How Buffett will win in bailout
Posted
Oct 02 2008, 01:52 PM
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At a time when the country is obsessing over the need for a $700 billion fix for the economy, billionaire investor Warren Buffett is positioning himself to be one of its biggest beneficiaries.
Not that Buffett needs bailing out. Instead, he's doing what he does best: Buying assets on the cheap when he perceives he has an advantage. As BusinessWeek points out, Buffett is doing what investors like John D. Rockefeller and J.P. Morgan have done in crises past, propping up faltering institutions.
But as he does so, Buffett, via his conglomerate Berkshire Hathaway, is playing salesman to average investors, even as he gets deals they could only dream of. Look at the GE deal: Buffett's buying $3 billion in perpetual preferred stock from General Electric. Buffett's investment has a 10% dividend -- $300 million a year -- and GE can’t undo the deal for three years. Buffett also gets the right to buy $3 billion in GE common shares at a price of $22.25. So he can sit back and watch the GE stock chart, and if it hits $45, for instance, he can double that $3 billion without having risked an extra dime.
GE will sell up to $12 billion in common stock to the public, which won't get anything like Buffett's sweetheart deal. Those investors will likely buy in because the Sage of Omaha did. But all they get plain old shares with much smaller dividends that can disappear well before Buffett’s, in the event that GE runs into yet more trouble. And if they think GE’s stock price is going to $45, they have to take the risk now, not simply cash in down the road.
It's almost identical to the terms Buffett received when making an investment in Goldman Sachs. As Charley Blaine pointed out in this blog last week, Buffett invested $5 billion in Goldman and received preferred stock that pays a 10% annual dividend. In addition, Berkshire received warrants to buy $5 billion in Goldman Sachs common shares at a strike price of $115 that can exercised at any time over the next five years. Like GE, Goldman used Buffett as the pitchman to sell sold $5 billion in common stock.
Even with his advantageous position in both companies, Buffett's investments aren't without risk. Other investors have bet that institutions like Washington Mutual would recover, and lost their shirts. No one's saying that the share prices of the companies won't go down; Goldman shares sank more than 5% this morning, for instance, while GE was down 9%, to slightly below Buffett's strike price. That GE and Goldman would do these deals at all with Buffett shows just how desperate they are.
Yet Buffett has another advantage over the average investor. From his perch as the country's most successful, and famous, investor, he gets to scare the wits out of lawmakers just as they consider a bill that in all likelihood will prop up the both of his new investments.
"This really is an economic Pearl Harbor," Buffett said on "The Charlie Rose Show" Wednesday. "That sounds melodramatic, but I've never used that phrase before. And this really is one."
The timing of that interview is no mistake. Buffett wants the House Republicans who rejected the bill on Monday to know where he stands on the crisis, and the bailout, saying he expected lawmakers to do the right thing. The bailout could be a boon for Goldman and GE, both of which have seen their shares plummet more than 40% over the past year.
"In my adult lifetime, I don't think I've ever seen people as fearful economically as they are now," Buffett told Rose.
Fear for some. Opportunity for Buffett. ``You want to be greedy when others are fearful and you want to be fearful when others are greedy.''
-- Christopher Oster
