Chapter Excerpt from Of Permanent Value: The Story of Warren Buffett / 2009 Woodstock Edition by Andy Kilpatrick – Buffett’s Behavior During the Financial Meltdown

BIRMINGHAM, Ala.--(EON: Enhanced Online News)--The following is an excerpt from Andy Kilpatrick’s biography on Warren Buffett, Of Permanent Value: The Story of Warren Buffett/2009 Woodstock Edition. This particular chapter examines Buffett’s actions during the current financial meltdown and how his actions influenced a nation. The 1,972-page book has 1,500 photos with 200 in color and can be purchased from Amazon by following this link.

“I’ve been buying American stocks. This is my personal account I’m talking about, in which I previously owned nothing but United States government bonds.”

One of Buffett’s Finest Hours

The year 2008 was rocking and rolling, but more than that — reeling.

In that annus horribilis, the world saw an economic meltdown of biblical proportions with unprecedented collapses in both the housing and credit markets. During this wide-spread financial panic, Warren Buffett’s Berkshire Hathaway slumped along with the world stock markets much of the year. Berkshire’s stock price plunged 32%, beginning the year at $141,600 and ending at $96,600, with short-lived extremes of $147,000 and $74,100 along the way. The sadly memorable year was Berkshire’s worst annual dollar-wise slump ever and the worst annual percentage slump in three decades. Still, Berkshire’s 2008 results compared somewhat favorably, if you will, with the 38% decline in the S&P 500 index in 2008.

As the year mercifully drew to a close, Buffett said that this wasn’t the first time Berkshire had seen big declines. “It’s happened to me three other times in my life, too. It happened when it went from 90 to 40 back in 1974, and it happened in 1987. It went down 50% in 1998 to 2000. I mean, I hope I live long enough so it happens a couple more times to me” (Fox Business Network, November 21, 2008). Even in the midst of the 2008 financial fiasco, Buffett and his powerful investment vehicle, Berkshire Hathaway, had a golden hour.

By September 15, 2008, the worldwide financial crisis — with its many mutations — was in full throttle. The prior weekend, Lehman Brothers filed for the biggest bankruptcy in history; Merrill Lynch was hastily sold to Bank of America; and the stock of AIG, once the world’s largest insurance company, plunged. Countrywide Financial Corp. had collapsed. Bear Stearns had been sold for a song to J. P. Morgan. Fannie Mae and Freddie Mac had been seized by the government.

Bank and brokerage stocks skidded as the Dow plunged 504 points that dreadful mid-September Monday; it was the worst day for the U.S. markets since the 9/11 attacks. But even worse was to come before the month ended. U.S. stocks plunged 26% during the next ten trading days. Major American corporations were vanishing right before our eyes.

Some money market funds, after suffering losses tied to commercial paper from Lehman Brothers, were hit with a wave of redemptions. The Reserve Primary Fund “broke the buck” with its per-share net asset value dropping below $1.

Treasury Secretary Hank Paulson seemed to be acting as president of the United States. Or was it really Buffett in that role? After all, the government sought Buffett’s advice about a $700-billion bailout package.

AIG, the once-huge insurer and large fixture in the canyon of finance, was having big trouble handling its own risk. The night of September 15, the federal government bailed out AIG with an $85-billion loan, taking over ownership of almost 80% of the company. With this turn of events, to whom would you turn for an insurance policy on an airplane, a windstorm, or an earthquake?

Days later, an AIG subsidiary announced it had arranged reinsurance coverage with a Berkshire unit. The Dow Jones Industrial Average remained in free fall. Commercial paper was, well, paper. During this period, for the first time since the 1930s, Treasurys went negative, meaning that investors were willing to accept a negative return for safety.

