He’s Warren Buffett, and he’s here to help.
This morning Buffett revealed on CNBC’s Squawk Box that he’s extended an offer to tottering bond insurers to provide re-insurance of on up to $800 billion in municipal bonds. The offer does not, of course, cover the more complicated derivative instruments that have been the source of so much profit and trouble for the bond insurers.
Speaking on the phone with CNBC’s Ancient Billionaire Correspondent Becky Quick, the Oracle of Omaha, said Berkshire Hathaway a week ago made the reinsurance offer to bond insurers Ambac, MBIA and FGIC. One firm has already rejected his offer to insure the safest part of their business. We’re guessing that’s MBIA, which is newly flush with Warburg Pincus cash. The other two
haven’t returned his calls are still considering the offer. The offer is ticking: he gave them 30 days to respond.
Buffett’s plan would likely
insure ensure that the covered municipal bonds would not be affected by a downgrade in the ratings of MBIA, Ambac or FGIC. According to Buffett, the trouble with the bond insurers is producing strange price discrepancies, with some uninsured bonds trading above insured bonds. “Essentially, they’ve already lost their triple A. They’re trading as if they had lost it,” Buffett said. “In the market the triple A has gone away a long time ago.”
Shares of these insurance companies will initially spike on the news, although by satisfying some of the concerns of government insurance regulators it could wind up contributing to the demise of a industry-wide bailout plan. In short, this “bailout” could spell the end of the insurers if the CDO situation gets bad enough. Buffett noted that the CDO exposure for these companies would not be covered, adding that “we can’t figure it out” when asked about the extent of that exposure. He described the “natural course” of the CDO insurance as “disastrous.”
Perhaps still smarting from DealBreaker’s “Will Warren Buffett Go To Hell?” feature, the Oracle stressed that he would “not be presenting this deal to Saint Peter” when he shows at the pearly gates. “We’re doing this to make money,” Buffett said. “I did not dream this up in one of my pro-bono moments.”
We thought we should let you know about this development since the odds are your attention was riveted on Fox Business. While Becks was talking to Buffett, FBN’s “Money for Breakfast” co-anchor Peter Barnes wasinterviewing an M&M in a Split-Screen from Candyland. Candyland! Who wants a gumdrop!
He’s Warren Buffett, and he’s here to help.
Old man Buffett gets a lot of credit for arguing in favor of the estate tax. We’ve never been able to figure that one out, though. He’s already exempted most of his wealth from the tax by donating it to a charity run by his buddy, Bill Gates. And even if you taxed his estate at a rate of 90%, his progeny would still be wealthy. He’s got enough money that he basically doesn’t have to care about taxes.
Not everyone is so fortunate. Although few inheritances are actually subject to the estate tax, millions are spent to avoid it. And a good amount of that is spent in ways that help make Warren Buffett even richer. You see, old Buffett is not exactly a disinterested party in the estate tax debate, and his advocacy of the tax is not exactly a selfless sacrifice. Because he is invested heavily in the insurance industry, he stands to lose a lot of dough if the estate tax every got repealed.
Tim Carney (who is the brother of one of our editors) explains how the insurance industry is lobbying like crazy to preserve the estate tax. Buffett is the industry’s most prominent lobbyist.
Death tax is a lifeline for insurance industry [Washington Examiner]
A new study by Gerald Martin of American University and John Puthenpurackal of (wait for it) the University of Nevada, called “Imitation is the Sincerest Form of Flattery,” has found that if you buy the same stocks as Warren Buffett, you will make a lot of money. It’s a companion piece to an equally groundbreaking paper by the same authors which found that Goldman Sachs employs many individuals from an ethnoreligious group originatating in the Israelites or Hebrews of the ancient Middle East. The study found that investors mimicking the Oracle’s stock picks, even up to four months later, would earn an annual return of 24.6 percent, easily beating the S&P 500, which rose 12.8 percent during the same period. Based on these numbers, Martin and Puthenpurackal came to almost the preposterous conclusion that “”Warren Buffett appears to possess investment skill.” (No joke, they actually came to and wrote that conclusion.) Investors partial to mammary glands of the gigantic variety will be pleased to note that Buffett told M&P that when he’s having difficulty making a decision about a stock, one of his tried and true tricks is to stare at a rack not unlike that of Liz Claman’s (and, in many cases, that exact one) for two, maybe three minutes, and the answer will “just come” to him. So keep doing what you’re doing.
