Buffett’s Crisis-Time Bets Show That Sometimes Greed Pays Off

Plant Money

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It’s starting to look like the late-2000s crisis was bad for everyone except Berkshire Hathaway (NYSE:BRKA)(NYSE:BRKB), led by Chairman and CEO Warren Buffett. During a period in which trillions of dollars of household and corporate wealth evaporated into a nebulous cloud of financial fairy dust and credit pipelines froze, Berkshire opened its wallet and lent tens of billions of dollars.

The advantage of lending when nobody else wants to is that you can charge pretty much whatever you want, and Buffett took full advantage of the situation to make sure he would get a healthy return on his investment. Buffett, perhaps channeling the ghost of J.P. Morgan (the man), put up about $26 billion during the crisis, lending cash to everybody from Bank of America (NYSE:BAC) to Mars Inc.

Fast forward to 2013, and Berkshire has pocketed a cool $10 billion in profit from the loans so far.

“In terms of simple profitability, an average investor could have done just as well investing in the stock market if they bought during the panic period,” Buffet said in an interview with The Wall Street Journal on Saturday. “You make your best buys when people are overwhelmingly fearful.”

Or, as he has famously said before — “Be greedy when others are fearful.”

So where have the returns come from so far? One of the companies Berkshire lent money to was Mars Inc., which in 2008 needed to finance its $23 billion purchase of Wm. Wrigley Jr. Co. Buffett loaned Mars $4.4 billion and purchased a minority interest in Wrigley for $2.1 billion at a discount of the buyout price.

The Journal reports that Berkshire is set to bank a profit of at least $680 million from the deal. Berkshire sold the notes back to Mars at around 115 percent of face value, plus interest.

Buffett made a $5 billion investment in Bank of America in 2011, a deal that helped shore up the bank’s balance sheet, speculated to be in a state of disrepair at the time. Bank of America, like so many other financial institutions, was dragged through the dirt during the financial crisis and continued to suffer in its wake. Increased regulatory pressure and a tidal wave of litigation compounded losses from mortgage liabilities that continued to bleed money.

But just two years after Buffett extended a hand to the bank, he was able to report to Berkshire Hathaway shareholders that he had booked a paper profit of $5.27 billion from the deal.

The deal with Bank of America left Buffett with a hoard of preferred shares — which pay an enormous dividend of 6 percent, or $300 million per year — and warrants to buy as many as 700 million shares of common stock. The warrants were locked in at $7.14 per share and the stock has about doubled since then.

Buffett also made a white-knight investment in Goldman Sachs (NYSE:GS). Berkshire received approximately 13.2 million shares of Goldman Sachs stock worth about $2 billion through the exercise of warrants acquired in return for a $5 billion loan made to the bank in 2008.

Buffett’s deal with Goldman is very similar to the ones he struck with Bank of America and GE Capital. The basic structure shows that Berkshire Hathaway made a loan in exchange for preferred stock that paid out a handsome dividend and warrants to buy additional stock at a fixed price until some future date.

Goldman Sachs redeemed the $5 billion in preferred shares at a 10 percent premium in 2011. The warrants — which expired October 1 — said Buffett could purchase up to $5 billion worth of Goldman stock at $115 apiece. That’s about 43.5 million shares. Closing September 27 at $159.85, this is a bargain, and netted Buffett about $2 billion. He received the payment itself in stock, about 13.2 million shares.

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