The three most flummoxed people in the investment community on Wednesday may be Warren Buffett, Jamie Dimon and Vikram Pandit.
They have just risked billions of dollars of their respective companies – Berkshire Hathaway, JPMorgan Chase & Co and Citigroup – in banking ventures on the assumption that the US government would ease the US credit crisis with a $700-billion bailout.
The US House of Representatives voted against the measure on Monday, sending stocks plummeting. No doubt the House and the US Senate ultimately will pass a bailout Bill. How else will markets, frozen by a series of disasters from slumping home values to failed credit-default swaps be rescued?
Buffett, Dimon and Pandit certainly will keep praying.
Berkshire Hathaway, Buffett’s investment vehicle, last week bought $5 billion in preferred stock of the Goldman Sachs Group, an investment-bank-turned-commercial-bank that was crying for capital. Public investors then bought $5 billion in Goldman Sachs’ common shares at $123.
Buffett negotiated a good deal. His preferred stock pays dividends of 10 per cent. He also got warrants to buy $5 billion in Goldman common shares at $115. That looked like an instant bonanza when the Goldman stock jumped to $137.99. But in yesterday’s market debacle, the shares slumped to $120.70.
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Taking on WaMu
Dimon made his bailout bet – with help from the US Federal Deposit Insurance Corp (FDIC) – by buying the assets of the biggest US savings and loan, the disintegrating Washington Mutual (WaMu). He got WaMu for a song, but along with acquiring branches in California and Florida, he took on $176 billion in WaMu loans. JPMorgan says it will write off $31 billion in bad WaMu assets immediately.
Just hours before the bailout went down, Pandit’s Citigroup, also with the help of the FDIC, agreed to buy Wachovia Corp’s bad loans and bank branches for $2.2 billion. Citigroup, which has already written off $61 billion in its own mortgage losses, will absorb as much as $42 billion in losses from the $312 billion in Wachovia loans it’s assuming. Citigroup said it would raise $10 billion in new capital. Before the House vote, Pandit could hope he would have the same luck JPMorgan did after buying WaMu. Investors snapped up $10 billion in new Morgan shares at $40.50. The stock then jumped to $49 before dropping to $41 yesterday.
Sinking deeper?
While Pandit’s takeover of Wachovia assets may have looked opportunistic, it’s a wonder that Citigroup wants to make any acquisition at all. Its adventure as an all-encompassing financial services company has been a flop. Kenneth Lewis, the chief executive officer of Bank of America, who is apeing Citigroup with his recent takeovers of stockbroker Merrill Lynch & Co and mortgage giant Countrywide Financial Corp, please note.
John Mack, the CEO of Morgan Stanley, no doubt was also dismayed by the bailout vote. Like Goldman Sachs, Morgan Stanley has become a bank holding company and needs more capital after big mortgage losses. Yesterday, he struck an agreement with the Mitsubishi UFJ Financial Group to sell a 21 per cent stake in the firm for $9 billion.