Buffett bails out Bank of America – shares soar but is he propping up failure?

26th August 2011

The billionaire investor's company Berkshire Hathaway, has already stepped in to help Goldman Sachs and General Electric during the credit crisis. Both of those deals came with a 10% divide

This is Money reported that news of the investment sent BoA's stock market value up 25%, before easing to settle 10 per cent up at $7.71 in late trading. Buffett said: ‘I am impressed with the profit-generating abilities of this franchise.'

Before Buffett's announcement the bank's shares had fallen 48% this year and 39% in the last three months.

Buffett has agreed to buy 50,000 preferred Bank of America shares that will pay a 6% annual dividend. The bank has the option to buy back the shares at any time for a 5% premium.

Howard Wheeldon, BGC senior strategist, said: ‘This is a smart move by Buffett. There has been a lot of hype about BoA recently. It has a very stable deposit base and people all too easily forget that.'

Across the Guardian comment boards several readers expressed concern over the long-term health of the bank, and whether Buffett's investment was enough.

However a few believe that a further round of quantitative easing was likely securing Buffett's investment.

Voltaire21 writes: Talk about a safe investment BoA would be bailed out if needed, so now Buffett can inject capital at extornotiante rates like he did at GS. Its good to have money in a bear market. However said that there was a whole host of secret bailouts that the public got to know about is probably right.

However a lot of readers expressed the same sentiment as Guardian website reader davemaclurg who writes: "At last, someone with big bucks bailing out one of the errant banks instead of banks looking to government and uliimately the less-well-off taxpayer.  As skintnick says, why not do it properly instead of propping up failure."

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