Warren Buffet on Charlie Rose

Thursday, October 02, 2008 | 12:31 PM

Here is last night's Charlie Rose Show, with WB speaking for an hour.

Thursday, October 02, 2008 | 12:31 PM | Permalink | Comments (75) | TrackBack (0)
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32-Floors of Anxiety

Friday, September 26, 2008 | 09:15 AM
in Credit | M&A

Interesting take via Bloomberg on the Barclay's takeover of Lehman:

"The name on the building is gone. So is the fast-moving video display of clouds in a blue sky over a wheat field combed by wind and followed by a message: ``Delivering our firm to clients worldwide.''

In their place on the façade of the 32-story headquarters building of Lehman Brothers Holdings Inc. at 745 Seventh Avenue in Manhattan is the white and blue logo of Barclays Plc. Inside, former Lehman employees still wear the green and white security badges of the 158-year-old bankrupt investment bank and wonder if they'll be gone.

Nine days after Barclays agreed to pay $1.75 billion for Lehman's investment banking and capital markets, including its headquarters, former Lehman employees at 745 say they're in limbo on whether they'll be retained by Barclays and under what conditions."

These are strange and interesting days . . .


Barclays Puts Logo on Lehman Office, Gets 32-Floors of Anxiety
Serena Saitto
Bloomberg, Sept. 26 2008

Friday, September 26, 2008 | 09:15 AM | Permalink | Comments (18) | TrackBack (0)
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A Very Expensive Berkshire/Goldman Deal

Wednesday, September 24, 2008 | 09:00 AM

If you missed last night's discussion on the "vote of confidence" deal from Warren Buffett, you are missing the big picture. Go read:  Berkshire to GS: "I Got $5 Billion, but Its Gonna Cost Ya."

The headline writers of both the NYT and the WSJ missed the numbers involved:

NYT: Buffett Deal at Goldman Is Seen as a Sign of Confidence

WSJ:  Move by Famed Investor's Is Seen as a Vote of Confidence in Crisis-Stricken Banking System

Doug Kass goes last night's analysis one better, and notes that using a Black Scholes produces a valuation of $2.8 billion dollars for the warrants. That makes the effective yield over 20% on the preferred purchase.

As we noted last night, this is terrific for Buffett, who smelled blood in the water. Its a tough deal for Goldman, who were a) obviously in a bind for capital; and 2) smart enough to learn from Lehman Brothers mistakes.

Wednesday, September 24, 2008 | 09:00 AM | Permalink | Comments (48) | TrackBack (1)
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Berkshire to GS: "I Got $5 Billion, but Its Gonna Cost Ya"

Tuesday, September 23, 2008 | 10:04 PM

Tonight's Goldman Sachs/Warren Buffett deal is a classic example of our post 2001 news: Looks good as a headline, is godawful underneath. Of course, futures popped on the announcement.

The WSJ subhead read "Move by Famed Investor Amid Crisis Seen as Vote of Confidence in Banking System."


Vote of confidence? Hardly. Doubtful. It is merely an opportunistic deal, and probably a damn good one, for Berkshire Hathaway (BRK). On the other hand, for Goldman Sachs, it is a very expensive deal. If you delve beneath the headlines, you see that Warren is not so much making a vote of confidence as he is extracting pound of flesh (and then some).

Verily, let's look at the details to figure out just how much GS is paying for this capital:

• Goldman Sachs pays a fat dividend to Berkshire Hathaway of 10% on $5 Billion dollars -- that's $500 million per year. And, since this is a preferred, it gets paid out of net income in after tax dollars dollars. Ouch.

• Goldman gets the right to call the preferred at any time at a 10 percent premium. Ouch again.

• Buffett gets $5 billion worth of warrants with a strike price of $115, or about 43.47 million shares. The warrants are good for only 5 years.

If Buffett were to go to the Street earlier today to buy 44 million calls with a $115 strike price (circa 2010), they would have cost him about $1.5 billion dollars. With GS now trading at $135, Buffett’s $5 billion investment is more like $3.5B, in terms of net cost to him. Hence, the 10% interest is more like 14%. 

Doug Kass thinks its an even better deal for Berkshire --  goes further than I do, putting an intrinsic value on the warrants of about $2 billion. That makes Buffet's net cost $3B -- so the effective yield is closer to 17%.  (Ouch)

A friend points out that Goldie bought back 1.5 million shares in the quarter ending 8/31, at an average price of $180 a share.  (Nice trade). I’m thinking the buyback program may be on hold for a while here.


Bottom line: This is a terribly expensive deal, but probably a necessary one. The smart boys at 85 Broad Street did not want to wait until they were too desperate to get even a mediocre deal. They sure as hell  did not want to "pull a Fuld."

