• Markets
• Economy
• Federal Reserve
• Housing
• Energy
• Digital Media

Buffett to Buy Bear? Bull$%*# !

Yesterday, the NYT floated a rumor that Warren Buffett was considering taking a stake in Bear Stearns. Have a read of the actual flailing report itself:

Bear Stearns, its shares and reputation beaten down after the collapse of two hedge funds, is in serious talks with several outside investors, including Warren E. Buffett, about selling as much as 20 percent of the firm, people briefed on the discussions told The New York Times Wednesday.

Other investors who have expressed an interest in buying a minority stake include the Bank of America, Wachovia and two Chinese institutions — the Citic Group and China Construction Bank, these people said.

There are many rumors I give a smidgen of credit for being very loosely based on fact. Where there's smoke, there's fire, etc.

This is not one of them.

First off, Bear Stearns (BSC) has become a giant rumor factory itself. First, a Chinese bank was taking a big stake. Then, a major money center bank was an acquirer. And now, Warren Buffett.

That's right, the world's best known value investor wants to own a company that could very likely have zero book value. A buyer of businesses with reliable earnings streams now wants to get into trading?  Buffett is the guy who had an unpleasant time running the ego factory at Salomon Brothers, and now we are told is looking at Bear? The man who is the chief spokesperson for the "Derivatives are financial WMDs" -- he's a tire kicker for the poster boy for MBS derivatives driven hedge fund disasters? 

PUH-leeze.

As we noted yesterday, much of the broker's reported earnings gains are accounting sleight of hand. Bear Stearns' earnings benefited from a drop in the value of their own debt -- about $225 million. Some people have estimated that the gains from such write downs were 140% of the quarterly earnings.

So while I doubt Buffett is seriously considering buying a stake in Bear, it does make sense that BSC needs a deep pocketed partner. Let's go to Punk Ziegel analyst Richard Bove, the man who had a very timely sell call on the brokers months ago:

"According to Bove, Bear needs a third party to make an investment for a few reasons. First, the company’s cost of funding has increased, making it less competitive in a number of businesses where it is a factor, with prime brokerage at the top of the list.

“Therefore,” Bove said, “Bear needs a deep pocket partner to shore up its balance sheet.”

Bove also noted that the company’s main business, the origination, packaging, securitizing and structuring of mortgage products is under pressure and will remain under pressure for some time."

However, it does not take more than a nano second of contemplation to recognize this as little more than an end of quarter goosing from the usual suspects.

Indeed, it seems that every time a given sector or stock is in trouble, someone floats a rumor that Buffett is a buyer. I had the same reaction to this absurdity that I did back in February when we heard Warren was buying a major stake in a large public home builder (Surprise! turned out to be nonsense). A commenter yesterday pointed out this November 2006 story regarding the Bill & Melinda Gates Foundation, a charitable trust that for some reason was taking a stake in 7 homebuilders. (Also, if you forward this email to 10 people, Bill Gates will give you $1000!)

It looks like someone is simply wildly throwing shit against the side of the barn, hoping something will  stick. That may work for cooking pasta, but its not a way to base your trading and investing.

The timing of these rumors -- option expiry, end of quarter mark up, or pre-earnings -- always seems to be suspect.

Then there's the companies themselves: Funny, these rumors always seem to fly around troubled firms or industries that just happen to have very large short interests.

Gee, do you think anyone is trying to squeeze the shorts?

UPDATE: September 27, 2007 3:30pm

Why am I not surprised by this announcement?

"At Bear Stearns, timing is everything. The struggling brokerage house raised at least $1 billion this afternoon with a surprise sale of 10-year bonds. The sale, which was met by strong demand in the bond market, comes just a day after Bear shares surged nearly 8% on rumors that the Wall Street firm was near a deal to bring in a big outside investor. One report said Bear has been talking with billionaire value investor Warren Buffett.

On Thursday, Bear Stearns took advantage of that momentum and some strong demand in the corporate bond market to raise some money. Sources say the deal drew more than $3 billion in orders for $1 billion worth of bonds, though it may be upsized.

The bonds are expected to be priced at 190 basis points over comparable 10-year Treasury bonds. Investors say that is attractive for the senior bonds, relative to subordinated Bear Stearns bonds and comparable Lehman Brothers (LEH) debt, both of which traded recently at about 175 basis points over Treasuries."

