The investment by Berkshire Hathaway is reminiscent of a $5 billion investment Buffett made in Goldman Sachs in September 2008 in the depths of the financial crisis. That injection of capital helped restore confidence in Goldman and helped the Wall Street firm attract other investments.
As with the Goldman infusion, Buffett negotiated extremely favorable terms from Bank of America. He is set to receive BofA preferred shares that will pay Berkshire a 6 percent dividend each year. If the bank wants to redeem the shares it has to pay Buffett a 5 percent premium.
In a statement, Buffett called Bank of America a "strong, well-led company" and said he phoned Chief Executive Brian Moynihan "to tell him I wanted to invest in it."
The move may help boost confidence in the Bank of America — the nation's largest bank — but it underscores how dire the Charlotte, N.C., company's situation has become in recent days as analysts have questioned whether the bank has enough capital and investors have worried about continued losses from the bank's mortgage holdings.
Many of the questions about the bank have arisen from its 2008 purchase of troubled mortgage lender Countrywide Financial Corp.
This week, the bank's stock fell to its lowest price since March 2009. The final drop came after a blogger wrote that the company might need as much as $200 billion in new capital. The bank took the unusual step of publicly rebutting the blogger.
On Wednesday a few analysts came to the bank's defense and the stock rallied, ending the day up 69 cents, or 11 percent, at $6.99. After BofA disclosed Buffett's investment early Thursday, the shares shot up as high as $8.80. They were recently trading at $8.19, up $1.20, or 17 percent from Wednesday's close.