Buffett's Bank of America Investment: A Five Criteria Case Study
Updated: 5 hours ago
In August 2011, Warren Buffett's Berkshire Hathaway invested $5 billion in Bank of America preferred stock paying 6% a year, plus warrants to buy 700 million common shares at about $7.14 each. Six years later Berkshire swapped the preferred for those 700 million shares, turning the deal into a paper gain of roughly $12 billion on top of the dividends. It is one of the clearest lessons in how deal structure can create a margin of safety.
Where this fits: this is a Five Criteria case study. It shows how the Five Criteria handle a company that fails some tests, and why a well-structured price can change the risk entirely.
The Context: Bank of America in August 2011
August 2011 was a frightening month. Standard & Poor's had just downgraded the United States' AAA credit rating for the first time, and the European debt crisis was escalating.
Bank of America was at the centre of its own storm. Its 2008 purchase of Countrywide Financial had left it exposed to huge mortgage losses and lawsuits. In the second quarter of 2011 alone it reported a net loss of $8.8 billion, driven mainly by charges to settle Countrywide mortgage-bond claims.
The share price had roughly halved during 2011. According to Insurance Journal's report on the deal, the stock had hit early-2009 lows the day before the announcement, amid fears that mortgage losses could require tens of billions in fresh capital.
The Deal: What Berkshire Actually Bought
The investment was announced on 25 August 2011. Buffett said the idea came to him in the bath, and the deal was agreed within about a day of his unsolicited call to the bank. The terms, as reported by Insurance Journal:
Component | Terms | What it did for Berkshire |
Preferred stock | $5 billion, 6% annual dividend, cumulative | $300 million a year of income, ranking ahead of common shareholders |
Redemption premium | Bank could buy it back at 105% of face value | A 5% bonus if the bank repaid early |
Warrants | 700 million common shares at about $7.14, exercisable for 10 years | Upside if the bank recovered, with no obligation if it did not |
Bank of America shares closed at $7.65 on the announcement day, up 9.4%. The market immediately read Buffett's involvement as a vote of confidence.
Why this structure matters
Buffett did not simply buy the common stock. He built a position with two very different parts.
The preferred stock was the downside protection. It paid a fixed 6% whether the share price rose or fell, and it ranked ahead of common shareholders.
The warrants were the upside. They gave Berkshire the right, but not the obligation, to buy 700 million shares at a fixed price for a decade. If the bank recovered, they could be worth billions. If it did not, Berkshire would simply not use them.
That is asymmetry: limited downside, large upside. Seth Klarman's idea of focusing on the downside first, and Graham's margin of safety, are both visible in the design.
What Happened Next: The 2017 Warrant Exercise
Bank of America spent the following years settling legacy mortgage claims and rebuilding capital. Its common dividend stayed tiny for years while it did so.
In his 2016 shareholder letter, Buffett set out a clear trigger. As quoted by CNBC, he wrote that if the common dividend rose above 44 cents a year before 2021, Berkshire expected to make "a cashless exchange of our preferred into common."
In June 2017, after passing the Federal Reserve's stress test, Bank of America raised its quarterly dividend to 12 cents, or 48 cents a year. Berkshire announced it would exercise the warrants, paying for them by handing back the $5 billion of preferred stock rather than cash. Once the swap completed in late August 2017, Berkshire held 700 million common shares and became the bank's largest shareholder.
The result
Dividends: about $300 million a year on the preferred for roughly six years.
Warrant gain: CNBC estimated a paper profit of about $12 billion at the time of the announcement.
Annual return: Professor David Kass of the University of Maryland calculated a total gain of roughly $13 billion, or about 28% a year over six years, combining the stock gain and the preferred dividends.
Berkshire held a large Bank of America stake for years afterwards. From mid-2024 it began selling, and by October 2024 CNBC reported that its holding had dropped below 10%.
Five Criteria Scorecard: Bank of America in August 2011
Banks are a sector exception in our framework. ROIC and net debt/EBITDA do not suit a business whose raw material is borrowed money, so we use bank equivalents such as return on equity and capital ratios. The defaults do not change for other industries.
Here is how the common stock looked in August 2011, using only information available then. Figures are from Bank of America's second-quarter 2011 earnings release.
