Thursday August 25. Follow the Leader? He’s smart. It’s too late on this deal, but maybe next time.

Thursday August 25. Follow the Leader? He’s smart. It’s too late on this deal, but maybe next time. There is a story of a lady who was a secretary for a very rich investor. Her job included placing his investment orders every day. She had seen him grow rich. So every time he invested, she did too. Finally one day, she was rich too. And, as the story goes, he did not manage the money well, but she did, and she had more than him.

New York/Charlotte, NC (Reuters) - Warren Buffett will invest $5 billion in Bank of America Corp, stepping in to shore up the largest U.S. bank in the same way he helped prop up Goldman Sachs and General Electric during the financial crisis.

Bank of America shares rose nearly 26 percent at one point, but gave up most of those gains by early afternoon, closing 9.4 percent higher at $7.65. Trading was so heavy that, at one point midday Bank of America shares made up nearly 13 percent of the composite volume for the entire stock market.

Buffett and Bank of America said he made an unsolicited call to the bank on Wednesday morning offering to make an investment. Buffett told CNBC the idea came to him while taking a bath and the deal was done in 24 hours.

The deal entails Buffett's insurance company, Berkshire Hathaway Inc buying $5 billion of preferred shares and receiving warrants to buy 700 million shares. The warrants helped lift Berkshire Hathaway's paper profits on the deal to more than $3 billion, although the transaction has not yet closed.

The deal is expected to close on September 1 and includes provisions barring Buffett from raising his total BofA stake past 14.9 percent. Fully exercised, at the most recent share count the warrants represent a 6.5 percent stake.

Even though the bank has said it did not need to raise capital, investors widely believed it needed more money and to show it could raise funds easily. Employees were also relieved by the news. On at least one BofA trading floor, traders cheered when the news crossed the wires.

Bank of America has been plagued by fears that bad mortgage loans and legal liabilities from loans packaged into bonds by its Countrywide unit could drag it into tens of billions of dollars in fresh losses that would stretch its capital.

The deal proved again that Berkshire Hathaway has become something of a lender of last resort to the financial system, as when it invested in Goldman Sachs Group Inc and General Electric Co. Buffett's role in aiding the economy and the financial system has become symbolically important, given the lack of policy options left for the U.S. government and the Federal Reserve to stimulate demand.

"This proves to the market that, if the bank needs additional capital, which we don't believe they do, but if they needed to calm the market by raising capital, they could do it within 30 minutes with a quick call to Uncle Warren," said Sean Egan, managing principal of Egan-Jones Ratings.

The deal comes at a cost for Bank of America. The $300 million of annual dividend payments it makes will cut into earnings per share and the deal will influence its outstanding share count.

Putting together these factors, analyst John MacDonald of Sanford C. Bernstein estimated the company's earnings per share will fall by roughly 5 percent for 2012 and 2013.

INSTANT RETURN: For Omaha-based Berkshire Hathaway, it is a better deal.

Berkshire gets warrants to buy 700 million shares of common stock at just over $7.14 per share, with an unusually long 10-year exercise period. One Berkshire holder said the warrants were by far the best part of the deal.

"He could well make a 100 percent return on his investment in a few years," said James Armstrong, president of Henry H. Armstrong Associates. "It's amazing how much a little hug from Buffett is worth these days."