Warren Buffett’s bet on Bank of America is about to pay off with a roughly $12bn windfall.

The billionaire plans to exercise warrants obtained six years ago in a vote of confidence in Bank of America while its shares were tumbling amid multi-billion-dollar probes tied to the housing meltdown. The cash infusion helped the bank put to rest doubts about whether it had enough capital, and its shares have more than tripled since then.

In the 2011 deal, Buffett’s Berkshire Hathaway invested $5bn in Bank of America in exchange for preferred stock and the right to buy 700-million common shares, a stake now worth $17bn. Berkshire said in a statement on Friday that it would convert its preferred shares into common stock once the North Carolina-based bank increases its dividend, now planned for the beginning of the third quarter.

Buffett laid out his thinking for the conversion, which will make him the company’s biggest shareholder, in a February letter to investors, saying that the decision would come down to simple math: the preferred investment pays $300m a year in dividends, so it makes sense to convert that into common stock if those shares began earning more.

After receiving Federal Reserve approval of its capital plan, Bank of America said on June 28 that it planned to boost its dividend 60% to 12c a quarter. By converting the preferred stake into common shares, Berkshire’s pay-out will rise to $336m a year. The $12bn in gains come on top of more than $1.5bn in dividends from the preferred stake over the past six years.

Buffett shored up confidence in Bank of America and its CEO, Brian Moynihan, at a critical juncture. With backing from Berkshire’s billionaire CEO, Bank of America soon rebounded. This generated a massive paper profit on the warrants, which allow Buffett to buy the stock at a discounted rate of $7.14 a share, compared with the closing price of $24.32 on Thursday.

The episode highlighted Buffett’s role as a financial firefighter and mirrored confidence-boosting investments he made in Goldman Sachs and General Electric during the 2008 crisis. In those cases, he was also able to extract generous terms in exchange for vouching for those companies’ long-term prospects. (Bloomberg)

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