Disappointing to see Warren Buffett publicly support this debacle, IMO.
bloomberg.com
Buffett Buys Goldman Stake in `Economic Pearl Harbor'
Sept. 24 (Bloomberg) -- Billionaire Warren Buffett, calling turmoil in the markets an ``economic Pearl Harbor,'' said his $5 billion investment in Goldman Sachs Group Inc. is an endorsement of the Treasury's $700 billion bank rescue plan.
``I am betting on the Congress doing the right thing for the American public and passing this bill,'' Buffett said on cable channel CNBC today. ``I certainly have a vote of confidence in Goldman and vote of confidence in Congress.''
Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben S. Bernanke are pushing Congress to quickly approve the proposal to remove illiquid assets from the banking system. Buffett is buying a stake in New York-based Goldman after three of the investment bank's biggest competitors collapsed or were forced into emergency sales.
``I think the Treasury will pay back the $700 billion and make a considerable amount of money,'' Buffett said, adding that if he had $700 billion on the government's terms to buy distressed assets, he would. ``Unfortunately, I'm tapped out.''
Goldman rose $4.95, or 4 percent, to $130 at 4 p.m. in New York Stock Exchange composite trading after Buffett's Berkshire Hathaway Inc. agreed yesterday to the investment. It will pay 10 percent interest and give Buffett the right to buy $5 billion in common stock in the next five years at $115 a share.
Scold
Buffett, 78, has frequently scolded Wall Street for shoddy accounting and risky investments. He's investing in the most profitable U.S. investment bank a week after Lehman Brothers Holdings Inc. went bankrupt and Merrill Lynch & Co. sold itself to Bank of America Corp. Bears Stearns Cos. in March was absorbed by JPMorgan Chase & Co.
``It's not like Pearl Harbor where you could look at what happened with your own eyes and decide you had to do something that day,'' Buffett said on the cable channel. ``This is sort of an economic Pearl Harbor we're going through.''
Michael Yoshikami, president and chief investment strategist for YCMNet Advisors in Walnut Creek, California, which manages $1 billion, including Berkshire shares, said Buffett's investment will pay off.
``It's a deal that will be quite lucrative for Berkshire Hathaway shareholders,'' Yoshikami said. For financial firms, ``this suggests the world is not coming to an end.''
Goldman's stock skidded about 40 percent this year. Berkshire rose $4,500, or 3.5 percent, to $133,300 at 4 p.m. in New York Stock Exchange composite trading, trimming its decline to 5.9 percent this year.
Buffett's Focus
Buffett chooses where to put Berkshire's money by focusing on companies with what he considers strong managers and a market- leading franchise. He invested more Berkshire cash in the past nine months, after complaining last year that he couldn't find anything big enough to buy. He has agreed to spend at least $25 billion this year to acquire companies, finance buyouts and purchase securities for Omaha, Nebraska-based Berkshire.
``It's nice to have a lot of money, but you know, you don't want to keep it around forever,'' Buffett said. ``I prefer buying things. Otherwise, it's a little like saving sex for your old age.''
``When the price gets right, you have to get in,'' said Gerald Martin, a finance professor at American University in Washington who has studied Buffett's investment history. ``The pendulum may finally have swung too far the other way.''
Berkshire has announced nine acquisitions since October, compared with six in the prior 12 months, when his largest deal was $350 million to buy VF Corp., an underwear and pajama maker.
2008 Deals
This year, the deals include the $4.5 billion purchase of Marmon Holdings Inc., the Pritzker family's collection of 125 companies, in March, and a $4.7 billion bid this month for Constellation Energy Group Inc., the largest U.S. power seller.
Buffett provided $6.5 billion in April to help Mars Inc. buy Wm. Wrigley Jr. Co., giving him a stake in the chewing gum maker. He pledged $3 billion in July to Dow Chemical Co.'s $15.4 billion takeover of Rohm & Haas Co. By midyear, his cash holdings had declined to $31.2 billion from $44.3 billion at the end of 2007.
Berkshire has bought $6.5 billion in auction-rate securities since December after the market froze. Yields for the debt rose as investors found themselves unable to redeem the securities. Dealers that ran the periodic bidding to determine interest costs stopped supporting the auctions.
The Goldman investment puts Berkshire back in an industry Buffett has mostly shunned since 1997, when Salomon Brothers was sold to Travelers Group. Buffett helped the firm fend off an unwanted takeover in 1987, only to see the New York securities firm trail every U.S. stock index for the next decade.
`Better' Deal
``Buffett has struck an extremely attractive deal,'' Guy Moszkowski, an analyst at Merrill Lynch & Co., wrote in a note to investors today. ``He is, we believe, getting a better deal than he did in 1987 when he bought a Salomon Bros. convertible with a 9 percent yield, for a company that is considerably more attractive than the '87 Salomon.''
Buffett has credited Byron Trott, a Goldman banker, with helping Berkshire complete at least four acquisitions, including the Marmon deal. Trott ``understands Berkshire far better than any investment banker with whom we have talked and - it hurts me to say this - earns his fee,'' Buffett wrote to shareholders in Berkshire's 2003 annual report.
Buffett has sometimes criticized Wall Street, saying at a news conference in May that the industry is ``going to go where the money is and not worry about consequences.''
Financial Stakes
The Salomon experience hasn't damped his enthusiasm for financial companies. Wells Fargo & Co., American Express and U.S. Bancorp are among Berkshire's 10 biggest holdings. His company is the No. 1 stakeholder in all three.
Buffett's investment decisions are often imitated by mutual funds and individual investors in an attempt to duplicate his success. A 2007 study by Martin, the American University professor, found that using this strategy for 31 years would have delivered annualized returns of about 25 percent, double the return of the S&P 500. |