This also looks like a steady stream of income for Berkshire Hathaway. And what do you want to bet me that Warren asked for -- and got -- a very serious promise from Bernanke & Paulson that Goldman would under no circumstances be allowed to tank like Lehman? This might even be a riskless deal for Buffett.

Vote of Confidence my ass . . .


Additional sources:
Berkshire Hathaway to Invest $5 Billion in Goldman Sachs
Goldman Sachs, September 23, 2008   

Goldman to Raise $7.5 Billion From Berkshire, Public
Christine Harper
Bloomberg, Sept. 23 2008

Buffett to Invest $5 Billion in Goldman

Tuesday, September 23, 2008 | 10:04 PM | Permalink | Comments (92) | TrackBack (0)
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SIPC: Lehman To Be Liquidated

Friday, September 19, 2008 | 01:00 AM

How did this little gem slip by unnoticed?  Tomorrow at 4PM, Lehman is to be liquidated.

SIPC released this:

“On Friday, September 19, 2008, SIPC will file a proceeding placing LBI in liquidation under the Securities Investor Protection Act (SIPA). After extensive discussions and consultation with representatives of the firm and its parent company, as well as representatives of the Securities and Exchange Commission, the Federal Reserve, the Commodity Futures Trading Commission, the Financial Industry Regulatory Authority and others, SIPC has decided that such action is appropriate for the protection of customers and to facilitate the transfer of customer accounts of LBI and an orderly unwinding of the business of the brokerage firm.

This action is being taken in connection with a proposed sale of the business of the broker-dealer to Barclays Capital Inc. A hearing on approval of that sale is scheduled for September 19, 2008, at 4p.m., in the Chapter 11 proceeding of the parent company, LBHI.

One of our small funds was prime brokered with Lehman, and even though we were advocates of selling/shorting the equity, that was merely a trade.

Our hearts go out to the many good people there suffering through this Fuldian mess.

Hopefully, the Barclays buy means that many of the 10,000 people who work in that division wont lose their jobs . . .



WASHINGTON, D.C. - September 18, 2008

Friday, September 19, 2008 | 01:00 AM | Permalink | Comments (16) | TrackBack (0)
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Merger Rumors, Shotgun Weddings

Thursday, September 18, 2008 | 10:01 AM

Today's list of "more than a rumor, less than a done deal" for your perusement:

1. Morgan Stanley & Wachovia as a possible match up. That presumes that MS can't get financing from the China Investment Corp (CIC).

2. Goldman Sachs and HSBC is a very interesting potential pair up

3. Lloyds is taking over UK mortgage lender HBOS, creating a British giant (yah, its official).

Any other possible combinations out there?

Thursday, September 18, 2008 | 10:01 AM | Permalink | Comments (37) | TrackBack (0)
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My Mea Culpa on Thain

Monday, September 15, 2008 | 02:08 PM

Its time for me to fess up:  I was wrong about John Thain.

In the past, I have been critical about some of the comments from Thain. That they were disingenuous, misleading, and sandbagged investors. But while all of these things were mean and rotten and undesirable from any company's management, let's look at the bottom line: Thain sold Merrill for $25-30 per share, and got $40B for the whole enterprise. Most of his employees will keep their jobs, most of all, the company will survive. Hell, it wouldn't surprise me to see Mother Merrill spun out as an independent entity a few years down the road, if it were worth it to Bank America (BAC) to do so.

Now, don't get me wrong. This isn't an endorsement of this merger. Most large acquisitions of this type are disasters. Think of AOL/TIme Warner, Travelers/Citibank, and more recently Bank America/Countrywide. But hell , its better than the alternative.

Everyone's comparing Bear v. Lehman. But that's the wrong comparison -- it's really Lehman v. Merrill and Fuld v. Thain. One is a goat, and one is the game winner.

A few weeks ago, many people were scratching their heads at his loss of credibility. Judged by this outcome, you can make a case that he kept his eye on what would make Merrill salable. He got enough crap off of the books to keep Mother Merrill solvent. His clearing the balance sheet paved the way for an acquisition.

Merrill could have easily been next in line after Lehman. But Thain did what Fuld wouldn't -- probably because he had no legacy investment in keeping Merrill independent. Thain wasn't a deal maker at Goldman, but he certainly pulled a rabbit out of his hat with a pretty good deal for Merrill's shareholders. Thain performed a magic trick to make the liability seem to disappear. He got a deal and earned his $80 mil as a banker's fee.

This does not excuse a lot of what I called anti-shareholder behavior and statements from MER's CEO. But Goddammit, sometimes its the big things that matter, and survival is the biggest of them all.