Gee, I guess yesterday's rumors were just a coincidence . . .

>

Sources:
Buffett Said to Consider Bear Stake   
LANDON THOMAS Jr.    
NYT, September 26, 2007
http://www.nytimes.com/2007/09/27/business/27wall.html

Bear Soars On Buffett Rumors
Carl Gutierrez,
09.26.07, 4:15 PM
http://tinyurl.com/2msgfe

Bear Taps the Bond Market
Liz Rappaport
TheStreet.com, 9/27/2007 1:19 PM EDT
http://www.thestreet.com/s/bear-taps-the-bond-market/newsanalysis/wallstreet/10381736.html

Thursday, September 27, 2007 | 06:18 AM | Permalink | Comments (39) | TrackBack (1)
add to de.li.cious | digg this! | add to technorati | email this post

Comments

Barry, aren't you affraid of some of the big wall street boys coming after you? Boy, that was some shallllackking! Thanks for confirming this newbies suspections.

Posted by: justin | Sep 27, 2007 7:28:26 AM

Barry,
I'm surprised that no one has yet mentioned the superb timing of this press release/rumor. Just as the market had begun an afternoon swan dive and the S&P was about to go negative for the day, up pops this story - reversing the fall back from resistance at just the right instant. Looks fishy to me!

Posted by: rufus | Sep 27, 2007 7:38:51 AM

Lil ole me?

I cannot imagine any firm getting their panties in a bunch over a blogger -- especially over a post that is all opinion.

Boy, imagine what a lawsuit would do for traffic!

Posted by: Barry Ritholtz | Sep 27, 2007 7:52:23 AM

Moin,

nice rant!

Lets hope that some of them will have their own "Northern Rock Moment".... ;-)

Northern Rock shares plunged almost 10pc today as rumours swept the market that the ailing lender is set to be acquired for a knock-down price.

http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2007/09/19/bcnrock119.xml

Posted by: jmf | Sep 27, 2007 8:22:06 AM

It is impossible to reverse in a short life span a Bank demise in a declining economy, moreover when this Bank has no diversified streams of revenues (products and geographical)and is resources dependant (by the way one day few banks will have realise that a bank is only worth the amount of its deposits and free float).
The worst time to purchase Banks is still now as they are loaded with non performing loans direct exposure or indirect exposure, the Banks managing business is not a fund manager business.

Posted by: Philippe | Sep 27, 2007 8:23:52 AM

Great explanation by J Hussman about the past weeks Fed's so called "liquidity injection" and how the markets have treated normal.

"This week provides an instructive opportunity to observe this in real time. On Thursday, September 27th, an unusually large $24 billion amount of repurchase agreements will come due, leaving only about $7 billion of repos outstanding. It should come as no surprise, then, that the Federal Reserve will most likely enter into a seemingly enormous $24 billion or so in new repurchase agreements by Thursday afternoon. This will undoubtedly be reported with great fanfare, and will be interpreted as a “massive injection of reserves into the banking system” by the Federal Reserve, as if these funds are new liquidity. This interpretation will be utterly incorrect. It will be nothing but a rollover of existing repurchase agreements that the Fed routinely enters into in order to maintain a stable amount of reserves in the banking system."

Posted by: Strasser | Sep 27, 2007 8:26:40 AM

I don't have a citation but as Enron was in its death spiral.

The same Warren Buffett rumor was floated about Enron.

While I am sure that someone from Enron or Bear Stearns has called Warren, I am not sure that he returned their calls.

Posted by: sunsetbeachguy | Sep 27, 2007 8:31:37 AM

C'mon folks think about it. After all of Buffets' comments about derivatives, he is to buy a company in the epicenter of this mess ?????? I don't think so. Total pure BS. Thing is, it works. This is what now, the 4th Buffet rumour, and each one pumps the stock up. Lets see now if I wanted to unload some, what would I do...... Also a good good distraction to the bad SLM news. How timely. BR, excellent post.

Posted by: Stuart | Sep 27, 2007 8:41:57 AM

I had a good snicker when I saw this particular rumor hit the wires yesterday.

Then again, what do I know? I thought last week's Fed cut was priced in to the market when the news came down last week and prices still jumped and have kept jumping over hopes of a further cut.

