[ by Howard Haykin ]

We report in Wednesday's WHO'S News about how the sharp rise in price of Bank of America shares in 2012 contributed mightily to the excellent returns turned in by helped Warren Buffett's investment company, Berkshire Hathaway.  Buffett succeeded in more than doubling his $5 billion investment in BAC preferred over just an 18-month period.  [See "Buffett: “Thank you, Bank of America”.] 

Back in 2011, during a particularly bleak period for the bank, the legendary investor supported the bank by purchasing $5 billion worth of preferred shares.  The "rescue" was costly for Bank of America, which offered a 6% dividend on the stock and gave Buffett's Berkshire Hathaway company 700 million warrants with a strike price of $7.14 a share = just a slight premium to the then-prevailing price. 

At current prices, a $3 billion buyback would only offset the dilution caused by issuing those warrants.  And, if the bank were to retired Mr. Buffett's preferred shares, the bank likely would have to cut back on plans to ask  for capital returns - causing unease for common shareholders. 

Yet, according to David Reilly, in the WSJournal's 'Heard on the Street' column, it makes imminent sense for BofA CEO Brian Moynihan to do just that - retire Mr. Buffett's holdings.  Here's why it may make sense:

• Preferred shares do not qualify toward the bank's Tier 1 ratio under new Basel rules - the shares are the equivalent to debt.

• On that basis, the 6% dividend rate is expensive - inasmuch as BofA's long-term debt during Q3 of 2012 was about 3.1%.  So, it would be cheaper for the bank to retire the more expense preferred shares with debt.

• Next, Bank of America is in a much stronger position than it was in 2011, and so is not as reliant on keeping Mr. Buffett for his moral and physical presence.  Letting go of Buffett was be a show of strength for the bank, that it no longer is reliant on Buffett.

• Finally, current economics point to the benefits of cleaning up the bank's balance sheet. 

Clearly, things are looking up for Bank of America and its pro-active CEO Brian Moynihan.   [WSJ 'Heard on the Street', 1/2/13].