Dear Mr. Buffett_ What an Investor Learns 1,269 Miles From Wall Street - Janet M. Tavakoli [95]
In August 2008, Warren told me he read every page of Lehman’s financial report. In March of 2008, Warren told me he had been approached about helping Bear Stearns, but he could not come up with a value in a weekend (and did not have $60 billion in capital). He expanded on that to the students from the University of Pennsylvania when he said that bailing out Bear Stearns “took some guts that I didn’t want to match.”50 The balance sheets of the investment banks are so difficult to figure out that one cannot tell whether one is getting a good deal.
Pimco’s Bill Gross found there is a limit to the Fed’s largesse, and his Lehman investment lost money. In March, Bear Stearns, the fifth largest investment bank, was deemed too big to fail, but the Fed refused to help Lehman, the fourth largest investment bank. As Jim Rogers predicted, larger investment banks than Bear Stearns had problems, and the Fed had other problems besides investment banks—Fannie, Freddie, and AIG. Pimco’s investments were only partially protected by the Fed. The Total Return Fund’s return slumped, and it will be interesting to see if Gross ends up a net winner or a net loser as the market struggles for balance.
Jamie Dimon, JPMorgan Chase’s CEO, bought Bear Stearns, and Ken Lewis, Bank of America’s CEO, bought Merrill Lynch. Did either of them get a good deal? Did both of them get good deals? Who got the better deal? Ken Lewis certainly passed up Jamie Dimon in size, but only time will tell how this plays out. For my part, it seems that Ken Lewis is the more underestimated of the two.
In May 2003, I heard both CEOs give luncheon speeches at the Federal Reserve’s Conference on Bank Structure and Supervision. Jamie spoke the day before Ken Lewis. Jamie dressed in a light suit and spoke rapidly, sounding as if he had just drunk a pot of coffee. He seemed to suggest he had solved all of the problems at Bank One in the vein of a public relations speech (this predated its merger with JPMorgan Chase). He seemed uncomfortable with silence. In between questions the microphone was passed around for a few seconds. Jamie added to his already complete answers, and it seemed an attempt to fill dead air. The next day Ken Lewis spoke. He wore a conservative dark blue suit with a flag pin in his lapel. His grooming was impeccable. His speech flowed. Unlike Jamie, he spoke about corporate governance, the topic at hand. He gave clear and balanced reasons why (contrary to popular wisdom) it made sense in Bank of America’s case for him to occupy the position of both chairman and CEO. Ken Lewis left me with the impression that he is a very ambitious man who comes prepared. He did not underestimate his audience.
Perhaps these CEOs have a better crystal ball than Warren Buffett and I.The list of accounting distortions seems endless, 515253 but the key is to understand business fundamentals first, and then consider what the accounting statements imply.
By October 2008, J.P. Morgan acquired Bear Stearns and Washington Mutual; BofA acquired Merrill; and Wells Fargo acquired Wachovia. Morgan Stanley and Goldman Sachs became bank holding companies. The Treasury invested tens of billions of dollars in each. AIG got a bailout. Lehman was bankrupt. The situation is fluid. Meanwhile, Berkshire Hathaway has limited debt (leverage) and a lot of cash.
Starting around 1980, Berkshire Hathaway’s nonreported (undistributed) earnings from the ownership of equities exceeded reporting earnings generated by the business it owns.That means there is a lot of hidden value that does not show up on accounting statements. Earnings and