From The Wall Street Journal:
After the Tumult,
Is It Buffett Time?
Berkshire Chief Finds
His Popularity Grows
As More Loans Falter
By KAREN RICHARDSON
August 21, 2007; Page C1
The bond market has seized up, stocks are in turmoil, private-equity funds are sidelined and hedge-fund managers and lenders are hosting fire sales.
These are happy days for Warren Buffett.
“I can spend money faster than Imelda Marcos when things are right,” he says, referring to the former Philippines first lady and renowned shopper.
For the past three years, Mr. Buffett’s traditional bargain-hunting investment strategy has been partly stymied as debt-fueled private-equity funds and hedge funds drove asset prices out of his value-investing orbit.
The result: Today he’s sitting on a war chest of nearly $50 billion in cash.
Now, with the shakeout in the subprime-mortgage market forcing the end of easy money and the distressed sale of assets — such as Thornburg Mortgage Inc.’s sale yesterday of $20.5 billion of its top-rated mortgage-backed securities — many see Mr. Buffett, the 76-year-old chairman of the giant Berkshire Hathaway Inc. holding company, as one of the last buyers standing.
So what is Berkshire buying or looking to buy? Mr. Buffett hews to Berkshire’s policy of not discussing potential transactions. But it is safe to guess that sellers of all shapes and sizes — from beleaguered lenders hurt by the mortgage-backed and commercial-paper markets, to sponsors of private-equity deals that run the risk of falling through — are reaching out to him.
Some investors speculate Berkshire could be a buyer for parts of mortgage lender Countrywide Financial Corp., whose stock price has been hit hard by subprime worries. Countrywide’s assets, including its debt-servicing business and its portfolio of high-quality mortgages and mortgage-backed securities, could be attractive to Berkshire, these investors say.
It wouldn’t be the first time a financial firm asked Mr. Buffett for help. In 1991, he took over as chief executive of Salomon Brothers, then in the midst of a criminal probe for a scandal involving the Treasury market. Many credit Mr. Buffett today for shepherding Salomon back into the good graces of securities regulators and investors.
Seven years later, he came close to bailing out hedge-fund Long-Term Capital Management, which was run by some of his old Salomon crew, but later changed his mind, in part because he wanted the firm’s assets — its stocks, bonds and other securities — not its management company and its complex partnership structure.
Unlike LTCM, Countrywide runs some straightforward lending businesses, a strong brand name and high-quality mortgage assets that could complement Berkshire’s other securities investments. For example, Berkshire is a longtime shareholder in Wells Fargo & Co. and M&T Bank, also reputed to be conservative lenders with strong brand recognition and long operational histories.
In fact, Mr. Buffett has already been dipping his toe a little deeper into the market for mortgage-backed securities. In the second quarter, Berkshire reported that its insurance division doubled its investment in mortgage-backed securities rated double-A or higher, to $3.7 billion, from the first quarter.
As with other investments, Mr. Buffett declined to elaborate.
Investors are betting that he’s likely to swoop in and make some good calls. While the Dow Jones Industrials Average sank last week, Berkshire’s normally steady shares rallied. The Class A shares gained $2,200, or 1.9%, yesterday in 4 p.m. composite trading on the New York Stock Exchange to $120,700, up 8.2% since Aug. 10 and 9.7% higher in the year to date.
“This is Berkshire Hathaway’s market,” says Thomas Russo, partner at investment fund Gardner Russo & Gardner, where he manages about $3 billion. Mr. Gardner, also a longtime investor in Berkshire, says Mr. Buffett should be able to cherry-pick from a variety of cheap assets.
Imperiled private-equity deals, which rely on the debt markets for financing, could also be attractive to Berkshire. Texas utility TXU Corp., which is trying to persuade its shareholders to agree to its sale to Kohlberg Kravis Roberts & Co. and TPG, would complement Berkshire’s stable of companies, which includes the utility conglomerate MidAmerican Energy Holdings.
The trick would be getting a good price if the deal falls through, which might be difficult given TXU’s improved operating performance recently. Also, Berkshire doesn’t participate in auctions, so any deals would have to be privately negotiated with Mr. Buffett.
A spokeswoman for TXU declined to comment. A Countrywide spokesman wrote in an email that company policy prevents it from commenting on rumors of mergers and acquisitions.
Berkshire could also be taking advantage of cheaper stock prices in companies he already owns. For example, Berkshire bought shares of USG Corp., the wallboard maker, for as high as $46 in the past year and built up a little over a 17% stake. Yesterday, the shares closed at $37.96.
Aside from the nearly $47 billion in cash and cash equivalents on its balance sheet as of June 30, Berkshire also holds about $74 billion in stocks and about $27 billion in bonds, some of which Mr. Buffett has said he wouldn’t hesitate to redeploy to other investments if they looked like they would yield better returns.
Berkshire, which so far this year has generated about 32% of its revenue from insurance units including Geico and General Re, can also borrow cheaply since it carries a sterling triple-A credit rating.
Mr. Buffett doesn’t shy away from good, quick trading opportunities . After the Enron Corp. and WorldCom debacles in 2002, Berkshire bought the high-yield bonds of some 25 energy companies and some telecommunications firms, which had all been priced lower because of various scandals. By the end of that year, Berkshire had sextupled its “junk” bond investment to $8.3 billion.
At the end of 2003, Berkshire reported realized gains from the investments of about $1.1 billion, or 13.3%. Today, Berkshire still owns $2.9 billion in junk bonds, which Mr. Buffett says he’d sell if somebody brings him a deal that he can warm to.
There doesn’t appear to be a shortage of people who are courting him these days. “I’m definitely more popular than I was a few months ago,” he says — and then quips: “But I started from a low base.”