Posted by: Florida | Sep 27, 2007 8:48:49 AM

Man, CNBC and Bloomberg are really running with this though....taken as gospel.

Did Peter Costa just say he thought it was a good match for Buffet based on how things worked out with Salomon Brothers? Go figure!

Posted by: Global Savings Slut | Sep 27, 2007 8:58:30 AM

Based on rumors, which seem to pop up whenever the shit is about to hit the fan in the markets i.e. MER being downgraded yesterday, he is buying 40 companies and is wildly enthusiastic on all of them.

Isn't Bear knee deep in the stuff he calls, "instruments of financial destruction"? Why pray tell would he go anywhere close to Bear or any other outfit that took part in wildcat finance?

Posted by: SPECTRE of Deflation | Sep 27, 2007 9:08:07 AM

To pump 3rd Q numbers ? I think that is it .
I would expect alot of selling Friday in all leading sectors - make the Q look sweet , even though it wasn't .

Posted by: Bill | Sep 27, 2007 9:13:30 AM

I'm surprised the NYT allowed itself to be used in this way. They should be in the business of NEWS, not rumors. Please reveal your source!

Posted by: SteveC. | Sep 27, 2007 9:20:21 AM

SteveC, good comment. Also applies to CNBS too. They've been professional pump monkeys over this Buffet story.

Posted by: Stuart | Sep 27, 2007 9:45:10 AM

its the end of the quarter, the fed just cut by 50, and the futures are making contract highs here with the indexes very close behind.
why not? amp it up!

Posted by: FatMary | Sep 27, 2007 9:49:06 AM

I'm surprised the NYT allowed itself to be used in this way. They should be in the business of NEWS, not rumors. Please reveal your source!

Posted by: SteveC. | Sep 27, 2007 9:20:21 AM

You are surprised? Really? This has been going on since Moby Dick was a minnow.

Posted by: SPECTRE of Deflation | Sep 27, 2007 9:51:05 AM

"It looks like someone is simply wildly throwing shit against the side of the barn, hoping something will stick."

uhhh, that would be manure.

Posted by: FatMary | Sep 27, 2007 9:52:25 AM

the frightening thing is that the Fed will never look into the books of the financial industry -- either investment, commercial or hedge -- because it fears what it would find, assuming it could understand what it finds in the first place. so it goes un deeper and deeper in its underwriting of derivatives and unchecked risk

Posted by: scorpio | Sep 27, 2007 9:53:36 AM

The buffet rumor is just so tired and I immediatley called BS when I heard it as well.

here's an example of that type rumor:

HOG (Harley Davidson) had in the space of two weeks, the following rumors of potential buyers:
Honda Motors
Ducati
BMW
Carl Icahn
And the final rumor as the stock price headed for a 52 week low was....you guessed it: Warren Buffet

Options expiry. and end of qtr sees the largest amounts of upgrades and rumors all the time. How these people are continually allowed to do this is a mystery to me. The SEC can't even get charges to stick on those people who traded the Wall Street Journal Options and they knew a Sr VP at Fox.

I think the bigger story is Goldman downgrading MER ....just shows you how much power is concentrated in one firm.

Ciao
MS

Posted by: michael schumacher | Sep 27, 2007 10:01:00 AM

Ya, know Maria is good friends with Warren. What was her take on the rumour?

Posted by: FatMary | Sep 27, 2007 10:01:01 AM

Scorpio-

The SEC is "looking into the books" of the brokers......to insure they are compliant with current accounting rules.....

I have about as much confidence that they will ever find anything truthful as the next person.....absolutley none.

But it makes a great headline...

"we're on it so you don't have to be"

More lip service than anything else..

Ciao
MS

Posted by: michael schumacher | Sep 27, 2007 10:05:55 AM

You just can't make this stuff up. He couldn't see shit as FED Chair, but now you can't shut the blowhard up. Ben must be loving the guy. NOT!

Greenspan sees threat of '70s-style inflation

http://www.mcclatchydc.com/227/story/19988.html

Posted by: SPECTRE of Deflation | Sep 27, 2007 10:13:41 AM

The majority always thinks a grave dancer (whoever it is) is pschyo to buy assets in distress. Well, that's what they do folks.

jeesh

Feel free to short away (levered up)!

