Business, Finance & Economics

Warren Buffett's Berkshire Hathaway invests $5 billion in Bank of America

Warren Buffett's Berkshire Hathaway has announced that it will invest $5 billion in Bank of America, sending the banking giant's stock soaring Thursday morning.

The $5 billion is, in effect, a loan to the bank, in which it will pay around $300 million in dividends each year to Berkshire, CNBC reports.

BoA can pay back that loan at any time, but it will have to make an additional 5 percent dividend payment to do so.

U.S. stock opened higher on the move, seen as a vote of confidence in the bank at a time when analysts are questioning whether it has enough capital and investors are worrying about continued losses from its mortgage holdings. The bank's stock had plunged 52 percent in the past 12 months, and it had paid out $12.7 billion earlier this year to settle lawsuits.

The Dow Jones Industrial Average rose 21 points, or 0.2 percent, to 11341 on the news of Buffett's rescue package, while Bank of America surged 23 percent, the Wall Street Journal reports.

In a statement, Buffett, the chairman and chief executive officer of Berkshire Hathaway Inc., called Bank of America a "strong, well-led company" and said he phoned Chief Executive Brian Moynihan "to tell him I wanted to invest in it," the LA Times reports.

The investment by Berkshire Hathaway is reminiscent of a $5 billion investment by the billionaire in Goldman Sachs in September 2008, helping to restore confidence in Goldman during the financial crisis, the AP reports. 

Goldman paid back its $5 billion loan in April of this year, paying Berkshire roughly $1.6 billion in dividends over the two-and-a-half-year life of the deal. The "Oracle of Omaha" helped a number of other companies out, including General Electric Co. to the tune of $3 billion.

Buffett told CNBC that he conjured the idea while in the bathtub on Tuesday. He called Brian Moynihan, chief executive officer of Bank of America, on Wednesday. 

Meanwhile, jobless claims climbed by 5,000 to 417,000 in the week ended Aug. 20, the Labor Department reported Thursday, owing in large part to new applications from Verizon, where workers had been striking over a contract deal, ABC reports.