A bold $5 billion wager on Bank of America (NYSE: BAC) from famous investor Warren Buffett lifted the stock at Thursday’s open but the stock quickly pared its gains, along with financial exchange traded funds.
Buffett’s Berkshire Hathaway will buy 50,000 shares of preferred stock with a 6% dividend. Berkshire also receives warrants to purchase 700 million shares of Bank of America common stock.
The warrants may be exercised for 10 years after the transaction closes, according to a press release. Bank of America gets $5 billion in cash in exchange for the preferred stock and warrants.
Investors wondered whether the purchase signals a bottom in the beaten-down financial sector. Buffett reached a similar deal with Goldman Sachs (NYSE: GS) in the credit crisis.
Financial Select Sector SPDR Fund (NYSEArca: XLF) saw its early rally fade but was still up fractionally at last check. The financial ETF has been hit hard during the recent stock-sell off and is down 20% year to date.
Buffett’s warrants to buy Bank of America stock have an exercise price of $7.14 a share. The stock nearly hit $9 in morning trade before pulling back.
Financial Select Sector SPDR Fund
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