The mature Warren Buffett: Loan Shark to Fortune Global 500

Warren Buffett has transitioned from Investor to Loan Shark, a “pay day” loan source to the Fortune Global 500

Warren Buffett over a decade ago lamented that he could no longer provide the world-class returns of his first two decades as an investor.  The enormous scale on which he must now operate precludes investing in small-scale opportunities: in his own words, he must now hunt “elephants.”

His frank assessment should now be obvious to everyone.  He no longer provides extraordinary yields as an investor:  his Berkshire-Hathaway is underperforming the S&P 500. Nonetheless, most recently, he has acted as an extraordinarily successful “loan shark” to three troubled Fortune Global 500 companies, i.e., Goldman Sachs, General Electric, and Bank of America.  He has advanced billions of dollars at terms staggeringly advantageous to Berkshire-Hathaway. 

In a time when ordinary citizens were earning 1%-2% on their money, Buffett is getting 10% on his, plus, a 10% kicker on repayment.  As a bonus, he has received warrants to buy millions of shares of common stock of all those companies at predetermined strike prices, exercisable over 5-10 years. The potential result could be significant ownership in those companies, while diluting existing shareholders.

He is now a “loan shark” because he no longer strictly follows his, well publicized, rules of investing:

1)   Invest in businesses you understand

2)   Invest in a record of excellence

3)   Invest in a company that produces a product with a “competitive edge”

4)   Invest in proven management

5)   Invest “long term”

His previous investments followed his time tested pre-purchase process, a combination of analysis of operations and his “evaluation” of management.  His completion of the Bank of America deal following a 24-hour due diligence period is unprecedented in Berkshire Hathaway history.  Bank of America also lacked many of the attributes Buffett describes as essential in his previous investments.

In his long consistent investment history, Buffett rarely skips steps in his risk evaluation process, what could have possibly encouraged him to do it in the case of Bank of America?  Everyone who has been paying attention understands that Bank of America has been on extremely thin ice for some time.

The acquisitions of Countrywide Financial and Merrill Lynch & Co have proven to be “tar babies” of enormous magnitude and threaten to destroy the company.  The lawsuits concerning payment of hundreds of billions of dollars in settlement of misrepresented previous transactions, previously settled for $8.5 billion under New York jurisdiction, may soon be transferred to the Federal Courts, possibly exposing the Bank to exponential liability.

With these elements in play, Buffett could hardly be expected to make a quick decision, but he did.  Since, no matter how lucrative the deal, all would be lost if Bank of America were to fail.  It would seem that the only way that this decision could be expedited, is if Buffett were reassured that Bank of America was indeed “too big to fail” and that the government would make all efforts to see that Bank of America would survive to repay the debt.

Berkshire Hathaway historically minimized its political attachments and leanings. Today Warren Buffett carries water for the President and the Federal Government.  There is a sense that the 24-hour due diligence leading to the Bank of America deal and its announcement just prior to the Bernanke Jackson Hole Federal Reserve statement, was expedited by a “wink and a nod” by President Obama, days before the event.

The details will continue to make its way into the public consciousness in the coming months.  Just know that part of the “change” under President Obama, is the transformation of Warren Buffett from “Investor Extraordinaire” to  “Big Business Loan Shark.” The government is now working to help Warren Buffett make obscene money while diluting (through the future exercise of the warrants for 700 million shares of common stock) ordinary investors stake in Bank of America.

Geoff

References:

1)   August 25, 2011 Bank of America Gets a Better Deal from Warren Buffett than Goldman Sachs, GE – Deal Journal – WSJ: http://blogs.wsj.com/deals/2011/08/25/terms-of-warren-buffetts-rescue-deals/?mod=google_news_blog

2)   October 1, 2008 Warren Buffett’s Three Rules for Investing In a Crisis – CNBC: http://www.cnbc.com/id/26963156/Warren_Buffett_s_Three_Rules_for_Investing_In_a_Crisis

3)   August 27, 2011 How to Invest Like Buffett – BuffettBuys.com: http://www.buffettbuys.com/how-to-invest-like-buffett.html

4)   October 4, 2010 Chart of the Day: Warren Buffett’s Alpha 1977-2009 – Seeking Alpha: http://seekingalpha.com/article/230091-chart-of-the-day-warren-buffetts-alpha-1977-2009

5)   March 18, 2011 Why Warren Buffett can’t make money any more – Telegraph: http://www.telegraph.co.uk/finance/personalfinance/investing/8380312/Why-Warren-Buffett-cant-make-money-any-more.html

6)   August 15, 2011 Warren Buffett’s Quotes and Words of Wisdom: http://warren-buffett-words-of-wisdom.com/

7)   August 4, 2011 Buffett Can’t Get Analysts to Say Buy Berkshire – Bloomberg: http://www.bloomberg.com/news/2011-08-04/buffett-can-t-get-analysts-to-give-buy-rating-after-berkshire-s-decline.html

8)  July 5, 1999 ONLINE ORIGINAL: Homespun Wisdom from the ‘Oracle of Omaha’: http://www.businessweek.com/1999/99_27/b3636006.htm

9)  Buffett FAQ: http://buffettfaq.com/

10) August 27, 2011 BuffettBuys.com – Warren Buffett’s Portfolio: http://www.buffettbuys.com/

Please refer to previous GeoffTalk.com posts on “Bank of America” & “Warren Buffett”:

1) August 25, 2011 Buffett loans $5 billion to Bank of America, disguises it as capital infusion – 1 update | GeoffTalk: http://geofftalk.com/?p=950

2) August 22, 2011 Bank of America first “too big to fail” bank, to fail? 3 updates | GeoffTalk: http://geofftalk.com/?p=887

 

 

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