By Scott Cendrowski and Nin-Hai Tseng
FORTUNE – The International Monetary Fund is known as the lender of last resort to countries on the brink of default. Billionaire investor Warren Buffet might as well be known as the same for companies in crisis.
After rescuing Goldman Sachs
and General Electric
during the depths of the financial crisis, Buffett’s Berkshire Hathaway
is swooping in to reassure markets once more. This time, the Omaha-based conglomerate run by Buffett is investing $5 billion in Bank of America
, allaying widespread fears that the biggest U.S. bank lacks sufficient capital.
Buffett has boatloads of cash on hand, so it’s no surprise to find him in position to squeeze lofty terms out of partners that desperately need the sterling imprimatur of his investment. Berkshire’s deal with BofA includes: buying 50,000 preferred shares of the bank at a dividend of 6% a year; BofA can buy back the investment at any time by paying Buffett a 5% premium; and, Berkshire will get warrants to buy 700 million BofA shares at an exercise price of just over $7.14 a share, with the ability to exercise any time in the next 10 years.
The deal almost mirrors Berkshire’s agreement with Goldman Sachs, except that the dividend is smaller in the BofA deal. In the Fall of 2008, Buffett propped up Goldman with a $5 billion investment via purchase of preferred stock that was repaid earlier this year. The investment paid a 10% dividend, and provided Berkshire with warrants to buy up to $5 billion of Goldman common shares.
Eights days after the Goldman deal, Berkshire gave GE a vote of confidence by investing $3 billion via purchase of the industrial giant’s preferred stock. The stock paid a dividend of 10%. The deal also gave GE the ability to buy back the shares from Buffett after three years by paying a 10% premium or $3.3 billion. Also, Berkshire received warrants to buy $3 billion of GE common stock for $22.25 a share at any time over the next five years.
Indeed, Buffett can win the game before ever stepping up to bat. Which may be all the more reason for regular investors to be wary of riding his coattails. Just look at the charts below. Buffett has earned billions on deals with GE and Goldman Sachs, but if you bought the stocks the same day Buffett announced his investments in the companies, your returns have been less spectacular.