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Monday 6 October 2008
Like J.P. Morgan, Warren Buffett Braves a Crisis
In the midst of a financial crisis, a towering figure of American business steps forward with his reputation and financial resources for public good and personal gain.
In the midst of a financial crisis, a towering figure of American business steps forward with his reputation and financial resources for public good and personal gain.
Their times and personalities are vastly different, of course. But J. Pierpont Morgan’s role in the Panic of 1907 has its echo in Warren Buffett’s actions during the current financial troubles.
“What Buffett is doing is similar in ways to what Morgan did in 1907,” said Richard Sylla, an economist and financial historian at the Stern School of Business at New York University. “It’s what you might call profitable patriotism.”
Comparing the two men and their moves in periods of market turmoil, just more than a century apart, reveals how much some things have changed over the years and how other things have not, according to business historians and finance experts.
Morgan was 70 during the financial crisis of 1907, in the twilight of his career. Buffett is 78. Like Morgan so long ago, Buffett now finds himself “at the center of things; he draws headlines and he inspires confidence,” said Robert Bruner, dean of the Darden School of Business at the University of Virginia, and a co-author with Sean Carr of “The Panic of 1907: Lessons From the Market’s Perfect Storm” (Wiley, 2007).
In the last two weeks alone, Buffett has exercised his influence mainly by investing in embattled blue-chip companies, committing a total of $8 billion to Goldman Sachs and General Electric. He drove hard bargains and invested on favorable terms.
Buffett has been fielding many phone calls recently because of his cash, his reputation and his ability to act quickly. The GE investment, for example, was put together in a matter of hours, after GE reached out to Buffett through his longtime banker at Goldman Sachs, Byron Trott.
“In the last few weeks, everyone who has been in trouble or thought they were in trouble has called him,” said Alice Schroeder, author of “The Snowball: Warren Buffett and the Business of Life,” a biography released last week by Bantam. Schroeder, a former Wall Street analyst, is the first Buffett biographer to receive his cooperation, and she said she talked to him regularly.
The companies benefit from the credibility dividend that comes with the Buffett endorsement. Last Thursday, the day after he announced his investment in GE, the company raised more than $12 billion in a public sale of shares.
Buffett is also the largest shareholder in Wells Fargo, which last Friday swept in with a $15 billion bid for another banking company, Wachovia, offering seven times what Citigroup did at the start of the week.
Buffett is the world’s richest person, topping this year’s ranking of billionaires by Forbes magazine with $62 billion. Buffett has pledged to give most of that fortune to charity upon his death.
Yet even more than money, Buffett brings the reputational capital that comes from being a peerless long-term investor, revered for his acumen and sound judgment.
“So there is immense signaling power to Buffett’s moves, showing others that now may be a good time to invest,” Bruner said.
Morgan wielded his power over the financial markets more directly than Buffett, though his personal wealth lagged the early 20th century industrial titans John Rockefeller and Andrew Carnegie.
In 1907, the United States had no central bank. The financial crisis began that year because trust companies handling wills and estates — firms long synonymous with safe investment — exploited legal loopholes and became wild speculators in the stock market. When those investments soured, the collapse of the trusts threatened the financial system.
Morgan stepped in and functioned as America’s central bank. The United States Treasury handed him $25 million (more than $550 million today) with the blessing of President Theodore Roosevelt — who was not a natural Morgan ally, given his aversion for big business and its leaders, memorably deriding them as “malefactors of great wealth.”
But those were dire economic times. Morgan gathered his fellow financiers at his New York mansion and hammered out a rescue plan. After a few rocky weeks, the panic subsided.
“In 1907, Morgan was not only committing some of his own money but also organizing the entire financial community to join in the rescue,” said Ron Chernow, a business historian and the author of “The House of Morgan” (Atlantic Monthly Press, 1990).
Indeed, Chernow said, one motivation for creating the Federal Reserve in 1913 was that Morgan would not be around forever. Morgan died that same year.
Morgan also used the power of his personality and public statements to try to sway market behavior and psychology. In the current crisis, when authorities became concerned that short-sellers were accelerating the stock-market swoon, the Securities and Exchange Commission issued a legal order prohibiting short-selling in the shares of roughly 800 companies.
In 1907, financial policies were less formal. Morgan simply stated that short-sellers, who bet that a company’s share price would drop, “shall be properly attended to,” said John Steele Gordon, a business historian and author.
His words were to be taken as an implied threat, and a reminder that he was watching. “Nobody wanted to find out what that might mean,” Gordon explained. “In Morgan’s day, the world was so much smaller, and Morgan was so powerful.”
