[ by Melanie Gretchen ]

Warren Buffet's Berkshire Hathaway, an investment holding company, had a profitable 2012 thanks in large part to the unexpected run-up in price of Bank of America shares.    He further generated significant profit in 2012 by repurchasing Berkshire stock on the open market. 

A year earlier, the billionaire investor bought, on behalf of Berkshire Hathaway, $5 billion in preferred stock – just months before the bank hit its all-time low share price of around $5.  For his $5 billion, Buffett received preferred shares that carried a 6% dividend, along with 700 million warrants with a strike price of $7.14 a share. 

However, even with Buffett's support, the stock continued for a time to fall in price, and reached an all-time low of $5 a share - which, back then, made Buffett's transaction appear somewhat questionable.  Nevertheless, Bank of America shares began to rise immediately after hitting its low, and continued to rise throughout 2012, closing the year at $11.61 a share.  BAC shares climbed another 37¢ on the first trading session of 2013, to close on Wednesday at $11.98.

For Mr. Buffett, this means he ...  continues to have the "golden touch" with investments and he retains his standing on the Forbes Roster of the World's Richest Individuals for 2012 - he is #3.  If Mr. Buffett were to exercise the 700 million warrants, then turn around and sell the acquired shares, Berkshire would stand to earn nearly $3.4 billion in profits - before any adjustments for transaction costs. 

That figure does not include any capital gains he could take on selling or redeeming the preferred shares, or taking into consideration the $300 million in dividend income per annum earned on his 6% preferred shares.  Even if BofA were to repurchase Berkshire's preferred stock, as Goldman Sachs did in 2011, Mr. Buffett will have made out just fine.

Also, refer to our related Behind The News story evaluating what benefits BofA would derive by:  [Retiring Buffett's $5Bn Preferred Shares]

For further details, go to [WSJ, 1/2/13].