Bank of America Denies Needing Capital, Then Raises Capital At 6% From Buffett

Bank of America BAC has been telling all of Wall Street for weeks now that it does not need to raise capital. The market, on the other hand, was making it abundantly clear that it thought BAC definitely needed to raise capital. It was a showdown, and BAC shares kept plummeting despite the protestations of management with regard to the bank's liquidity situation. Frankly, the problem that Bank of America's management has is that no one believes what they say, because of a track record of speaking less than accurately about the company's financial condition. On Thursday, BAC raised capital through a special deal with Warren Buffett's Berkshire Hathaway. Buffett gave them $5 billion and in return he got preferred shares which will pay an annual dividend of 6%. Berkshire also is getting warrants to buy 700 million Bank of America shares at an exercise price of $7.14. The warrants may be exercised in whole or in part in the 10 years following the closing of the deal. Essentially, Buffett got an unbelievably good deal. One that only he could engineer because of his status as the Oracle of Omaha. It is not as if he went out and bought the common stock. Instead he used BAC's vulnerability to strike a nice deal for Berkshire shareholders. A real vote of confidence would be if he had purchased common stock. This deal appears to be little more than a ploy to stabilize the financial sector and hopefully the American economy, fundamentals be damned. It serves both Buffett and Bank of America, but it really doesn't change much. The $5 billion is a drop in the bucket for the Oracle's empire. Consider that Berkshire has a massive stake in Wells Fargo worth around $10 billion and positions in other financial stocks. It certainly was in Buffett's best interest to attempt to stabilize the plunging share price of BAC, and financials in general, particularly given the favorable terms he received. This deal also allows Bank of America to save face, but only in a superficial way. Sure, on the surface, it appears to be a vote of confidence, but why is the bank giving Berkshire such favorable terms if it didn't need capital? Of course it needed the money. As of this writing, BAC shares are already more than 12% off of their highs for the session. It does not appear that the market is totally fooled by this Berkshire investment, which only Buffett could obtain.