The estimated $44 billion in cash that Buffett’s company, Berkshire Hathaway, has on hand is a modest sum compared with the vast size of today’s financial markets. So he can make selective investments but not turn things single-handedly.
At a time when government looms so much larger in the economy than it did a century ago, Buffett, unlike Morgan, is not directly involved in the current rescue. Yet Buffett has said that the government has asked for his advice, and he knows and admires the architect of the rescue package, Treasury Secretary Henry Paulson Jr.
Buffett, according to Schroeder, has over the years become more comfortable and more committed to speaking out on public issues. “It’s not lost on him that people trust him more than they trust politicians,” she said.
Buffett still speaks to the press only occasionally, and he declined to be interviewed for this article. But after the House of Representatives rejected the rescue plan last Monday, Buffett got a call from Charlie Rose, the television interviewer, who has known Buffett for years. He urged Buffett to appear on his PBS interview show as soon as possible.
“I told him, ‘You have to do this,’ “ Rose recalled in an interview on Saturday. “ ‘No one has your credibility, and people want to hear what you have to say.’ “
Buffett agreed to do it, and Rose flew to San Diego, where Buffett would be on Wednesday. The hourlong interview on Wednesday night was vintage Warren Buffett: calm, plain-spoken and wry.
He called the current crisis an economic Pearl Harbor, requiring immediate action. Its biggest single cause, he explained, was the real estate bubble. “Three hundred million Americans, their lending institutions, their government, their media, all believed that house prices were going to go up consistently,” he said. “Lending was done based on it, and everybody did a lot of foolish things.”
As far back as 2003, Buffett had warned that the complex securities at the center of today’s troubles — once so profitable, but now toxic — were “financial weapons of mass destruction.” These securities were engineered by the math quants on Wall Street, and in the interview Buffett expressed his disdain: “Beware of geeks bearing formulas.”
To help pay for the rescue, the government should raise taxes on the wealthy, Buffett suggested. “I’m paying the lowest tax rate that I’ve ever paid in my life,” he said. “Now, that’s crazy.”
On Friday, after public sentiment shifted, the House passed the financial rescue package. But the markets are still weak, and it remains to be seen whether Buffett’s recent investments will prove to be wise ones.
“It’s a high-risk moment, and I think he may have ventured into the waters prematurely,” said Chernow, the historian. “But Warren Buffett is worth many billions of dollars, and I am assuredly not.”
1 comment:
Like J.P. Morgan, Warren Buffett Braves a Crisis
By Steve Lohr
6 October 2008
In the midst of a financial crisis, a towering figure of American business steps forward with his reputation and financial resources for public good and personal gain.
Their times and personalities are vastly different, of course. But J. Pierpont Morgan’s role in the Panic of 1907 has its echo in Warren Buffett’s actions during the current financial troubles.
“What Buffett is doing is similar in ways to what Morgan did in 1907,” said Richard Sylla, an economist and financial historian at the Stern School of Business at New York University. “It’s what you might call profitable patriotism.”
Comparing the two men and their moves in periods of market turmoil, just more than a century apart, reveals how much some things have changed over the years and how other things have not, according to business historians and finance experts.
Morgan was 70 during the financial crisis of 1907, in the twilight of his career. Buffett is 78. Like Morgan so long ago, Buffett now finds himself “at the center of things; he draws headlines and he inspires confidence,” said Robert Bruner, dean of the Darden School of Business at the University of Virginia, and a co-author with Sean Carr of “The Panic of 1907: Lessons From the Market’s Perfect Storm” (Wiley, 2007).
In the last two weeks alone, Buffett has exercised his influence mainly by investing in embattled blue-chip companies, committing a total of $8 billion to Goldman Sachs and General Electric. He drove hard bargains and invested on favorable terms.
Buffett has been fielding many phone calls recently because of his cash, his reputation and his ability to act quickly. The GE investment, for example, was put together in a matter of hours, after GE reached out to Buffett through his longtime banker at Goldman Sachs, Byron Trott.
“In the last few weeks, everyone who has been in trouble or thought they were in trouble has called him,” said Alice Schroeder, author of “The Snowball: Warren Buffett and the Business of Life,” a biography released last week by Bantam. Schroeder, a former Wall Street analyst, is the first Buffett biographer to receive his cooperation, and she said she talked to him regularly.
The companies benefit from the credibility dividend that comes with the Buffett endorsement. Last Thursday, the day after he announced his investment in GE, the company raised more than $12 billion in a public sale of shares.
Buffett is also the largest shareholder in Wells Fargo, which last Friday swept in with a $15 billion bid for another banking company, Wachovia, offering seven times what Citigroup did at the start of the week.
