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Berkshire Hathaway Rescues Bank of America

Warren Buffett
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Warren Buffett

, the news that Bank of America is selling a stake to an outside investor is sending the stock through the roof.

As I predicted yesterday

Berkshire Hathaway agreed to buy 50,000 preferred shares of Bank of America for $5 billion, according to a statement from the bank.

Berkshire also will get warrants to purchase 700 million common shares.

The result is today's dilution rally. As I explained yesterday, bank stocks rally on dilution because having a larger amount of equity capital makes them healthier. The capital structure neutrality that applies to most other types of companies just doesn't work with banks, which means that dilutive capital raises are bullish.

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