Tuesday, September 16, 2008
Rumors Spring Eternal
“The situation is dire.”
That’s the Wall Street Journal, quoting “a person close to AIG” in this morning’s paper.
Dire AIG's situation may be, but that did not stop rumors from hitting the tape—including the same rumor that always seems to crop up every time a financial company’s situation gets “dire” in the seemingly perpetual financial crisis of the last two years.
And we’re not talking about a negative rumor.
We’re talking about the rumor that Warren Buffett is either in talks with, or planning to buy stock in, or meeting with officials about, the company in question.
The reason for this recurring rumor, of course, is that Buffett heads a company called Berkshire Hathaway that happens to have a Triple-A balance sheet—a true Triple-A balance sheet, not a manufactured Triple-A balance sheet. So Berkshire seems to always be mentioned as the rescuer of choice every time this stuff happens.
Sure enough, the Berkshire rumor went around yesterday, thanks to Reuters, which reported that Berkshire had been in talks with AIG.
Yet the rumor made no sense to us.
First of all, Buffett only makes investments when he knows he’ll make money. He does that by buying assets at prices observably below their fair value. How much of AIG’s book of business can be rationally evaluated, and priced, in a few days’ time?
Second, Berkshire spent nearly five years extracting General Re—a company he knew very well, thought was healthy, and was certain he was buying at a good price—from 23,000 derivative contracts that cost Berkshire $400 million to clean up. And that was when the market for derivatives was healthy. How long would it take to fix an unhealthy AIG?
Third, Berkshire and AIG have a rocky history, with four of General Re’s former executives being convicted early this year of helping AIG construct a “sham” transaction to help AIG look better for Wall Street’s Finest.
All in all, the Berkshire-for-AIG rumor made no sense to us.
Indeed, today's Wall Street Journal reports that the company merely "talked with" Warren Buffett. Hardly the stuff of major acquisitions at a time of crisis.
But hope springs eternal.
And so will the rumor that Warren Buffett is going to rescue the next guy to get in trouble.
I Am Not Making This Up
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Posted by Jeff Matthews at 8:34 AM