Tags: Acquisition, Liars Poker, Warren Buffett

Warren Buffett and Berkshire Hathaway Rumored as Bear Stearns Investors

By , Money Morning •

From Staff Reports

Bear Stearns Cos. Inc. (BSC) shares jumped almost 7.5% yesterday (Wednesday) after the New York Times reported that the investment bank is in talks to sell a minority stake to investors including Warren Buffett.

The firm is in "serious" talks with several outside investors and could sell as much as 20% of itself, the newspaper said, citing unidentified people briefed on the discussions. Other investors who have expressed an interest in investing in Bear Stearns include Bank of America Corp. (BAC), Wachovia Corp. (WB), and two China-based institutions, the Citic Group and China Construction Bank, the Times reported.

Bear Stearns declined comment, the newspaper said. The company's shares climbed 7.37%, or $8.42 each, to close yesterday at $122.66. In the past 52 weeks, the stock has ranged between $99.75 to $122.61.

The revelation by the troubled investment bank comes only three weeks after it was revealed that British investor Joseph Lewis has acquired a 7% stake in Bear Stearns, buying a little more than 8 million shares in the last several weeks, the company said on Sept. 10.

Bear Market at Bear Stearns

Bear Stearns's stock has declined more than 15% since mid-June when two of the firm's hedge funds failed because of bets on mortgage-linked securities, damaging the respected "risk-averse" reputation of Bear Stearns Chief Executive Officer James "Jimmy'' Cayne, 73. Two Bear Stearns Cos. hedge funds filed for bankruptcy back in early August while another had its assets frozen.

The Bear Stearns High-Grade Structured Credit Strategies Master Fund Ltd. and the Bear Stearns High-Grad Structured Credit Strategies Enhanced Leverage Master Fund Ltd. filed for protection under Chapter 15 of the bankruptcy code.

This was essentially the kick-off of the subprime mortgage crisis in the U.S. debt markets - which subsequently spread internationally, causing a global credit crunch that continues today.

Third-quarter earnings dropped in well short of Wall Street expectations after fixed-income sales and trading slumped 88%, thanks to "extremely challenging'' market conditions. The implosion of the hedge funds hung a $200 million loss around Bear Stearns' neck like an ox's yoke. Chief Financial Officer Samuel Molinaro said Sept. 20 that "the worst is definitely behind us.''

The New Players

Rumored investors include China Construction Bank, that nation's second-largest lender by assets, watched its shares rise 32% on Tuesday, its first day of trading on the Shanghai exchange. Citic Group's Citic Securities Co. is the world's fastest-growing brokerage, with a market capitalization of about $40.7 billion - greater than Bear Stearns and Lehman Brothers, Bloomberg News reported.

But, as usual, the real buzz follows super-investor Warren Buffett, head of Berkshire Hathaway Inc.(BRK.A, BRK.B).

Buffett, 77, and the billionaire chairman of Berkshire, contacted Cayne a month ago, the Times reported.

Although the Chinese banks would give Bear Stearns tremendous global cachet, Berkshire might be the ideal partner. Buffett has invested in troubled financial-services companies a number of times through the years - including American Express (AXP), when it was stung by a scandal involving phony salad oil that it accepted as collateral, and Salomon Brothers, which was stung by a bond-trading scandal. Made famous by the hilarious, but realistic bestseller called "Liar's Poker," written by a young bond trader named Michael Lewis, Salomon's raucous internal culture, and the lack of controls that led to its seemingly inevitable missteps and scandal. The book described Salomon's raucous internal culture, and like the movie "Wall Street," and the two other books, "Barbarians at the Gate," and "Bonfire of the Vanities," helped define the 1980s as a decade of Wall Street-fueled largesse.

Buffett was able to overcome all that and help Salomon rebound. The company was sold to Travelers Corp., which is now Citigroup Inc. (C), in 1998.

With both Salomon and American Express, Buffett became personally involved, but not so much that management was kept from doing its job. Buffett provided a steadying influence internally, and his presence soothed Wall Street, and bought management time to make needed internal fixes.

Lewis to the Rescue?

Lewis, the U.K.-based investor, stepped in early this month. The aggregate purchase price for the shares he purchased, about $860 million, was paid out of working capital by several firms controlled by Lewis, a U.K. citizen and Bahamas resident, according to a Bear Stearns filing with the Securities and Exchange Commission. In the filing, the company said Lewis acquired the stake as an investment, and may purchase more stock in the future.

Punk Ziegel & Co. analyst Dick Bove told MarketWatch.com that Lewis is "a very savvy investor" who "sees significant value in holding a key block of stock" in Bear Stearns.

Bove told clients Monday that he had hoped that Bear Stearns would find a strong financial institution to step in and help provide support for its balance sheet.

"Bear Stearns has taken the position that it does not need this support, but virtually every investor I speak with would be delighted if new third-party money came into the firm from a financial institution," Bove said.

As of Sept. 10, according to the filing, Lewis and entities he controls owned 8.09 million shares, representing 6.97% of Bear Stearns' 116.1 million outstanding shares. The shares were acquired by companies called Aquarian, Cambria, Darcin, Mandarin and Nivon, MarketWatch.com reported.

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