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With one move this week, Warren Buffett's Berkshire Hathaway made a paper profit of $12 billion while becoming the biggest shareholder of Bank of America.
CNBC described Buffett's investment maneuver as "quick" and "clever," but it was actually years in the making.
In August 2011, in the aftermath of the financial crisis when Bank of America was still coping with legal struggles and national investigations into its foreclosure practices, Berkshire Hathaway agreed to purchase $5 billion worth of the bank's preferred stock, which paid out a 6% dividend.
The dividend alone generated roughly $300 million annually.
More importantly, the investment came with warrants giving Berkshire Hathaway the right to swap its preferred Bank of America stock for 700 million shares of common stock at a price of $7.14 each. Back in August 2011, when BofA shares were trading below $7 for much of the month, that may have seemed like a reasonable deal from the standpoint of Bank of America shareholders.
As of Friday morning, though, the stock was at about $24.50.
Buffett's firm said on Friday that it would indeed exercise its warrants and exchange the preferred stock for common shares.
Berkshire Hathaway will officially exercise its warrants on Monday, when Bank of America is boosting its dividend rate from 44 cents to 48 cents. "After the swap is completed, Buffett's firm will begin collecting $336 million of annual dividends, more than the $300 million he gets from the preferred shares, which have a 6 percent dividend," Reuters explained.
The takeaway is that Berkshire Hathaway will have spent around $5 billion on BofA stock that's now worth over $17 billion. That's a paper profit of more than $12 billion at the same time his company will be collecting tens of millions more in dividends.