Saturday, December 12, 2009

Warren Buffett Maintains His Midas Touch

The WSJ reflects back on Berkshire Hathaway's decisions during the crisis, concluding that he made a series of skillful decisions.

Here's a link to the article that prompted this video and a few highlights. It's really a great timeline of the crisis and we recommend you go to the and read the whole thing [emphasis added]:

Warren Buffett believes his best deals during the economy's biggest belly flop since the Crash of 1929 may well turn out to be the ones he didn't do.

Mr. Buffett slammed the door on one opportunity after another during the most harrowing stretch of his storied career. That impulse, he says, left him with the financial firepower he needed last month to strike the biggest deal he has ever done -- Berkshire Hathaway Inc.'s $26.3 billion purchase of railroad Burlington Northern Santa Fe Corp.

"I bought my first stock in 1942, and this roller coaster surpassed anything that I've seen," says the 79-year-old investor. "We didn't do all the smartest things. We didn't do anything really dumb."


On March 28, 2008, Mr. Buffett, Berkshire's chairman, took a call from Richard Fuld, then head of Lehman Brothers Holdings Inc. Mr. Fuld wanted to know whether Mr. Buffett would inject about $4 billion into the investment bank to stanch losses.

That night, in his offices in Omaha, Neb., Mr. Buffett pored over Lehman's annual financial report. On the cover, he jotted down the numbers of pages where he found troubling information. When he was done, the cover was dotted with numbers. He didn't bite. Six months later, Lehman filed for bankruptcy protection.

"Everybody was looking for money in those days," Mr. Buffett recalls.

He didn't say no to everyone. He invested $5 billion in Goldman Sachs Group Inc. and $3 billion in General Electric Co. But for Berkshire shareholders, the bigger story may be the deals that he passed up.

"I don't think Buffett gets enough credit for all the pitches he doesn't swing at," says Paul Howard, an analyst at Janney Montgomery Scott. "And he gets a lot of pitches."


The requests for bailout financing began March 15, 2008, a Saturday. Mr. Buffett received a call at Berkshire's headquarters from New York private-equity investor J. Christopher Flowers. Mr. Flowers and a team of bankers were trying to arrange a last-minute buyout of Bear Stearns Cos., the struggling investment bank.

After listening to a pitch for about 10 minutes, Mr. Buffett said he wasn't interested. The next day, J.P. Morgan Chase & Co. struck its own deal to take over Bear.

Two weeks later, Mr. Buffett rebuffed the request from Lehman's Mr. Fuld. Mr. Fuld didn't respond to requests for comment.

As the housing market cratered, companies laden with securities backed by home mortgages were teetering. Later that spring, Morgan Stanley bankers representing Freddie Mac, the mortgage giant, reached out to Mr. Buffett for an investment. He thought Freddie Mac's troubles were too severe.


Mr. Buffett remembers September 2008, when the financial crisis came to a head, as one of the most hectic months of his career. It started with a request from Robert Steel, then the chief executive of Wachovia, for an investment of as much as $10 billion. Mr. Buffett, who thought Wachovia had recklessly dived into subprime mortgages during the housing boom, turned him down.

Wachovia eventually was purchased in a fire sale by Wells Fargo & Co., in which Berkshire is a stockholder. A spokesman for Wachovia declined to comment.

On Oct. 6, 2008, Warren Buffett sent a letter to then Treasury Secretary Henry Paulson outlining a plan to pool public and private assets to purchase toxic assets from troubled banks.

On March 27, 2008, working late in his Omaha office to review Lehman Brothers' 10K for a potential investment, Mr. Buffett jotted down on the 10K cover a list of pages where he found troubling financial information. Then, on Sept. 12, a Friday, Robert Willumstad, then the chief executive officer of troubled insurer American International Group Inc., called to ask Mr. Buffett for an investment of about $5 billion.

Mr. Buffett says he was aware AIG needed to raise capital quickly. "Don't waste your time on me," he recalls telling the AIG chief.


Mr. Buffett did, however, agree to consider making an offer for some of AIG's property-and-casualty businesses. Later that evening, Mr. Willumstad called back. "How about the whole thing?" he recalls asking Mr. Buffett, referring to all of AIG's property-and-casualty businesses. He said the price was $25 billion.

Mr. Buffett said he would look over information about the deal. He swiftly concluded it was too big. Berkshire would have to borrow a lot of money, potentially threatening its coveted AAA credit rating.


That same weekend, another AIG deal was in the works. Berkshire executive Ajit Jain, who runs its massive reinsurance unit, held discussions with an investment group led by Mr. Flowers and Kohlberg Kravis Roberts & Co., the New York private-equity giant. They were trying to line up a deal to provide reinsurance for some AIG operations, which would have eased some of the company's capital constraints.

If the commercial-paper market had frozen completely, more major financial institutions and possibly even household names such as GE would have failed, Mr. Buffett says, "because their checks would have failed to clear." That would have triggered panic in the nation's money-market funds, which held about $3.5 trillion in assets, because some of them held commercial paper. The resulting chaos, Mr. Buffett concluded, could have crashed global financial markets, threatening Berkshire.

"I felt that this is something like I've never seen before, and the American public and Congress don't fully understand the gravity" of the problems, he recalls. "I thought, we are really looking into the abyss."

At a birthday party for a wealthy friend in Omaha, several guests asked Mr. Buffett if their money-market funds were safe. He found the questions worrisome: They suggested widespread fears about the safety of funds long perceived to be invulnerable to losses.


In late September, Mr. Buffett decided to strike.

Goldman Sachs, like Morgan Stanley, was in need of cash. The bank already had made several pitches to him. None had enticed him. But he remained open to offers, partly because he was familiar with Goldman's operations, having worked with the bank for many years on various deals.

On Sept. 23, Goldman banker Byron Trott, who had long worked closely with Mr. Buffett, called to ask what it would take to do a deal.

Mr. Buffett laid out his terms. Hours later a deal was struck. Berkshire purchased $5 billion of Goldman preferred shares with a 10% annual dividend, as well as warrants to buy $5 billion worth of Goldman shares for $115 apiece. The shares now trade at about $166.


Mr. Buffett has some regrets about his decisions during the financial crisis. He says if he'd waited to deploy his cash until March 2009, when the market hit bottom, he could have made a killing.

"I made plenty of mistakes," he says. "I didn't maximize the opportunities offered by the chaos. But in the end, it worked out OK."