Bank of America was Warren Buffett's latest sage bet on a bank

October 9, 2024 6:00 AM

Some 13 years after Warren Buffett-led Berkshire Hathaway made a $5 billion investment in Bank of America , the Oracle of Omaha has been reducing his stake in the Charlotte, North Carolina-based bank.

It's just the latest example of Buffett making a big bet on a troubled financial institution — and profiting handsomely.

Back in August 2011, BofA was coming off a quarter in which it lost $8.8 billion, largely due to costs related to the subprime mortgage crisis. The bank's stock price was down about 50% on the year.

Buffett was reportedly soaking in the bathtub when he got the idea to invest in BofA. He soon tried to reach CEO Brian Moynihan but was thwarted by a call-center worker who wasn't able to transfer calls to the chief executive.

Less than 24 hours after the two men eventually connected, they signed a deal. Years later, Moynihan credited Buffett with stabilizing BofA in its time of need.

Throughout his legendary career, the 94-year-old investor has bought bank stocks when they're low and taken big profits from the investments, though he has not always executed his exit flawlessly.

What follows is a look at four instances of Buffett's pattern, starting with an investment he made roughly 60 years ago.

American Express

American Express was a hot brand in the early 1960s, offering traveler's checks and charge cards at a time when air travel was taking off.

But the company, which was not yet a bank, got into trouble in 1963. A warehouse in Bayonne, New Jersey — owned by an Amex subsidiary — was found to have suffered a large fraud involving supposed shipments of vegetable oil that turned out to be, in part, seawater.

Amid this scandal, Buffett visited an Omaha steakhouse to determine whether its patrons were continuing to use American Express to pay for their dinners, according to Roger Lowenstein's 1995 biography of Buffett. It turned out that Amex remained popular. After Buffett did more research that supported the same conclusion, he invested.

By 1967, his $1 million investment in Amex had made a $10 million profit, according to Lowenstein.

Wells Fargo

In 1990, Buffett bought 10% of the stock in Wells Fargo at what Lowenstein described as a "fire-sale price."

At the time, commercial real estate in California was distressed, and San Francisco-based Wells Fargo had substantial exposure to the market.

The bet looked shaky, but Buffett had a long-term outlook. After a friend called to warn him about other investors' belief that the bank could go under, he reportedly responded: "We'll see who's right."

Wells Fargo's stock price later soared, but Buffett did not time his exit well. He still had a large stake in the bank when its sales misconduct scandal blew up in 2016. It wasn't until early 2022, when the megabank's share price had largely stagnated versus six years earlier, that Buffett sold his final remaining shares.

"I feel very good about the banks we own. They're very attractive compared to most other securities I see," Buffett told CNBC in a February 2020 interview. "The question is really whether they'll do something massively dumb, which I mean, periodically a number of banks have done."

"Wells Fargo's classic in terms of one lesson," Buffett continued, citing the words of his longtime partner Charlie Munger. "He says, 'Whenever you have a problem, you attack it immediately.'"

Goldman Sachs

Shortly after the infamous "Lehman weekend" of September 2008, as the financial sector continued to teeter, Goldman Sachs was looking to raise capital.

Goldman approached Buffett numerous times, according to "Too Big To Fail," Andrew Ross Sorkin's retelling of the 2008 crisis.

Under the initial offers, Buffett would have received preferred shares in Goldman that carried a modest interest rate, according to the book's account. The preferred shares could have been converted to common shares at roughly a 10% premium to the current stock price.

"In a market like this, there's no reason I can take the risk," Buffett reportedly responded.

Ultimately, Berkshire Hathaway agreed to purchase $5 billion worth of special preferred shares that would pay a 10% annual dividend.

Buffett also made it a condition of the deal that Goldman's top executives not be allowed to sell their shares before he sold his. "If I'm buying the horse, I'm buying the jockey, too," he reportedly told Goldman CEO Lloyd Blankfein.

Under the terms of the deal Buffett struck, Berkshire was reportedly receiving $1.37 million a day in dividends. In March 2011, Goldman said it was exercising an option to buy back the Berkshire Hathaway shares.

Buffett's 2008 deal with Goldman also included warrants, or rights to purchase shares, which in 2013 were converted into a large ownership share in the investment bank. At the time, Buffett's $5 billion had reportedly yielded $3.1 billion in cash and paper gains over a five-year period.

Bank of America

At the time Buffett invested in BofA, Moynihan had been CEO for only about a year and a half. The bank was straining under the weight of the liabilities it inherited in its purchase of the subprime mortgage lender Countrywide Financial.

Under the August 2011 deal with Buffett, Berkshire Hathaway received both preferred shares in BofA and warrants to purchase 700 million common shares.

"Bank of America is a strong, well-led company, and I called Brian to tell him I wanted to invest in it," Buffett said in a press release at the time.

Moynihan said in the same press release: "I remain confident that we have the capital and liquidity we need to run our business. At the same time, I also recognize that a large investment by Warren Buffett is a strong endorsement in our vision and our strategy."

Since that investment was announced, BofA's share price has climbed from around $8 to roughly $40.

In recent months, as Berkshire has been reducing its ownership stake in the bank from about 13% to just over 10%, Buffett hasn't explained his thinking to Moynihan.

"I don't know what exactly he's doing because, frankly, we can't ask, and we wouldn't," Moynihan said last month at an industry conference. "We're buying the stock, a portion of the stock, and so life will go on. But he's been a great investor for our company and stabilized our company when we needed it at the time."