Criterion | What we test | Bank of America, August 2011 | Verdict |
1. Great business | Consistent high returns | Net loss of $8.8 billion in Q2 2011; returns depressed by Countrywide legacy costs | Fail |
2. Durable moat | A named source of advantage | Over $1 trillion of deposits; scale and customer switching costs in consumer banking | Pass |
3. Aligned management | Capital allocated like owners | New CEO (Brian Moynihan, since 2010) cleaning up; previous team's Countrywide deal destroyed value | Borderline |
4. Sound balance sheet | Survive a bad year without diluting | Tier 1 common ratio 8.23%, but markets feared more capital would be needed | Borderline |
5. Reasonable price | Margin of safety | Shares around $7 versus tangible book value of $12.65 per share | Pass |
What the scorecard tells us
On the common stock alone, Bank of America did not pass all five criteria. A beginner applying our framework in August 2011 should have kept it on a watchlist, not bought it.
The franchise was intact: a huge, low-cost deposit base does not disappear in a mortgage crisis. The price was very low relative to tangible book value. But current returns were poor, and the balance sheet had real uncertainty.
Buffett's genius was that he did not buy the common stock on those terms. He used Berkshire's reputation and capital to negotiate a different security. The preferred dividend dealt with Criterion 4 risk by putting him ahead of common holders. The warrants captured the Criterion 5 opportunity. He effectively rewrote the deal so that the failing criteria mattered much less to him.
What Individual Investors Can Learn
You cannot negotiate a private preferred deal with a major bank. But you can apply the principles.
Separate the franchise from the crisis. Ask whether the core business survives, not whether the headlines are bad. That is Criterion 2 thinking.
Let price do the work. The deepest discounts appear when fear is highest, as we explain in how to use short-term price movements.
Protect the downside first. If a business might need to raise capital, common shareholders can be diluted. Check the balance sheet using our guide on how much debt is too much.
Size for survival. Even a good bet can go wrong. See position sizing.
Be patient. The payoff took six years, and most of that time was dull.
Having worked in investor relations, I have seen how a credible, well-capitalised investor can change market perception of a company almost overnight. That confidence effect was part of Berkshire's edge here, and it is not something ordinary investors can copy.
Common Mistakes When Studying This Deal
Assuming Buffett "bought the dip" in the common stock. He bought preferred stock and warrants on special terms not available to the public.
Ignoring the downside. The deal worked in part because the structure protected Berkshire if recovery took longer.
Using hindsight. In August 2011 the outcome was genuinely uncertain. Judge decisions by the information available at the time.
Treating banks like other companies. Bank analysis needs capital ratios and book value, not EBITDA.
Copying famous investors blindly. Berkshire's cost, time horizon and diversification were very different from yours.
Frequently Asked Questions
How much did Buffett invest in Bank of America in 2011? Berkshire invested $5 billion in 6% cumulative preferred stock, and received warrants to buy 700 million common shares at about $7.14 each.
How much did Buffett make on Bank of America? When Berkshire moved to exercise the warrants in 2017, CNBC estimated a paper profit of about $12 billion, on top of roughly $300 million a year in preferred dividends.
Why did Buffett exercise the warrants in 2017? Bank of America raised its dividend to 48 cents a year. That made owning the common stock more attractive than holding the 6% preferred, so Berkshire swapped one for the other.
Would Bank of America have passed the Five Criteria in 2011? Not as a common stock purchase. It passed on moat and price but failed on business quality and was borderline on management and balance sheet.
Your Next Step
Try building your own scorecard on a company you know using how to research stocks step by step. Then compare it with our other case study, how I would evaluate Mattel stock, and read the wider lessons from the greatest investors.
About the author: Cameron Hayes is a senior investor relations and finance professional who has worked in IR at Nasdaq Copenhagen-listed companies including Nilfisk and Maersk Drilling. He holds an MSc from Copenhagen Business School and a BCom from the University of Ottawa, and founded Gingernomics to teach individual investors the Five Criteria framework. More about Gingernomics.
The content on Gingernomics is for educational and informational purposes only and does not constitute financial advice. Always do your own research and consult a licensed financial advisor before making any investment decisions. Past performance is not indicative of future results.
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