Buffett to invest $5 billion in shaky Bank of America
Warren E. Buffett, the legendary investor, is sinking $5 billion into Bank of America in a bold show of faith in the country’s biggest, and most beleaguered, financial institution. It comes amid deepening worries about the long-term health of the company, which has already had to set aside roughly $20 billion to atone for its mortgage misdeeds at the height of the housing bubble.
Bank of America’s problems are emblematic of the economic woes facing the country in general and the housing market in particular. Its fortunes have been waning as the outlook for growth has darkened and the financial markets have gyrated.
More than some other large banks, Bank of America’s fate is also heavily intertwined with that of consumers. It services one in five home loans, and with 5,700 branches assembled through decades of mergers, it counts 58 million customers.
The losses suffered by the bank — $9 billion over the last 18 months — have spurred worries about just how solid its foundations are and raised fears that it will need tens of billions of dollars in fresh capital. Bank executives insist that that is not the case, and they were quick to trumpet Buffett’s move as a crucial show of support for an embattled management team, especially the chief executive, Brian T. Moynihan.
“In the shaky couple of weeks that we’ve gone through in the financial markets, it’s a good time for this vote of confidence by a savvy investor,” said Charles O. Holliday Jr., the bank’s chairman. “We didn’t need the capital, but it doesn’t hurt to have more in a volatile time.”
Even as investors cheered Buffett’s investment, lifting the bank’s shares more than 9 percent, analysts cautioned that it did not address more fundamental problems that will take years to correct. Moreover, it does little to lift the uncertainty over how much the company will ultimately have to pay to angry investors holding hundreds of billions of dollars worth of soured mortgage securities. Also hanging over the company is the prospect of a multibillion-dollar mortgage settlement with the government.
“This is a good endorsement but it’s no silver bullet,” said Michael Mayo, a bank analyst with Credit Agricole in New York. “Bank of America got the Good Housekeeping seal of approval and Buffett got a sweetheart deal, but the company hasn’t been able to get its arms around the magnitude of the losses.”
The bulk of those losses stem from the company’s disastrous acquisition of Countrywide Financial in 2008, the subprime lender whose reckless lending policies have made it a symbol of the housing bubble. Moynihan’s predecessor, Kenneth D. Lewis, paid $4 billion for Countrywide. It has already cost the company more than $30 billion.
To offset that red ink and strengthen the bank’s capital position, Moynihan has sold more than $30 billion worth of assets since the start of 2010, most recently unloading its Canadian credit card business and a portfolio of commercial real estate.