Fri, 03/12/2010 – 17:51
This is interesting. From the newly released report by the Lehman Bankruptcy examiner. My notes in [brackets].
“Fuld and Buffett spoke on Friday, March 28, 2008. They discussed Buffett investing at least $2 billion in Lehman. Two items immediately concerned Buffet during his conversation with Fuld. First, Buffett wanted Lehman executives to buy under the same terms as Buffett. Fuld explained to the Examiner that he was reluctant to require a significant buy‐in from Lehman executives, because they already received much of their compensation in stock. However, Buffett took it as a negative that Fuld suggested that Lehman executives were not willing to participate in a significant way. [With the stock trading at a price where you could entice Buffett to buy it, if the Lehman folks will not make a bet alongside Buffett that his investment can help raise enough capital to save the firm, they’ve just acknowledged that in their hearts they know Lehman is doooomed…] Second, Buffett did not like that Fuld complained about short sellers. Buffett thought that blaming short sellers was indicative of a failure to admit one’s own problems. [Buffett always has this view about CEOs who complain of short-sellers. He may even agree that the short-sellers aren’t affecting the stock price. He just feels that ultimately the “weighing machine” is what matters, and the CEO’s job is to focus on the business and not the behavior of speculators.]
“Following his conversation with Buffett, Fuld asked Paulson to call Buffett, which Paulson reluctantly did. Buffett told the Examiner that during that call, Paulson signaled that he would like Buffett to invest in Lehman, but Paulson “did not load the dice.” [an interesting term for Buffett to choose since loading the dice is a form of cheating]. Buffett spent the rest of Friday, March 28, 2008, reviewing Lehman’s 10‐K and noting problems with some of Lehman’s assets. Buffett’s concerns centered around Lehman’s real estate and high yield investments, lending‐related commitments derivatives and their related credit‐market risk, Level III assets and Lehman’s securitization activity. [the usual suspects] On Saturday, March 29, 2008, Buffett learned of a $100 million problem in Japan that Fuld had not mentioned during their discussions, and Buffett was concerned that Fuld had not been forthcoming about the issue. [wonder how he learned of this? little gaps like that in an examiner’s report are always interesting. obviously he did not learn from Lehman. from the Treasury then? Paulson? ] The problems Buffett saw in the 10‐K along with Fuld’s failure to alert Buffett to the issue in Japan cemented Buffett’s decision not to invest in Lehman. [probably any one of these factors would have been enough; the black box aspect of AIG was so troubling to Buffett that all by itself it prevented him from taking significant credit risk from them on behalf of Berkshire.]
At some point in their conversations, Fuld and Buffett also discovered that there had been a miscommunication about the conversion price. Buffett was interested only in convertible preferred shares. Buffett told Fuld that he was willing to agree to a $40 conversion price per share, while Fuld thought Buffett was offering to buy in at “up‐ 40,” or 40% above the current market price, which would have been about $56 per share. [Fuld must have been hallucinating or else unfamiliar with Buffett’s investing history.] On Friday, March 28, 2008, Lehman’s stock closed at $37.87. Fuld spoke to Lehman’s Executive Committee and several Board members about his conversations with Buffett. Lehman recognized that an investment by Buffett would provide a “stamp of approval.” However, Lehman already had better offers for its April capital raise, and Lehman did not think it could give a better deal to Buffett at the same time it gave a less attractive deal to others. [The fatal mistake. Buffett ALWAYS gets a better deal than others. That’s the whole point, right? Fuld is delusional or uninformed. Where is Paulson? Maybe Fuld wasn’t listening to him.] On Monday, March 31, 2008, before Buffett could tell Fuld that he was not interested, Fuld called Buffett to say that Lehman could not accept his terms.”
Later. Lehman throws a “Hail Mary” pass to Sokol to try to score with Buffett:
Skip McGee, the head of Lehman’s Investment Banking Division, “contacted [Sokol] again in late August or early September 2008 and outlined Lehman’s “Gameplan” for survival, specifically SpinCo. [Choice of name more evidence that hallucination is going on inside Lehman.] During a subsequent telephone call with Sokol, McGee explained the “good bank/bad bank” scenario and stated that Lehman would need an investor. Sokol believed the e‐mail and call were intended to induce Sokol to pass that information on to Buffett, so Sokol briefed Buffett on SpinCo. [If, in spring 2008, even the failing Lehman understands Sokol to be Buffett’s successor, the coronation has proceeded too far down the red carpet. I’d look for Buffett to pull back a bit now. He is, after, still in charge.] Buffett thought the idea would not solve Lehman’s problems.
Sometime during the week prior to Lehman’s bankruptcy, McGee again reached out to Sokol with what both Sokol and McGee described to the Examiner as a “Hail Mary” pass. McGee asked, “Do you have any ideas to save us?” Sokol, who was bear hunting in Alaska at the time, told McGee that he did not.” [Ironic counterpoint: when Buffett was vacationing in Alaska, he said “To hell with the bear” because he was on his cell phone trying to call Goldman to bid on Long-Term Capital Management.]
interesting story.
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