May 7, 2021

Buffett to Invest $5 Billion in Shaky Bank of America

Bank of America’s problems are emblematic of the economic woes facing the country in general and the housing market in particular. Its fortunes have been waning as the outlook for growth has darkened and the financial markets have gyrated.

More than some other large banks, Bank of America’s fate is also heavily intertwined with that of consumers. It services one in five home loans, and with 5,700 branches assembled through decades of mergers, it counts 58 million customers.

The losses suffered by the bank — $9 billion over the last 18 months — have spurred worries about just how solid its foundations are and raised fears that it will need tens of billions of dollars in fresh capital. Bank executives insist that that is not the case, and they were quick to trumpet Mr. Buffett’s move as a crucial show of support for a management team, especially the chief executive, Brian T. Moynihan.

“In the shaky couple of weeks that we’ve gone through in the financial markets, it’s a good time for this vote of confidence by a savvy investor,” said Charles O. Holliday Jr., the bank’s chairman. “We didn’t need the capital, but it doesn’t hurt to have more in a volatile time.”

Even as investors cheered Mr. Buffett’s investment, lifting the bank’s shares more than 9 percent, analysts cautioned that it did not address more fundamental problems that will take years to correct. Moreover, it does little to lift the uncertainty over how much the company will ultimately have to pay to angry investors holding hundreds of billions of dollars worth of soured mortgage securities. Also hanging over the company is the prospect of a multibillion-dollar mortgage settlement with the government.

“This is a good endorsement but it’s no silver bullet,” said Michael Mayo, a bank analyst with Crédit Agricole in New York. “Bank of America got the Good Housekeeping seal of approval and Buffett got a sweetheart deal, but the company hasn’t been able to get its arms around the magnitude of the losses.”

The bulk of those losses stem from the company’s disastrous acquisition of Countrywide Financial in 2008, the subprime lender whose reckless lending policies have made it a symbol of the housing bubble. Mr. Moynihan’s predecessor, Kenneth D. Lewis, paid $4 billion for Countrywide. It has already cost the company more than $30 billion.

To offset that red ink and strengthen the bank’s capital position, Mr. Moynihan has sold more than $30 billion worth of assets since the start of 2010, most recently unloading its Canadian credit card business and a portfolio of commercial real estate.

Bank of America shares have been pounded in recent weeks amid deepening worries about just how much the mortgage mess will eventually cost the bank, how the downshift in the economy will crimp earnings and whether it can absorb losses without having to raise more capital.

Earlier this week, the stock dropped to its lowest point since the aftermath of the financial crisis, and nearly 30 percent below where it began the month.

Other banks’ stocks have dropped, too, but the speed of the descent and the surge in the cost of insuring the company’s debt awakened memories of the financial crisis, when companies like Bear Stearns and Lehman Brothers found themselves short of capital.

Bank of America’s capital position is much stronger than it was going into the financial crisis — it held $218 billion at the end of the second quarter by one key measure, but was still behind peers like JPMorgan Chase and Wells Fargo.

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