Posted by: Fred | Sep 27, 2007 10:24:11 AM

IMPORTANT TIP:

"It looks like someone is simply wildly throwing shit against the side of the barn, hoping something will stick. That may work for cooking pasta"

Only fools test pasta like that! When boiling your spaghetti, etc., simply pull a strand from the water, use a fingernail to sever it in half, and if the center of the strand is still white on the inside (like a potato), then it's not done yet. This is the only fool proof method since pasta is "cooked" when the boiling water penetrates to the center of the pasta--give or take, depending on how you like it cooked. Whenever I see somebody throw pasta at a wall, I know I am having dinner with a sloppy idiot.

Posted by: dukeb | Sep 27, 2007 10:30:51 AM

To be fair,
CNBC's Gasparino called BS on the BSC rumor at about 3:40pm prior to the close and this was re-iterated by another commentator.

A (very small) short position opened at about 3:15pm was covered before the close for a (very small) profit-- will pay some of the overhead this month. Not bad for 45 minutes exposure.

Buffet buying Bear would be like Steve Jobs buying a Windows PC. This rumor was pure bull and anyone with half a brain knew it the moment it was floated, for all the reasons BR has eloquently enumerated.

Who says the markets are efficient?

Posted by: Grodge | Sep 27, 2007 10:43:59 AM

You think the Buffet rumours are bad? Just wait until analysts and talking heads have nothing left to say but, "Its cheap at these prices." Followed by, "NOW its really cheap." Which is then followed by, "Ok. NOW BACK UP THE TRUCK." Which is then followed by a few months of silence and then the eventual capitulation downgrade to 'SELL'. Investors get pwn'd of course.

Whats happening now reminds me a lot of the cheerleading that went on as the Tech Bubble rolled over and began its long long slide back to earth...

TheFinancialNinja

Posted by: Ben Bittrolff | Sep 27, 2007 10:44:36 AM

I highly recommend everyone re-reading "When Genius Failed" it's the story of another credit crunch in 1998 with LTCM.

Anyway the point is Buffett flirted for a long time with coming to the aid of LTCM and buying them out, and JM and the boys at LTCM took a bunch of trips out to meet with the Wizard of Omaha. But at the end of the day, it doesn't seem like he was ever serious.

Bear = ditto.

Posted by: Michael Donnelly | Sep 27, 2007 10:46:48 AM

Good point Michael...but the banks that DID bail LTCM out made a killing in a "short holding period".

Posted by: Fred | Sep 27, 2007 10:56:18 AM

I read this blog because BR is one of the few who is willing to call this kind of BS for what it is.

I am old enough to remember the tremendous tsuris Salomon Bros. put Buffett through the first time. I find it inconceivable that he would make the same mistake again. I am a contrarian on Buffett as his hagiography is totally overdone at this point in his career IMO.. but he is way too smart to get involved in this mess.

Posted by: Jay Weinstein | Sep 27, 2007 11:04:49 AM

dukeb,

Cooking isn't all about perfection-- it is pretty fun to throw the spaghetti at the fridge when kids are in the kitchen.

Next thing you know, they want to throw it and you have some new cooks in the family...

Posted by: wnsrfr | Sep 27, 2007 11:05:03 AM

Barry, I agree, the Buffett rumor seemed like a setup to kill shorts, and I posted as such on SI on Mish's thread.
It also got the indexes excited.

If Warren Buffett is buying a 20% stake in BSC (Bear Stearns) something is really f*cked up. Maybe he forgot the problems he had when he was heavy into Salomon?

Posted by: bucky katt | Sep 27, 2007 11:05:24 AM

Re: LTCM

Buffett & JM did _NOT_ have a back-and-forth discussion. Buffett was on vacation on a boat in Alaska. He submitted an offer for the PORTFOLIO only, not the management company (i.e. JM, et. al. would have lost their business and had no prospect of being personally made whole [not to mention what the creditors would have had to say about this firesale!]). JM wanted to negotiate on price, but WB had given them an extremely short window (1 hr?) to make a decision, and he shut off his phone (or was otherwise made unavailable) for discussion until the offer expired. What was being floated in the NYT (20% stake in the business, not the portfolio) is in no way related to WB's potential LTCM deal.

Posted by: mike | Sep 27, 2007 12:53:30 PM

I can envision a structure Buffett might consider. (He did a deal very similar to the one I'm about to describe with LVLT back in 2002.)

