Wednesday, October 01, 2008

Does the Oracle of Omaha know something we don't?

Okay, I was feeling pretty cool, calm and collected about this whole market meltdown until I heard that Warren Buffett, aka the Oracle of Omaha, was pumping $3 billion cash into General Electric in advance of a $12 billion stock offering because GE is having trouble raising money in the capital markets. Hearing this gives me pause, possums. General - freaking - Electric people!

General Electric Co. (GE) announced an offering of "at least" $12 billion in common stock as the economic bellwether joined a number of other financial giants that have been forced to raise capital in recent weeks.

In addition, Warren Buffett's Berkshire Hathaway (BRKA BRKB) again slid into the role of a rescuer as it agreed to buy $3 billion in perpetual preferred stock from GE in a private offering.

The moves come as the conglomerate, whose finance arm brings in nearly half its revenue, has joined the broad financial sector in recent weeks in seeing its stock get pummeled by investors' worries amid the credit crisis.

But until last week, the company had held strong that its finance arm was having no troubles.

That changed last week as the company cut its third-quarter and full-year earnings guidance, citing "unprecedented weakness and volatility in the financial-services markets," and announced a number of major moves -- including suspending stock buybacks and likely not having a dividend increase for the first time since the 1970s -- to strengthen its capital and liquidity.

Shares of GE were recently down 3.8% to $24.51. The stock has fallen 34% year to date. Credit default swaps for General Electric Capital Corp., the financing arm, tightened dramatically on the news. It now costs $500,000 to protect $10 million of bonds for five years, down from $650,000 prior to the announcement, according to Phoenix Partners Group. The debt-protection costs had hit as high as $740,000 earlier Wednesday as anxiety swirled over GE's ability to access commercial paper and other debt markets.

I've been bailed out by Warren Buffett before. Yep. Remember the 1991 Treasury Auction scandal? Probably not, it was limited to a single firm - mine, and it was the presence of Warren Buffett that pulled the firm I worked back from the precipice of doing a Lehman or a Bear Stearns.

There had been hanky-panky at the Fed Auction, two top execs knew it, didn't do anything about it and the firm got caught. It was a devastating blow to our major business and our name became mud with pretty much everyone, prime brokers, the feds, the banks, the customers. Everybody. When they lost confidence in us, we lost our credit, without credit we couldn't finance our massive positions. Almost overnight our whole business began slipping away. Enter Warren Buffett. If it hadn't been for him we would have gone under. (Sound familiar? Hanky panky, loss of confidence, loss of credit, out of business. Multiply that by the whole global financial network instead of one firm and you get an idea of the magnitude of this magilla.)

That's why I'm a little concerned about this latest investment. First Goldman, now GE? It looks like Warren is instituting a bailout program of his own. I assure you, Mr. Buffett is not doing this out of the goodness of his heart (He put the hammer to them on the terms.) and I just hope he's doing it because he thinks he will make money, not because he is afraid of this sucker going down.

After all, he does have quite a bit to lose if it does. You can understand why he would be throwing cash at this problem.

The deal’s terms are practically identical to the ones Buffett got last week in making a $5 billion investment in Goldman Sachs. Buffett will buy preferred shares paying a rich 10% dividend and redeemable by the issuer at a 10% premium. Berkshire also gets warrants to buy an equal amount of common stock at a discount to recent prices.

Will he end up being the JP Morgan of the Banking Panic of 2008.

From: Lessons of the Panic of 1907. (Finally, a Wall Street meltdown older than Dinah!)

On Oct. 17, 1907, panic began to spread on Wall Street after two men tried to corner the copper market. In the months preceding the panic, the stock market was shaky at best; banks and securities firms were contending with major liquidity problems.

By mid-October, Wall Street was paralyzed; for days, there were runs on several large banks. Millions of dollars were withdrawn, and banks closed their doors. New York City was on the brink of bankruptcy. By 1908, there was a severe but short-lived recession. The man who saved the day was J.P. Morgan, who brought together leading financiers and banks to bail out the ailing market.