Earlier: You Say Harem, I Say Whorehouse
Buying What Buffett Buys Based on Filings Doubles S&P 500 Gains [Bloomberg]
“Derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.”—Warren Buffett
Back in the early days of this century, Warren Buffett faced a rare—although not as rare as some believe—financial setback and public relations disaster when Berkshire Hathaway was forced to shutter its General Reinsurance securities unit, which it had purchased for $22 billion only a few years earlier. The Berkshire-owned company found itself caught up in the financial and accounting scandals, with its business facing serious losses and its executives under investigation by the SEC and facing numerous criminal prosecutions. Even after the company shut it down, General Re, which was a major derivatives dealer, was stuck with 14,384 outstanding contracts with 672 counterparties outstanding, with billions of dollars on the line. Buffett’s personal fortune fell by $5 billion to $30 billion, reducing him to rank of “second richest person” behind Bill Gates.
Right around that time, Buffett publicly turned against derivatives. “When Charlie [Munger,] and I finish reading the long footnotes detailing the derivatives activities of major banks, the only thing we understand is that we don’t understand how much risk the institution is taking,” he told investors.
But not understanding derivatives and publicly attacking their role in global finance hasn’t stopped Berkshire Hathaway from selling derivative contracts on stock indexes and bonds. This year the company has collected premiums of about $2.5 billion from these derivatives, according to a report in the Wall Street Journal. Buffett once compared being the derivatives business to being in Hell. And, apparently, he likes it there.
Is this rank hypocrisy? Perhaps it depends on what your definition of derivatives is. From the Wall Street Journal article, it’s hard to tell what exactly Berkshire Hathaway has been selling. But it sure sounds like credit derivative swaps. Those derivatives, of course, are part of what fueled investor’s ravenous appetite for corporate debt—at least until the recent credit crunch. It was often said that these derivatives weren’t making the world a riskier place but helping diversify risk—although that assessment in now undergoing a general re-assessment. And these are often considered some of the riskiest types of derivative products on the market.
The lesson seems to be: Watch what they do, not what they say. Especially if they say it in a folksy Midwest way.
Buffett Scores With Derivatives [Wall Street Journal]
It’s widely known that Jesus roots for the Colorado Rockies. But now they have a much more important fan: legendary investor Warren Buffet, who is cheering on the Rockies because Berkshire Hathaway chain Jordan’s Furniture promised certain customers free furniture if the Red Sox win the World Series.
Why Buffett’s Rooting Against the Red Sox [TheStreet.com]
MarketWatch’s David Weidner has finally narrowed down the choices and now you must choose between the two: liar or genocidal maniac?
Human-rights groups said they were disappointed Darfur didn’t figure into Buffett’s decision. Don’t believe a word of it…If it were all about the profit, Buffett, by his own admission, left money on the table. “I still sold it way too soon,” he said. This doesn’t sound like investing the Warren Buffett way. Berkshire owned more than 11% of PetroChina when it bought its stake in 2006. So, with the stock rising, he sells all of it in a matter of months after an investor protest at the Berkshire annual meeting? Unlikely. Warren Buffett was uncomfortable with this investment. And if he wasn’t? Then he’s as deluded as the sick people who are profiting from the suffering in Africa.
Not to influence your choice, but we’ve received no fewer than five emails to tips at dealbreaker dot com more or less implying that the Oracle has the heads (like, the skulls) of several Amnesty International officials in his basement meat locker. But he’s also looked Food and Drug Administration officials in the face and flat out lied about the fat content in one of Dairy Queen’s large Oreo Blizzards (he says zero grams, they counter that it’s more like 25). So this is a tough call.
