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.

Jeff Matthews
I Am Not Making This Up

© 2008 NotMakingThisUp, LLC

The content contained in this blog represents the opinions of Mr. Matthews.
Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations. This commentary in no way constitutes investment advice. It should never be relied on in making an investment decision, ever. Nor are these comments meant to be a solicitation of business in any way: such inquiries will not be responded to. This content is intended solely for the entertainment of the reader, and the author.


Anonymous said...


First off, I love the blog and I look forward to every post.

However, in this case, I disagree that it doesn't make sense for Buffett to at least be in talks with AIG, if for no other reason than he might be able to pickup some pieces of the company without having to assume all of the risks.

Consider his purchase of Johns Manville, which he picked up without having to assume its asbestos liabilities. Or take, Buffett's offer earlier this year to the mono-line insurers to take on a portion of their liablities.

Also, Buffett picked up great pipeline assets on the cheap from Dynegy and Williams in the wake of the Enron debacle.

Lastly, Buffett confirmed that he was in talks regarding Long Term Capital Management when it blew up, but his offer was rejected for being to low (shocking)!

I agree that it would make no sense for Buffett to take on the entire company, but I think it is perfectly reasonable for him to try and pick up parts of what could still be a valuable franchise.

Anonymous said...

Jeff - John Hempton over at Bronte Capital also made the point that Berkshire does not get into the types of insurance where AIG allegedly excels (I believe he mentions life and property insurance), so I guess AIG would be a poor match in addition to all the nasty, complex derivative transactions. All in all, a foolish rumor it seems.

Anonymous said...

I think Berkshire would only do AIG in bankruptcy, so it could strip off the bad derivatives and other contracts that were concocted in the Greenberg era. I think Buffett would be thrilled to have AIG, but only under those conditions.