Saturday, November 22, 2008

Is Buffett Worried? Part II: “It’s Not Personal, Sonny.”

Finally, Berkshire Looks Undervalued

Ignore misplaced skepticism -- Buffet's baby is finally cheap again.

—Barron’s, November 24, 2008

Well, now we know.

The culprit in Berkshire Hathaway’s recent fall from grace—at least in the credit default swap market—may just be the very firm Warren Buffett himself invested in just two months ago.

That firm would be Goldman Sachs.

According to this week’s Barron’s:

The Street talk is that Berkshire's counterparties, believed to include Goldman, are worried about their Berkshire financial exposure and are trying to hedge that by buying protection in the credit-default swap market.

Barron’s goes on to point out what we alerted readers here on Thursday:

The cost of that protection last week hit five percentage points -- up from a half-point earlier this year, and seemingly absurd for a company that still deserves a triple-A credit rating. Similar protection for Chubb (CB), which has a lower credit rating, costs less than a percentage point.

What makes Barron’s speculation particularly juicy is the fact that Warren Buffett is an extremely loyal person.

Buffett almost never replaces the CEOs of the 76-plus Berkshire companies, short of government pressure in the case of General Re; never sells what he calls Berkshire’s “permanent” investments in the likes of Coke and Washington Post, no matter how high the price or how much their prospects have change; and even hangs on to once-great companies such as Fruit of the Loom despite the near-total evaporation of their competitive “moat” and the inevitable decay in their business.

One wonders, if the Barron’s speculation is true, how Buffett feels about Goldman Sachs’ own peculiar notion of “loyalty”…which is to say more of the Michael Corleone type—“It’s not personal, Sonny. It’s strictly business”—than of his own.

Jeff Matthews
I Am Not Making This Up

© 2008 NotMakingThisUp, LLC

The content contained in this blog represents the opinions of Mr. Matthews.
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Randy said...

He understands the godfather quote. Remember he was happy to lend his USG shares out to short sellers. In this case, if someone has to hedge, they hedge. He may actually be happy to get a chance to buy back shares cheap, we'll see if he initiates the Dutch Tender he was planning in 2000, the last time the stock was nearly this cheap.

The real question is what kind of exposure does GS have here? BRK's debt is safe. Methinks the buyers of those 15/20 year index puts are the ones worried about whether BRK can pay up. Is GS one of them? It's a silly way to hedge, esp. with so little risk of BRK defaulting.

I'm just grateful they enabled me to become a BRK shareholder again at $81k last week. Never thought the price would be attractive enough.

Josh said...

Do you think they'll even be around long enough for him to exact revenge? It's heresy to say, but the tsuami here is bigger than the pool Buffett has been swimming in for half a century. He's wrong this time. Reflation. High oil. More reflation. More high oil. I'm with Clarium and Balestra on this one.

whydibuy said...

It wouldn't be the first time Buffett has aided in his own demise. Witness his investment in USG. After his initial buy at 15 and then on the way down from 100 he added at 40-46 and had stated that he was fine with people shorting the stock and he would not put it in a cash account. If I recall, the bear was Carl Icahn. Sure was a friend to carl as USG trades at 7 now. Personally, this fear may signal the end stages of the bear market where even the bluest of bluechips are doubted. Yes, fear has finally progressed even to BRK .