Buffett Exceeds `Pretty Good Returns' as Bank Winnings Stack Up

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(Bloomberg) -- Warren Buffett had a simple message for investors as the U.S. financial services industry struggled under the weight of post-crisis regulations, legal settlements and deleveraging: Banks can still be profitable.

“You will earn less on capital than was the case a while back,” Buffett said in a July 2011 interview on Bloomberg Television. “But you can still earn pretty good returns.”

That is, of course, unless you’ve got Buffett’s golden touch. Less than two months after that comment, he agreed to inject $5 billion into Charlotte, North Carolina-based Bank of America Corp., shoring up confidence in the lender at a critical juncture. The deal -- which he said he dreamed up in the bathtub -- has delivered huge gains for his conglomerate, Berkshire Hathaway Inc.

On Friday, his firm said it would exercise warrants that it received six years ago to buy 700 million shares of Bank of America at a steep discount. In effect, he’ll turn his $5 billion preferred stake into about $17 billion worth of common stock in the second-largest U.S. lender.

Buffett’s broader point about banks has also borne out. While the billionaire was a frequent critic of the behavior that led to the housing crisis, he continued to bet on many of the nation’s largest lenders. Now he’s sitting on more than $40 billion in unrealized gains on the shares.

Berkshire’s returns have also benefited from additional distributions. Goldman Sachs Group Inc., for instance, paid Buffett’s firm about $1.7 billion in dividends and a redemption premium on an investment the billionaire made during the depths of the financial crisis. Berkshire already has made more than $1.5 billion on dividends from the Bank of America investment.

With banks winning Federal Reserve approval to increase distributions to shareholders, Berkshire should continue to see cash roll in. Annual dividends from five of its big holdings will soon be more than $1.4 billion.

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