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Warren Buffett’s Berkshire Hathaway has agreed to modify the terms of an investment in Bank of America to help boost the bank’s regulatory capital levels.
Mr Buffett invested $5bn in 2011 as a vote of confidence in BofA, which was then fending off fears about its exposure to the mortgage market. The bank’s share price has since more than doubled.
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However, the investment was made in a form of preferred stock that was later disqualified from contributing towards regulatory capital.
Tweaking the terms gives Mr Buffett a slightly riskier investment by fixing the dividend at 6 per cent and allowing BofA to cancel it if it runs into financial trouble. Another tweak benefiting Mr Buffett means BofA cannot redeem the stock for five years.
The equity now counts as tier one capital, helping BofA’s leverage ratio and moving the company closer to being able to pay bigger dividends and share buybacks.
It is the latest evidence of banks scouring their balance sheets to find ways of improving their capital levels beyond retaining profits or raising new equity.
The amendments are subject to approval at BofA’s annual general meeting on May 7 and Berkshire Hathaway has committed to vote in favour, the bank said. Berkshire Hathaway was not immediately available for comment.
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“If our stockholders approve the amendment and it becomes effective, our tier one capital will increase by approximately $2.9bn, which will benefit our tier one capital and leverage ratios,” the bank said in the filing.
Separately, BofA became the latest bank to confirm it was co-operating with a global probe into foreign exchange markets. More than a dozen regulators across Europe, the US and Asia are investigating more than 15 banks over possible manipulation of the $5.3tn a day foreign exchange markets.
BofA also announced an investigation by the US attorney’s office for the Eastern District of New York into the bank’s compliance with a Federal Housing Administration programme.
The bank has one of the biggest outstanding exposures to litigation and regulatory investigations. BofA increased its range of possible losses – or losses from legal issues that have not yet been reserved for – from $5.1bn to $6.1bn.
In its annual regulatory filing, Morgan Stanley disclosed it had reached a $275m settlement with the Securities and Exchange Commission to resolve allegations it committed fraud when underwriting mortgage-backed securities in 2007.
The Wall Street bank also revealed its total litigation expenses were $2bn last year, up significantly from $513m in 2012 but still much lower than peers such as JPMorgan Chase and BofA.
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