Finance History | Bank of America Corporate Center, Charlotte, 1 September 2011 — US$5 Billion Bought Income and Optionality

On 1 September 2011, Berkshire Hathaway invested US$5 billion in 2011 dollars in Bank of America preferred stock and common-stock warrants.

The package paired 50,000 preferred shares with a 6 percent annual dividend rate and warrants to buy 700 million common shares. Exercising all the warrants required another US$5 billion in 2011 dollars, equivalent to US$7.142857 per common share in 2011 dollars.

The two instruments divided the economics. Preferred dividends paid Berkshire while it waited, while the warrants preserved exposure to a recovery in the common stock without requiring an immediate common-equity purchase.

Bank of America could redeem the preferred stock for US$5.25 billion in 2011 dollars under the agreement's terms. The warrants lasted until 2021, giving the bank time to rebuild and Berkshire time for the equity option to become valuable.

This was a negotiated security rather than an ordinary stock-market purchase. Its value depended on contract terms, the issuer's capacity to keep paying, and the possibility that confidence in the banking system and the company would recover.

The investment also carried concentration risk. A preferred claim ranks ahead of common stock but behind debt, and a warrant has value only if the common shares exceed the exercise price before expiration.

By 2017, Bank of America planned a higher common dividend, making conversion economically attractive to Berkshire. On 24 August 2017, Berkshire exercised all 700 million warrants and surrendered substantially all of the preferred shares to cover the US$5 billion exercise cost in 2017 dollars.

The result turned a crisis-era hybrid instrument into a major common-stock position. It demonstrated how Berkshire could exchange immediate liquidity for income, contractual protection and long-dated upside when a large institution wanted a credible capital partner.

The Bank of America Corporate Center at 100 North Tryon Street provides the public Charlotte anchor. The tower represents the balance sheet behind the deal, while the preferred-and-warrant structure shows that the price of capital depends on timing, seniority and confidence as much as headline dollars.

Photo: Kiran891, CC BY-SA 4.0, via Wikimedia Commons.