If I had to choose a financial sector CEO to tie my life savings to as an employee -- my 401k, my ESOP, my options it wouldn't be Dick Fuld of Lehman, or Alan Schwartz of Bear Stearns, or Martin Sullivan of AIG. It sure as hell wouldn't be Wachovia's Ken Thompson or CitiGroup's Vikram Pandit or Washington Mutual's Kerry Killinger.

Nope, it would be none of the above.

If you  had to be in a foxhole with a Broker Dealer CEO, you could do worse -- a lot worse -- than John Thain.

<mea culpa end>


Rinse. Lather. Repeat.  (July 29, 2008 ) 

Actual Merrill CDO Sale: 5.47% on the Dollar  (July 29, 2008) 

The Reign of Thain Has Been Anything But Plain  (August 1, 2008)

Monday, September 15, 2008 | 02:08 PM | Permalink | Comments (62) | TrackBack (0)
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Lehman Gets PE Bid; Friday Night Fed Meeting

Friday, September 12, 2008 | 09:29 PM

Its Friday night after a long week, and we all have things to do. But I couldn't sign off without passing along these two tidbits:

1) Lehman received offers for its asset-management unit from private-equity firms, including Bain Capital and Clayton Dubilier & Rice.

2) The Fed canceled their usual Friday night poker game, and instead called an Emergency meeting.

Here are the details, first on the Private Equity bid, via Bloomberg:

"The bids value the unit, which includes the Neuberger Berman fund business, private-equity funds and a brokerage firm serving wealthy individuals, at about $5 billion, said the people, who asked not to be named because the auction is private. KKR & Co. LP, which was weighing an offer, hadn't made a bid by the 5 p.m. deadline, the buyout firm told people involved in the process.

Lehman said Sept. 10 it would sell 55 percent of the investment unit, part of Chief Executive Officer Richard Fuld's plan to keep the 158-year-old firm independent. After its shares dropped 53 percent in the next two days, Fuld, 62, began talks with companies including Bank of America Corp. to sell all of Lehman, potentially derailing the investment-management auction. . . . Blackstone and Carlyle Group had weighed bids for the investment unit and opted to stay out of the auction."

Emergency Federal Reserve meeting, via WSJ:

"The Federal Reserve Bank of New York held an emergency meeting Friday night with top Wall Street executives to discuss the future of venerable firm Lehman Brothers Holdings Inc. and the parlous state of U.S. financial markets.

In attendance were New York Fed President Timothy Geithner, Treasury Secretary Henry Paulson, Securities and Exchange Commission Chairman Christopher Cox, Morgan Stanley Chief Executive John Mack and Merrill Lynch Chief Executive John Thain, among others."

Note that at this point there is the faint air of LTCM about the room. (Ahem). WSJ continues:

"The meeting began at 6 p.m. but precise details about what was discussed could not be learned. The meeting appeared similar to one a decade ago when the New York Fed pulled together top Wall Street executives to prevent the collapse of hedge fund Long-Term Capital Management.

One big issue: Most of the firms at the meeting have themselves been hit with big losses and may not have the excess capital to step in. (talk about understatement)

"Senior representatives of major financial institutions met at the Federal Reserve Bank of New York Friday evening to discuss recent market conditions," a spokesman for the New York Fed said.

The future of Lehman could open a new chapter in the government's handling of the financial crisis, which is sweeping up an increasing number of firms, including American International Group Inc. and Washington Mutual."

I assume the crew won't waste a bailout announcement on a Friday eve or Saturday, as there are no markets on the planet that are open 9at least none that matter).

Our new national slogan is: If its Sunday, it must be bailout.

Disclosure: Short AIG



Lehman Investment Unit Gets Bids From Bain, Clayton
By Jason Kelly and Jonathan Keehner
Bloomberg, Sept. 12 2008

New York Fed Holds Emergency Meeting On Lehman's Future
WSJ, September 12, 2008 9:10 p.m.

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Lehman Bailout This Weekend?

Thursday, September 11, 2008 | 10:49 PM

Rumors circulating amongst several hedgies are that KKR and Blackstone are interesting in taking a bid at Lehman. Note that Blackstone is run by Peter Peterson and Steve Schwartzman, former Lehman Brothers guys.

The scuttlebutt is that the private equity boys are looking for a Fed backstop, and want a Bear Stearns-like deal, with Fed/Treasury taking on $20-40 billion dollars in risk. So goes the circulating rumors amongst the Long/Short crowd.

The WSJ noted:

"Given the firm's deep financial troubles, a deal of any sort is far from certain, according to people familiar with the situation. In addition, prospective buyers would likely want the U.S. government to help shield them from future losses from any such transaction, these people said, as happened in March, when Bear Stearns Cos. was forced into a deal to be acquired by J.P. Morgan Chase & Co. In that deal, the federal government agreed to absorb as much as $29 billion in potential losses."

