Bank of Nebraska

Buffett's BofA bet: Warren Buffett's $5 billion endorsement is a coup for Brian Moynihan. The Bank of America boss has been floundering to find a way to boost confidence in his firm and his leadership. Shares had tanked 60 per cent from the year's high in January. The Sage of Omaha's backing helps immensely, initially pushing the stock up as much as 20 percent before pulling back. But it won't end BofA's woes.

The investment from Nebraska doesn't directly address two big concerns frightening shareholders. First, the deal offers no fix to BofA's mortgage black hole. The combination of a slew of unquantifiable legal claims and more potential losses from a possible lurch back into recession has generated ever larger guesstimates of the bank's downside. Some reckon BofA could be on the hook for up to $200 billion. Buffett won't have much inside information on that front: he and Moynihan struck a deal in less than 24 hours.

 

Second, Buffett's Berkshire Hathaway is buying perpetual preferred stock, just as it did with Goldman Sachs and General Electric in the 2008 crisis. That means no boost to BofA's common capital, a far more important measure of a bank's health. Granted, the deal also comes with warrants to buy 700 million shares at $7.14 apiece. But Buffett doesn't typically exercise these quickly. Three years on, he still holds Goldman warrants, even though the firm traded over strike price for years until recently.

That leaves BofA essentially unchanged beyond the valuable Buffett stamp of approval. The folksy investor is even imposing less painful terms than he did on Goldman and GE.

They paid a 10 per cent dividend on preferred shares; BofA's yield just 6 percent. That's less than where its outstanding preferred stock trades and only slightly more expensive than safer unsecured debt. The Charlotte-based bank also need pay a 5 per cent premium to buy them back from Buffett, half the rate Goldman forked over last year.

That's all helping to buoy investor sentiment. But if shareholders are given any more reason to fret over BofA's underlying problems, those concerns may prove more enduring than Buffett's thumbs-up.