Economy is 'flat on the floor': Buffett

http://www.straitstimes.com/Prime%2B...ry_285234.html

October 3, 2008 Friday

Economy is 'flat on the floor': Buffett

Billionaire seizes the moment with big stake in GE, his second big blue-chip buy in eight days


NEW YORK: Billionaire Warren Buffett, the world's most famous investor, said the US economy is 'flat on the floor' after a cardiac arrest as companies struggle to secure funding and unemployment increases.

'In my adult lifetime I don't think I've ever seen people as fearful, economically, as they are now,' Mr Buffett, 78, said on Wednesday in an interview to be broadcast on PBS. 'They are not wrong to be worried,' he added.

A lack of short-term credit is 'sucking the blood out of the economic body of the United States', he said, and it is 'going to be getting worse for a while'.

Mr Buffett is emerging as the banker of choice to the embattled blue-chip companies of American business. On Wednesday, he announced he would invest US$3 billion (S$4.3 billion) in General Electric, the industrial giant that is also the US' largest non-bank financial company.

The move came eight days after he said he would invest US$5 billion in the biggest investment bank, Goldman Sachs. In both cases, he drove a hard bargain and extracted favourable terms.

Still, he is betting when other investors remain fearful and on the sidelines. And his investments, analysts say, are based on the assumption that these two companies will come through the financial turmoil in good shape - helped by a government economic rescue package that will bring confidence to shaky markets.

'You want to be greedy when others are fearful and you want to be fearful when others are greedy,' Mr Buffett told PBS.

As home foreclosures climbed across the US, the billionaire has spent at least US$28 billion this year to acquire companies, finance buyouts and purchase securities for Berkshire Hathaway, which he leads as chairman.

He is pursuing deals at a time when others cannot. Frozen credit markets have choked funding and reduced corporations' ability to acquire rivals. The value of announced mergers shrank 28 per cent to US$2.37 trillion this year from the same period last year, Bloomberg's data show.

'Buffett's philosophy is always to keep some powder dry,' said Edward Jones analyst Tom Kersting, who tracks Berkshire. 'That allows him to take advantage of the current turmoil.'

'We want to use cash,' Mr Buffett told PBS. 'There are times when cash buys more than other times, and this is one of those times where it buys more.'

And the billionaire is seizing the day by demanding outsized payments in the form of 10 per cent dividends for Berkshire's cash, and his implicit endorsement.

'The government plan is about tamping down Wall Street fear and bringing back Wall Street greed to pursue profit-making opportunities. Buffett is just doing it ahead of the game, before there is a government package, betting there will be one and it will work,' said Wells Capital Management's chief investment strategist James Paulsen.

Mr Buffett, on his part, said in the interview that US regulators had 'basically' taken the proper steps during the deepening economic crisis. He said he supports a US$700 billion financial-rescue plan before Congress that is designed to help the economy, and expects the legislation to pass.

With congressional action, the 'best case' is that the economy begins to improve in six months, he told PBS.

The rescue plan was approved by the Senate yesterday (Singapore time) and is scheduled to go to the House for a vote tonight.

Mr Buffett compared the economy to a heart-attack patient who needs attention now.

'Paramedics have arrived,' he said. 'And they shouldn't argue about whether to put the resuscitation equipment a quarter of an inch this way, or they shouldn't start criticising the patient...

'They should do what's needed right now,' he said. 'I think Congress will do the right thing.'

BLOOMBERG NEWS, NEW YORK TIMES

http://www.todayonline.com/articles/279297.asp

Friday, October 3, 2008

BUFFETT’S AS GOOD AS A BAILOUT

THE NEW York Times


WARREN Buffett is emerging as the banker of choice to the embattled blue-chip companies of American business.

He will put US$3 billion ($4.3 billion) into General Electric, the industrial giant that is also the US’ largest non-bank financial company.

The move comes eight days after Mr Buffett said he will invest US$5 billion in Goldman Sachs.

In both cases, Mr Buffett has driven a hard bargain and extracted favourable terms. Still, he is betting when other investors remain fearful and on the sidelines.

And his investments, analysts say, are based on the assumption that these two companies will come through the financial turmoil in good shape — helped by a government economic rescue package that will bring confidence to shaky markets.

“Buffett is the poster child for what the Fed and Treasury want to see happen, private money coming in to turn things around,” said Mr James Paulsen, chief investment strategist for Wells Capital Management.

“The government plan is about tamping down Wall Street fear and bringing back Wall Street greed to pursue profit-making opportunities. Buffett is just doing it ahead of the game, before there is a government package, betting there will be one and it will work.”

GE is selling US$3 billion of preferred stock in a private offering to Mr Buffett’s company, Berkshire Hathaway. The preferred stock pays dividend of 10 per cent, and GE can buy the shares back after three years by paying a 10-per-cent premium, or US$3.3 billion.

But the real payoff for Mr Buffett will come if GE’s battered stock rebounds.

As part of the financing, Berkshire Hathaway is receiving warrants to purchase US$3 billion of GE common stock for $22.25 a share, at any time over the next five years.

In regular trading on Wednesday, GE shares closed down $1 a share, at $24.50. The shares are down 34 per cent so far this year.

Analysts say GE is getting not only needed financing but also a credibility dividend. “Warren Buffett has become the new triple-A credit rating system,” said Mr Edward Yardeni, an independent investment strategist. “It’s a big endorsement for GE.”

GE portrayed its financing plans as a kind of insurance policy, giving the company ballast in extremely uncertain times.