Wednesday, October 01, 2008

What Did Warren Do?

On Tuesday, Mr. Buffett says, he was sitting with his feet on his desk in Omaha, drinking a Cherry Coke and munching on mixed nuts, when he got an unusually candid call from a Goldman Sachs Group Inc. investment banker. Tell us what kind of investment you'd consider making in Goldman, the banker urged him, and the firm would try to hammer out a deal…
—The Wall Street Journal, September 25, 2008

Such was the Wall Street Journal’s folksy account of the Oracle of Omaha’s initial involvement in talks that led to a $5 billion investment in Goldman Sachs, the folksy details provided, of course, by the man himself.

The Oracle does like good press, when it suits him.

And so we here at NotMakingThisUp could not help but wonder about yesterday’s article in the same publication regarding a financial company Berkshire Hathaway has had an investment in for much longer than Goldman Sachs—nearly 18 years longer, by our math.

That company is Wells Fargo, which, according the Wall Street Journal was prepared to buy Wachovia Sunday afternoon, but backed out.

Here’s how the deal with Wachovia did not go down, according to that paper:

By Saturday morning, talks had heated up with various suitors, and Mr. Steel and his team flew to New York.

By the evening, Wells Fargo had begun to emerge as the favorite. It had told both Wachovia's advisers and regulators that it was prepared to do a deal without government assistance and was willing to pay a premium. Just as important, Wells Fargo representatives said they were confident they could complete a deal before the stock market opened Monday….

Midday Sunday, Mr. Kovacevich dropped a bombshell. Wells Fargo had developed concerns about the health of one of Wachovia's loan portfolios. Unless Wachovia could convince it otherwise, Wells Fargo wouldn't be willing to pay any more than $10 a share….

Now, "Mr. Kovacevich" is Dick Kovacevich, Chairman of Wells Fargo.

Warren Buffett himself has lauded Mr. Kovacevich as one of a handful of “giant-company managers whom I greatly admire,” ranking him alongside Jeff Immelt of GE and Ken Chenault of American Express.

Oh, and Berkshire Hathaway owns over 9% of Wells Fargo.

Given the long history, the large ownership stake, and the presence of Warren Buffett at the center of every financial crisis since Long Term Capital, we kept expecting Warren Buffett’s name, and Berkshire Hathaway’s ownership position, to come up in the Wall Street Journal account of Wells Fargo’s deal/no deal for Wachovia.

But they did not:

For the next four hours, Wachovia's team tried to ease his concerns, but Mr. Kovacevich kept repeating: "It's not my call, it's our loan people." Behind the scenes, Wachovia's advisers began to hear from regulators that Wells Fargo was getting cold feet.

Still, we wonder if somebody else besides anonymous “loan people” was gettting cold feet about Wells Fargo’s bid for Wachovia.

And, if so, we wonder why the same type of folksy details of that 'somebody else', like those provided in the Goldman Sachs story a few days back, never made yesterday's Wall Street Journal account of the deal/no deal for Wachovia?

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.


ann&paul said...

things I would like to know..Since bloomberg reported that GS and MER made billions on the bailout of $85bil for would be instructive to find out what price was paid..and what amount for the toxic paper paid by C and JPM as part of the takeover of Wachovia and WAMU respectively..which will then probably be converted to par after the 700bil bailout..maybe that is one of the reason for Paulsons need for secrecy and the need to have a free 'get out of jail ' card from the justice dept...what the hell happened to 'free mkts'... Paul

Anonymous said...

Jeff, at the risk of being dense, are you implying that you think Warren Buffett told them to nix the acquisition?

Anonymous said...

What did Warren do? He had a conversation with Charlie Rose today. I think it airs tomorrow morning on PBS.

Anonymous said...

Jeff: Respectfully, I have to disagree with your implication that Mr. Buffett put "pressure" on Mr. Kocevich to nix the Wachovia deal. My thinking is that, after reading WFC's latest 10-Q, the loan people probably did have something to say as, and I quote,

"Approximately 38% of WFC's
$73 billion core Home Equity portfolio and 71% of our $11 billion liquidating Home Equity
portfolio had combined loan-to-value ratios above 90%." (page 6)

I would argue that the loan people at WFC didn't want to put out additional "fires in the hole" by taking on Wachovia's bad home loans, given the deterioriating property values in California and Arizona, which means they're expecting higher losses.

Just a thought, and I could be wrong.

Annie and Lyon Jewett said...


I would argue that the loan people at WFC didn't want to put out additional "fires in the hole" by taking on Wachovia's bad home loans, given the deterioriating property values in California and Arizona, which means they're expecting higher losses.

Just a thought, and I could be wrong.

10/02/2008 12:48 AM

Aaron, I have to agree with you.

"Fires in hole" is an understatement. Remember the Wachovia TV commercial with "pick a payment (READ OPTION ARM)?"

I do. They bought World Savings and swallowed the MOAB (mother of all bombs). It became a "pick a death" scenario for them as the recast of these dud loans came to fruition.

Until LTVs stabilize, there is no future, just the mournful regret of past poor decisions.

Anonymous said...

sorry for the OT, comment, but I gotta share...
on wednesday's CNBC fast money there was not-making-this-up moment when Barney frank was explaining that the senate bailout bill wasn't being loaded up with pork, but simply being attached to a regular tax credit bill. Frank explained that The senate has to pass this bill every year for a 1 year term to avoid the GAO accurately accounting for it in the federal budget! the irony of a regulatory/bank bailout being attached to a bill primarilly structured to cook the Fed's books.

Anonymous said...

Would you like to rescind this post now Jeff?

Anonymous said...

to lyon jewett:

Well, while I appreciate your agreemment with my opinion, I was wrong on two counts:

A) Buffett, I think, had some impact on the pending WFC-Wachovia deal, as he talks about in this CNBC interview transcript, which you can read here; and

B) Apparently, there was also a recently enacted tax break by the IRS "for banks that take big losses on bad loans inherited through acquisitions," according to Eric Dash at the NYT. You can read the article yourself here.

Maybe Buffett persuaded WFC's board to make this shotgun wedding with Wachovia go through based on the Treasury bailout package plus the IRS tax break being a boon to the balance sheets of both banks (i.e., allowing them to recapitalize fairly quickly, even with anticipated deteriorating loan to value ratios).

Once again, Buffett shows Americans just how shrewd an investor he is, and more importantly, "Professor" Jeff keeps "schooling" readers like me on how shareholders with more than a 5% equity stake in a publicly traded company are going to be an influence on how the CEO and the board of directors acts on financial matters, both big and small (thanks Jeff!)

Mark Holder said...

interesting comment that they wouldn't bid more then 10 bucks unless they could get comfortable with the loans. Their official bid is now 7 bucks. Might be some upside to that coming in the following weeks. Doesn't sound like 10 bucks is out of the question.