Buffett is the world’s richest person, topping this year’s ranking of billionaires by Forbes magazine with $62 billion. Buffett has pledged to give most of that fortune to charity upon his death.
Yet even more than money, Buffett brings the reputational capital that comes from being a peerless long-term investor, revered for his acumen and sound judgment.
“So there is immense signaling power to Buffett’s moves, showing others that now may be a good time to invest,” Bruner said.
Morgan wielded his power over the financial markets more directly than Buffett, though his personal wealth lagged the early 20th century industrial titans John Rockefeller and Andrew Carnegie.
In 1907, the United States had no central bank. The financial crisis began that year because trust companies handling wills and estates — firms long synonymous with safe investment — exploited legal loopholes and became wild speculators in the stock market. When those investments soured, the collapse of the trusts threatened the financial system.
Morgan stepped in and functioned as America’s central bank. The United States Treasury handed him $25 million (more than $550 million today) with the blessing of President Theodore Roosevelt — who was not a natural Morgan ally, given his aversion for big business and its leaders, memorably deriding them as “malefactors of great wealth.”
But those were dire economic times. Morgan gathered his fellow financiers at his New York mansion and hammered out a rescue plan. After a few rocky weeks, the panic subsided.
“In 1907, Morgan was not only committing some of his own money but also organizing the entire financial community to join in the rescue,” said Ron Chernow, a business historian and the author of “The House of Morgan” (Atlantic Monthly Press, 1990).
Indeed, Chernow said, one motivation for creating the Federal Reserve in 1913 was that Morgan would not be around forever. Morgan died that same year.
Morgan also used the power of his personality and public statements to try to sway market behavior and psychology. In the current crisis, when authorities became concerned that short-sellers were accelerating the stock-market swoon, the Securities and Exchange Commission issued a legal order prohibiting short-selling in the shares of roughly 800 companies.
In 1907, financial policies were less formal. Morgan simply stated that short-sellers, who bet that a company’s share price would drop, “shall be properly attended to,” said John Steele Gordon, a business historian and author.
His words were to be taken as an implied threat, and a reminder that he was watching. “Nobody wanted to find out what that might mean,” Gordon explained. “In Morgan’s day, the world was so much smaller, and Morgan was so powerful.”
The estimated $44 billion in cash that Buffett’s company, Berkshire Hathaway, has on hand is a modest sum compared with the vast size of today’s financial markets. So he can make selective investments but not turn things single-handedly.
At a time when government looms so much larger in the economy than it did a century ago, Buffett, unlike Morgan, is not directly involved in the current rescue. Yet Buffett has said that the government has asked for his advice, and he knows and admires the architect of the rescue package, Treasury Secretary Henry Paulson Jr.
Buffett, according to Schroeder, has over the years become more comfortable and more committed to speaking out on public issues. “It’s not lost on him that people trust him more than they trust politicians,” she said.
Buffett still speaks to the press only occasionally, and he declined to be interviewed for this article. But after the House of Representatives rejected the rescue plan last Monday, Buffett got a call from Charlie Rose, the television interviewer, who has known Buffett for years. He urged Buffett to appear on his PBS interview show as soon as possible.
“I told him, ‘You have to do this,’ “ Rose recalled in an interview on Saturday. “ ‘No one has your credibility, and people want to hear what you have to say.’ “
Buffett agreed to do it, and Rose flew to San Diego, where Buffett would be on Wednesday. The hourlong interview on Wednesday night was vintage Warren Buffett: calm, plain-spoken and wry.
He called the current crisis an economic Pearl Harbor, requiring immediate action. Its biggest single cause, he explained, was the real estate bubble. “Three hundred million Americans, their lending institutions, their government, their media, all believed that house prices were going to go up consistently,” he said. “Lending was done based on it, and everybody did a lot of foolish things.”
As far back as 2003, Buffett had warned that the complex securities at the center of today’s troubles — once so profitable, but now toxic — were “financial weapons of mass destruction.” These securities were engineered by the math quants on Wall Street, and in the interview Buffett expressed his disdain: “Beware of geeks bearing formulas.”
To help pay for the rescue, the government should raise taxes on the wealthy, Buffett suggested. “I’m paying the lowest tax rate that I’ve ever paid in my life,” he said. “Now, that’s crazy.”
On Friday, after public sentiment shifted, the House passed the financial rescue package. But the markets are still weak, and it remains to be seen whether Buffett’s recent investments will prove to be wise ones.
“It’s a high-risk moment, and I think he may have ventured into the waters prematurely,” said Chernow, the historian. “But Warren Buffett is worth many billions of dollars, and I am assuredly not.”
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