and conditions of the deal, Berkshire will purchase $5 billion worth of preferred stock that pays a 6% annual dividend, and receive warrants for 700 millions stocks that it can use for more than 10 years. Bank of America will have the option to buy back those preferred stocks anytime for a 5% premium.

Buffett is fond of financial companies that he reckons have a strong brand. He already owns Wells Fargo, eventually upped his stake over the past year. In the last quarter, he purchased around 10 million stocks of the lender.