Oracle and PetroChina [MarketWatch]
At Least One Subsidiary of Citic Group Does Not Consider Itself Too Good To Be Seen in Public With Bear StearnsBy Bess Levin
Though China Citic Bank Corp, the banking unit of China Citic Group, said as recently as Thursday that it hadn’t spoken with Bear Stearns about buying a stake in the awesomely declining Madison Avenue stock, nor did it plan to “in the next three months,” China’s Citic Securities Co., another unit of Citic Group*, agreed to pay $1 billion for about 6 percent of BSC (with the right to buy an additional 3.9% in the public market), and to also give Bear a 2% stake in the Beijing-based firm for $1 billion, with the option to buy an addition 5% of the company over the next five years. Sneaky! And also, pretty good news for both firms. For Citic (Securities), whose shares have more than tripled so far this year, the deal offers a larger presence in the global market, even if that entryway comes at the price of being associated with Bear Stearns. For Bear Stearns, whose shares are down 28% on the year, the deal means that there’s at least one company out there still willing to work with Bear Stearns. The odd couple is also said to be planning a venture that will combine their operations outside of China. The deal apparently came together in the last few months, though its roots can, completely unsurprisingly, be traced back to 1992, when Citic Group President Chang Zhenming first met Jimmy Cayne, while “playing cards.” (Both men, along with Citic Securities Chair Wang Dongming, are said to share each other’s philosophy of placing hobbies before actual work).
On a related note, Warren Buffett maintains that he “wouldn’t touch Bear Stearns with an 80-ft pole,” and that the only way you’d ever see something “so sickening” actually come to pass would be if it were the conclusion to a series of escalating dares. But he could very well be lying so…on your toes.
Bear Stearns, China’s Citic to Invest in Each Other [Bloomberg]
Bear Stearns, Citic Reach Deal [WSJ]
Bear Stearns and Chinese Bank to Form Joint Venture [NYT]
Bear, Citic Strike Deal [CNN Money]
Bear Stearns and Citic enter a finger trap [Market Watch]
Citic Says It Doesn’t Now Plan To Seek Stake in Bear Stearns [WSJ]
China Citic Bank: No Plan To Buy Bear Stearns Stake In 3 Months [CNN Money]
Buffett and Citic Deny Bear Stearns Talks [DealBook]
*Start at the beginning and take a shot every time I say “China” or “Citic.”
In an interview with Liz Claman’s sweater puppets Thursday on Fox, Warren Buffett rebuffed the rumor that Berkshire Hathaway is considering a stake in Bear Stearns, following Citic’s denial on Thursday of having any desire to purchase shares of the precipitously declining stock. Referring to a New York Times article from last month that claimed he might buy as much as 20 percent of the bank, Buffett said, “That was an incorrect story. We were not taking a stake. That one had no basis.” (“First of all, Jimmy Cayne’s bridge game leaves much to be desired. Second of all, the only way you could get me to buy a piece of Bear Stearns would be as the conclusion to a series of escalating dares. Which is how I ended up with Fruit of the Loom, or as I like to call it, “The Poor Man’s Hanes.”)
Buffett also disclosed that Berkshire had unloaded all its shares in PetroChina, but claimed that he sold out “100 percent because of valuation,” and not because human rights groups have been telling him since May that he was personally responsible for the genocide in Darfur. WB said he “sold a little too soon,” since shares of PTR rose even higher after he began to pull out.
When asked how he could have possibly predicted the value of buying into PetroChina four years ago, Buffett told Claman, “other guys read Playboy. I read reports. [I came across PetroChina] and said, this is a great centerfold.”
Earlier: You Say Harem, I Say Whorehouse
Buffett Tells FOX Business He’s Sold PetroChina Stake [Fox]
Buffett Avoids Bear Stearns, Countrywide Financial [Bloomberg]
Citic Bank:No Plan To Buy Bear Stearns Shares In Next 3 Months [CNN Money]