Bank of America has reached a $5 billion agreement to sell 50,000 shares of Cumulative Perpetual Preferred Stock to Berkshire Hathaway in a private offering, giving the bank’s balance sheet a welcome boost of confidence.

The agreement gives the shares a liquidation value of $100,000 per share to Berkshire Hathaway, of which celebrated investor Warren Buffett is the chairman and chief executive. The preferred stock has a dividend of 6 per cent per annum, payable in equal quarterly installments, and is redeemable by Bank of America at any time at a 5 per cent premium.

Furthermore, the agreement gives Berkshire Hathaway warrants to purchase 700,000,000 shares of BofA common stock at an exercise price of $7.142857 per share. These can be exercised at any time during the 10-year period following the close of the transaction.

The deal echoes that between Berkshire Hathaway and Goldman Sachs, which saw the veteran investor’s company buy $5 billion worth of preferred stock in the investment banking giant, with an option to buy another $5 billion over the next five years. The deal was widely viewed as expensive for Goldmans, but given Buffet’s legendary shrewdness it was seen as a big vote of confidence and saw the institution’s share price bounce back at a difficult time in the industry.

Bank of America, meanwhile, has been hit this year by legacy issues surrounding Countrywide, as well as other mortgage-related costs. The group recorded a net loss of $8.8 billion for the quarter ended 30 June 2011.

It has seen its share price fall too, having opened the year at $13.85 and closed on the 24 August, before the news, at $6.99.

After the market gapped up yesterday morning on the news, the bank’s share price rose nearly 26 per cent at its high point ($8.80) relative to its closing price the day before. It ended the day at $7.65.

"Bank of America is a strong, well-led company, and I called Brian to tell him I wanted to invest in it," said Buffett. "I am impressed with the profit-generating abilities of this franchise, and that they are acting aggressively to put their challenges behind them.”