A convertible with a conversion price 15% below market with a fat coupon, say 8%. The key is there could be no anti-shorting language or hedging restrictions.

If he could sell enough calls, buy enough puts, and short enough stock go get 100% hedged at an average effective sale price that is equal to the price the 15% conversion discount is computed from, then the old man has completely hedged price risk and locked in a virtually risk free one year rate of return of 23%.

Berkshire is sitting on $50 billion of cash. A 25% stake in BSC would require "only" about $2.5 billion.

Is it inconceivable that he'd use 5% of the excess cash he's got laying around earning money market rates in a deal that could generate 23% virtually risk free?

Posted by: Groty | Sep 27, 2007 1:12:19 PM

BR writes:
"The timing of these rumors -- option expiry, end of quarter mark up, or pre-earnings -- always seems to be suspect."
And/or before bond sales:
Bear Taps the Bond Market
By Liz Rappaport
Markets Columnist
9/27/2007 1:19 PM EDT
[quote]
The struggling brokerage house raised at least $1 billion this afternoon with a surprise sale of 10-year bonds. The sale, which was met by strong demand in the bond market, comes just a day after Bear shares surged nearly 8% on rumors that the Wall Street firm was near a deal to bring in a big outside investor.
[quote]
http://www.thestreet.com/s/bear-taps-the-bond-market/newsanalysis/wallstreet/10381736.html?puc=_tscrss

Posted by: MertTo | Sep 27, 2007 1:50:16 PM

because when Buffet takes a billion dollar stake -- he's always sure to alert the media first so he can pay an extra 10% on his shares...

At the very least you'd want to say "Buffet already did secretly take a position" --- but then one would quickly be able to figure out the truth of such a rumor -- so that wouldn't work either.

Posted by: ari5000 | Sep 27, 2007 2:59:33 PM

That story was hilarious. As was the Countrywide.......I wouldn't wish Bear on Charles Manson. Buffett will wait until the shit hits the fan before doing anything. That might be years. These are all lies perpetrated by the financial community and what tells me how deep the speculation still is, is the market response to such mindless bullshit.

Posted by: BDG123 | Sep 27, 2007 3:48:31 PM

That story was hilarious. As was the Countrywide.......I wouldn't wish Bear on Charles Manson. Buffett will wait until the shit hits the fan before doing anything. That might be years. These are all lies perpetrated by the financial community and what tells me how deep the speculation still is, is the market response to such mindless bullshit.

Posted by: BDG123 | Sep 27, 2007 3:48:57 PM

hmmm, such passion, BR. It almost sounds like you got caught on the wrong side of a short. :) I hope not, but what happened to 'buy the rumor, sell the news?'

After beginning to nibble last week, I went ahead and loaded up on calls yesterday morning because what I see are breakouts in large cap tech, commodities and the commodities-based foreign etfs. I am being careful to avoid builders and financials, but I note that even the mid and smallish S&P firms are beginning to roll over to buys.

From a trading standpoint, it really doesn't matter to me if any or all 'news' is bullshit, I am just riding the wave and letting the charts speak. I am still 2/3 bonds or CDs and using some pretty strict rules about position sizing and stops.

I paid a lot of tuition last year in learning that it really doesn't matter whether we are Governed By Liars or the economy is crap, that has nothing to do with trading. Most of the people here post their convictions which is fine, I just hope that they don't act on them rather than following prices. Altho I appreciate the criticisms of technical analysis, the fact is that it's the only reasonable basis for trading and works pretty well if you don't let it get too complicated and understand that it only provides a map, not a scale model.

Anyway, I am green on 5 out of 6 trades at the moment. That could change tomorrow, but if it does, I'll deal with it based on my own risk preferences, which gets back into position sizing, a topic which most 'investors' don't appear to understand.

==whipsaw==

Posted by: whipsaw | Sep 27, 2007 9:11:28 PM

Barry, have you heard the latest? They are expecting a major infusion of cash from the wife of a former Nigerian dictator. ;-)

I propose that we call these sort of things "bear droppings".

8-)

Posted by: If a bear sh!ts in the street... | Sep 28, 2007 7:17:19 AM

May 2008

Sun	Mon	Tue	Wed	Thu	Fri	Sat
				1	2	3
4	5	6	7	8	9	10
11	12	13	14	15	16	17
18	19	20	21	22	23	24
25	26	27	28	29	30	31