Buffett’s BofA Eureka Moment Pays Off, for Now

Friday, 24 Aug 2012 | 4:01 PM ET
Warren Buffett
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Warren Buffett

One year ago, Warren Buffett took an eventful bath. The result: A brainstorm that led to a $5 billion investment in Bank of America.

After deliberating for a day, Bank of America chief executive Brian Moynihan agreed to let Buffett buy 50,000 shares of cumulative preferred equity that would cash out at $100,000 a share.

The stock will pay a 6 percent dividend, or $300 million, annually. Should Buffett want to cash out at any time, Bank of America will pay him a 5 percent, or $250 million, premium on the buyback. (Read More:Bank of America vice chairman, a former CFO, to retire in September.)

The Big B of A Trade
A year ago Warren Buffett pumped $5 billion into Bank of America. Shares were at $6.30; today, they are above $8. CNBC's Kayla Tausche reports.

Buffett paid $5 billion for the preferred stock, but got an added bonus in a stockpile of 700 million warrants — which the Oracle of Omaha can convert to stock at a price of roughly $7.15 a share, should he decide to do so in the next nine years.

And why shouldn’t he, so long as the stock is above that price, or in the money? In the year since the deal was announced, Bank of America shares have risen 16 percent, adding about $700 million in value (on paper) to his warrants. (Read More: Buffett Shuns Investment Banks, Embraces Wells Fargo.)

So let’s calculate this: Buffett has an additional $300 million from the dividend (part of his Berkshire Hathaway’s disclosure of $1.86 billion in interest income through the first half of the year). Future dividends aside, he will cash out his Bank of Americapreferred at $5.25 billion. And, as long as BAC shares stay above $7.15 will collect an additional $5 billion, before taxes.

As occurred with Buffett’s investment in Goldman Sachs – which has striking similarities to his BofAepiphany — the value of the warrants is no sure thing, with their price moving alongside market volatility. Still, not too bad for a summer bubble bath.

-By CNBC's Kayla Tausche

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