Yesterday, the NYT floated a rumor that Warren Buffett was considering taking a stake in Bear Stearns. Have a read of the actual flailing report itself:
Bear Stearns, its shares and reputation beaten down
after the collapse of two hedge funds, is in serious talks with several
outside investors, including Warren E. Buffett, about selling as much
as 20 percent of the firm, people briefed on the discussions told The
New York Times Wednesday.
Other investors who have expressed an interest in buying a minority stake include the Bank of America, Wachovia and two Chinese institutions — the Citic Group and China Construction Bank, these people said.
There are many rumors I give a smidgen of credit for being very loosely based on fact. Where there’s smoke, there’s fire, etc.
This is not one of them.
First off, Bear Stearns (BSC) has become a giant rumor factory itself. First, a Chinese bank was taking a big stake. Then, a major money center bank was an acquirer. And now, Warren Buffett.
That’s right, the world’s best known value investor wants to own a company that could very likely have zero book value. A buyer of businesses with reliable earnings streams now wants to get into trading? Buffett is the guy who had an unpleasant time running the ego factory at Salomon Brothers, and now we are told is looking at Bear? The man who is the chief spokesperson for the "Derivatives are financial WMDs" — he’s a tire kicker for the poster boy for MBS derivatives driven hedge fund disasters?
As we noted yesterday, much of the broker’s reported earnings gains are accounting sleight of hand. Bear Stearns’ earnings benefited from a drop in the value of their own debt — about $225 million. Some people have estimated that the gains from such write downs were 140% of the quarterly earnings.
So while I doubt Buffett is seriously considering buying a stake in Bear, it does make sense that BSC needs a deep pocketed partner. Let’s go to Punk Ziegel analyst Richard Bove, the man who had a very timely sell call on the brokers months ago:
"According to Bove, Bear needs a third party to make an
investment for a few reasons. First, the company’s cost of funding has
increased, making it less competitive in a number of businesses where
it is a factor, with prime brokerage at the top of the list.
“Therefore,” Bove said, “Bear needs a deep pocket partner to shore up its balance sheet.”
also noted that the company’s main business, the origination,
packaging, securitizing and structuring of mortgage products is under
pressure and will remain under pressure for some time."
However, it does not take more than a nano second of contemplation to recognize
this as little more than an end of quarter goosing from the usual
Indeed, it seems that every time a given sector or stock is in trouble, someone floats a rumor that Buffett is a buyer. I had the same reaction to this absurdity that I did back in February when we heard Warren was buying a major stake in a large public home builder (Surprise! turned out to be nonsense). A commenter yesterday pointed out this November 2006 story regarding the Bill & Melinda Gates Foundation, a charitable trust that for some reason was taking a stake in 7 homebuilders. (Also, if you forward this email to 10 people, Bill Gates will give you $1000!)
It looks like someone is simply wildly throwing shit against the side of the barn, hoping something will stick. That may work for cooking pasta, but its not a way to base your trading and investing.
The timing of these rumors — option expiry, end of quarter mark up, or pre-earnings — always seems to be suspect.
Then there’s the companies themselves: Funny, these rumors always seem to fly around troubled firms or industries that just happen to have very large short interests.
Gee, do you think anyone is trying to squeeze the shorts?
UPDATE: September 27, 2007 3:30pm
Why am I not surprised by this announcement?
"At Bear Stearns, timing is everything. The struggling brokerage house raised at least $1 billion this afternoon with a surprise sale of 10-year bonds. The sale, which was met by strong demand in the bond market, comes just a day after Bear shares surged nearly 8% on rumors that the Wall Street firm was near a deal to bring in a big outside investor. One report said Bear has been talking with billionaire value investor Warren Buffett.
On Thursday, Bear Stearns took advantage of that momentum and some strong demand in the corporate bond market to raise some money. Sources say the deal drew more than $3 billion in orders for $1 billion worth of bonds, though it may be upsized.
The bonds are expected to be priced at 190 basis points over comparable 10-year Treasury bonds. Investors say that is attractive for the senior bonds, relative to subordinated Bear Stearns bonds and comparable Lehman Brothers (LEH) debt, both of which traded recently at about 175 basis points over Treasuries."
Gee, I guess yesterday’s rumors were just a coincidence . . .
Buffett Said to Consider Bear Stake
LANDON THOMAS Jr.
NYT, September 26, 2007
Bear Soars On Buffett Rumors
09.26.07, 4:15 PM
Bear Taps the Bond Market
TheStreet.com, 9/27/2007 1:19 PM EDT