We are all following the financial crisis spurred by Wall Street for two years now. And I, like everybody else, have followed with intense interest the Madoff scandal, the subprime mess, the failure of Lehman, Bear Stearns, Fannie Mae, Freddie Mac, AIG, GM and Citibank, and the government bailout called TARP.
The title of this article, written by Scott Patterson is 'In the Year of Investing Dangerously, Buffet Looked 'Into the Abyss.' occupies three columns on page one and continues to page A16 in the Weekend Edition of December 12-13, 2009.The first time I read it, I underlined half of the article, starred many parts and immediately placed it in a file that reads Blogs.(I have , perhaps 20-30 articles in this file, on all subjects that interest me from ski-bumming, to Stamford's ex-Mayor Molloy from our downtown sculptures to aviation--but none underlined as much as this one.)
What fascinates me is that here is the financial whiz and oracle of Omaha, Warren Buffet--admittedly one of the richest guys in the world, who is approached by many of the above mentioned firms with requests to inject from $4 billion in the case of Richard Fuld of Lehman Brothers to $25 Billion for the entire Propery and Casualty business of AIG. Truly astronomical figures, but hardly so for one whose estimated wealth is close to $50 billion.
What is impressive is that Buffet is your down to earth, 'everyman' character; here's an example: he's flying up to Edmunton, Canada to see a concert with Seal and Paul Anka as the headliners and he gets a phone call in his hotel room from Barclay's PLC President Robert Diamond, Jr. and an advisor who were urgently trying to broker a last-minute deal to save Lehman which was teetering on the verge of bankruptcy. Patterson describes the circumstances: "U.K regulators wouldn't approve such a large deal without shareholder approval, they told Mr. Buffet, which could take several days or even weeks. Regulators were worried that Lehman's trading partners would panic, refusing to do any more business with the bank . Would Mr. Buffett, for a fee, guarantee Lehman's trading positions until a shareholder vote." (Buffet asked them to fax him the terms of the deal as he had to leave for the concert. When he returned after the event, there was no fax; so there was no deal.)
Buffet is portrayed as a man on the move who eschews his cell phone but clearly accessable to the head honchos of the big Wall Street firms.
One offer after another, he turns down: First Lehman, then Freddie Mac, then Wachovia (later gobbled up in a fire sale by Wells Fargo), then AIG, then Morgan Stanley. Along the way, Patterson reports that Buffet "....felt that this [finanacial credit crisis of illiquidity] was something like I've never seen before, and the American public and Congress don't fully understand the gravity of the problems. I thought we are looking into the abyss." (italics mine)
Buffet is being pitched counteroffers by each firm after he initially turns their first offer down. Goldman is in need of cash and Buffet turns down their pitches. "On September 23, 2008, Goldman banker Byron Trott, who had long worked 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." ( He also invested $3 billion in GE preferred shares on similar terms)
What a great deal for Buffett and he 'saves' Goldman.
Meanwhile hats off to Scott Patterson and his excellent job of reporting.
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