Other rumors today included Bank of America making a run at Lehman brothers. Recall their CEO, Ken Lewis, said back in October 2007: "I've had all of the fun I can stand in investment banking at the moment." Is he ready for more fun? I guess if you define LEH at $4 as fun, he might be tempted back to the iBank pool.

Here's a more neutered version of the story, via Washington Post:

"The Federal Reserve and Treasury are actively helping Lehman Brothers put itself up for sale, and officials are hoping a deal will be in place this weekend before Asian markets open on Monday, according to sources familiar with the matter.

The government is looking for an agreement that would not involve public money. One scenario that is emerging includes multiple suitors acquiring different pieces of the venerable investment bank, which has suffered staggering losses from its business in real estate and mortgages.

The situation was still fluid tonight, and there was no guarantee what form an agreement would take, or even that it would be in place by Monday, the sources said on condition of anonymity because they had not been authorized to speak."

We will find out soon enough.

If its Sunday, it must be Bailout.



Lehman Races to Find a Buyer 
Bank of America Is Said To Be in Preliminary Talks; U.S. Plays Matchmaking Role
WSJ, September 12, 2008      

I've had all the fun I can stand in investment banking, says the boss of Bank of America
Stephen Foley
The Independent, 19 October 2007

U.S. Government Helping to Arrange Sale of Lehman Brothers
David Cho and Heather Landy
Washington Post, September 11, 2008; 7:39 PM

Thursday, September 11, 2008 | 10:49 PM | Permalink | Comments (31) | TrackBack (0)
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Fannie + Freddie = Frannie ?

Tuesday, September 02, 2008 | 06:44 AM

Hmmmm . .  take two poorly run, debt laden GSEs . . . Merge them . . . What do you get ?

One giant, poorly run, debt laden, GSE.

Its an idea so powerfully bad, ill conceived, and poorly thought out, it has precisely zero chance of occurring. If you think an idea this foolish, pointless, and banking fee laden could only have come from anals (sp) of Wall Street, then congratulations! You've figured out how some of the best and the brightest operate on the Street of Dreams.

A brief history lesson of these two entities quickly reveals what a silly idea this is:

In the depths of the Great Depression, the housing sector was an utter disaster. Its been estimated that over the course of the early 1930's, nearly one in 5 homes were in danger of default and foreclosure. The Home Owner’s Loan Act of 1933 created The Home Owner’s Loan Corporation (HOLC) in order to “relieve the mortgage strain and then liquidate.” From June 1933 to June 1935, the HOLC received 1,886,491 applications for $6.2 billion of home mortgage refinancing, an average of $3272 per application. HOLC purchased old mortgages in exchange for government bonds, and then reissued the mortgages at a lower interest rate.

Incidentally, in those days, mortgages were not 30 year fixed principal and interest mortgages we know today. Instead, the typical mortgage was an interest only, 3 - 5 year loans, with a balloon payment at the end. They did not amortize (pay down principal over time). Typically, home owners renewed upon maturity.  When credit froze up, the home owner lost the ability to roll the old loan into a new mortgage -- hence, the danger of losing their house.

Fannie Mae (FNM) was formed in 1938 to provide additional liquidity, creating a secondary mortgage market. Creating an entity to provide liquidity to the secondary market for mortgages would free banks to make additional loans.

In 1968, with the US budget under severe pressure form the costs of the Viet Nam war, Lyndon Johnson moved Fannie Mae "off balance sheet" of the federal budget. But once this government service became a private entity, it created a functional monopoly. To create some competition, in 1970 the Federal Home Loan Mortgage Corporation (FHLMC) was formed. That is the entity we now know  as Freddie Mac (FRE). (History lesson over)

What would the creation of "Frannie" accomplish?

Well, other than generating some banking fees, not a whole lot. It would remove competition from the the secondary mortgage market. It would put two management teams with a long history of corruption together. Lastly, it would create an even bigger lobbying and political influencing entity.

No thanks . . .


And They Could Call It Frannie
NYT, September 1, 2008 

The Federal Response to Home Mortgage Distress: Lessons from the Great Depression
David C. Wheelock
The Federal Reserve Bank of St Louis Review.  May/Jun 2008

From the New Deal, a Way Out of a Mess
Alan S. Blinder
NYT, February 24, 2008

Long Term Policy Evolved By HOLC
NYT, January 2 1936

History and Policies of the Home Owners’ Loan Corporation   
C. Lowell Harriss
New York, NY. National Bureau of Economic Research. 1951

Tuesday, September 02, 2008 | 06:44 AM | Permalink | Comments (13) | TrackBack (0)
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