Then, when a total financial meltdown seemed a certainty, word came of a government plan to bail out troubled mortgage-related assets at a possible cost of hundreds of billions of dollars, the most sweeping intervention in the financial markets since the Great Depression. Still, Berkshire held up reasonably well compared with the stocks of many other companies. This was due possibly to the seeming brilliance of its $4.7-billion purchase agreement (which was later undone—still to Berkshire’s great profit) with Constellation Energy at what appeared to be half-price, and because of an ongoing flight to the safety of Berkshire’s triple-A credit rating.

Treasury Secretary Paulson worked all hours trying to stem off a Depression-like financial panic. John McCain, the 2008 Republican presidential candidate, at first said that he didn’t favor a bailout; later, he endorsed a bailout version which then Democratic presidential contender Barack Obama favored after conferring with Warren Buffett. (Immediately after being elected president, Obama named Buffett as one of his economic advisers.)

The following week, the week of September 22, Washington Mutual failed and was sold to J. P. Morgan. The vanishing of American institutions continued.

Buffett was quoted as saying that current economic conditions were like an “economic Pearl Harbor,” adding that he supported Paulson’s plan for a $700-billion bailout of bad mortgage-related debts.

In the midst of the devastation, Buffett said, “I am betting on the Congress doing the right thing for the American public and passing this bill. I certainly have a vote of confidence in Paulson and vote of confidence in Congress” (CNBC, September 24, 2008).

Arguing for passage of the bailout bill, Buffett told CNBC that if it were not passed, “There was just no telling what would happen.” He continued, “Last week we were at the brink of something that would have made anything that’s happened in financial history look pale. We were very, very close to a system that was totally dysfunctional and would have not only gummed up the financial markets, but gummed up the economy in a way that would take us years and years to repair. We’ve got enough problems to deal with anyway. I’m not saying the Paulson plan eliminates those problems. But it was absolutely and is absolutely necessary, in my view, to really avoid going over the precipice.”

With Congress bickering over the bailout bill, Buffett still urged passage. He stated his belief that if the bill were not passed, the nation would face the “biggest financial meltdown in American history.”

He said the bailout might even make money for the government in the long run and that he would buy the damaged loans if he could get $700 billion on the government terms. After having spent about $10 billion in investments within a week, he added, “Unfortunately, I’m tapped out.”

Buffett’s investment in Goldman Sachs seemed to temporarily bolster confidence in Goldman and the other markets in general. But on September 29, the Dow took a record 778-point plunge in response to the House of Representatives’ initial rejection of the bailout bill.

Even the record plunge did not stop Buffett from placing his bets. Despite his claim to be “tapped out,” only eight days after the Goldman deal, he tilted the Berkshire keg for another purchase and found $3 billion more to invest in a preferred stock position in General Electric. The GE investment was especially sexy because it carried a whopping 10% dividend and the right to buy billions more in stock.

Then three days after the GE deal, as Wachovia Bank’s stock plunged, Citigroup tried to buy most of Wachovia at bottom dollar. However, Wells Fargo, a Berkshire investee, swept in to buy the beleaguered company.

In an Op-Ed piece in the New York Times (October 17, 2008) entitled “Buy American. I am.” Buffett said that for his personal account, “I’ve been buying American stocks. This is my personal account I’m talking about, in which I previously owned nothing but United States government bonds.”

Characterized by day after day of triple-digit drops in the stock market, the financial world continued to spiral. Meanwhile, Buffett stood by with cash on hand. His presence and activity were so powerful that he was mentioned by both McCain and Obama as a potential Treasury Department Secretary. The sudden endorsement by both candidates at the same time caused Buffett’s phone to ring off the hook.

His role in bolstering finances and confidence was compared with J. P. Morgan’s role in coming to the government’s rescue during the Panic of 1907 (New York Times, October 6, 2008).

The Panic of 2008 was eventually calmed a bit by the passage into law of the bailout bill. The historical and terrifying period put into high relief one of Berkshire’s finest hours. Buffett took this opportunity to fire off one of his classic quips, “I may go back to delivering newspapers.”