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DealBook: Buffett Gives $2 Billion to Gates Foundation

July 8, 2013 by Leave a Comment

Warren Buffett, the billionaire investor and chief of Berkshire Hathaway.Cliff Owen/Associated PressWarren E. Buffett, the billionaire investor and chief of Berkshire Hathaway.
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Warren E. Buffett has strengthened his bond with his friend and fellow billionaire Bill Gates, with a $2 billion charitable donation.

Mr. Buffett on Monday distributed 17.5 million Class B shares of Berkshire Hathaway to the Bill and Melinda Gates Foundation, a gift valued at about $2 billion based on Friday’s closing price.

The donation was part of Mr. Buffett’s annual charitable contributions, which also included gifts to the Susan Thompson Buffett Foundation, the charity named for Mr. Buffett’s late wife, and the Howard G. Buffett Foundation, which is named for Mr. Buffett’s son. In total, Mr. Buffett donated 22.9 million Class B shares of Berkshire Hathaway on Monday.

Seven years ago, Mr. Buffett pledged to give about $31 billion to the Gates Foundation, which aims to improve health and education in poor nations. He said at the time that he would give the bulk of his fortune to the foundation and four other philanthropies.

Mr. Buffett’s net worth is estimated by Forbes to be $53.5 billion as of March, making him one of the richest men in the world.

The billionaire has been active in deal-making recently, even amid a somewhat lackluster period for mergers and acquisitions. Mr. Buffett teamed up with 3G Capital in February in a $23 billion deal for the H.J. Heinz Company and said in his annual investor letter that he continued to hunt for “elephants.”

Mr. Buffett and Mr. Gates have also worked to persuade other wealthy Americans to give away much of their fortunes, through a commitment known as the Giving Pledge. The effort has attracted many prominent adherents.

Article source: http://dealbook.nytimes.com/2013/07/08/buffett-gives-2-billion-to-gates-foundation/?partner=rss&emc=rss

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DealBook: Buffett’s Goldman Deal Is Topic in Gupta Insider Case

May 24, 2012 by Leave a Comment

Byron Trott, a former Goldman Sachs banker, was asked about Warren E. Buffett's $5 billion investment in the bank.Louis Lanzano/Bloomberg NewsByron D. Trott, a former Goldman Sachs banker, was asked about Warren E. Buffett’s $5 billion investment in the bank.

Byron D. Trott has spent a career carefully cultivating the image of the discreet investment banker, a behind-the-scenes consigliere to some of America’s wealthiest businessmen, including his star client, Warren E. Buffett. At Goldman Sachs, Mr. Trott was so vigilant about guarding clients’ confidences that he was known to fire underlings who discussed private matters in the bank’s elevators.

But on Wednesday, Mr. Trott was forced to speak publicly about one of his biggest and most important deals — Mr. Buffett’s $5 billion investment in Goldman during the heart of the financial crisis in September 2008.

Mr. Trott took the witness stand for about an hour on Wednesday at the insider trading trial of Rajat K. Gupta, the former Goldman director charged with leaking boardroom secrets to his friend and business associate Raj Rajaratnam. Among the accusations is that Mr. Gupta gave Mr. Rajaratnam advance word of Mr. Buffett’s Goldman investment.

The government says that Mr. Rajaratnam traded on Mr. Gupta’s tips, reaping big profits for his Galleon Group hedge fund. Convicted by a jury of insider trading last year, Mr. Rajaratnam is serving an 11-year prison sentence. Mr. Gupta’s trial, in Federal District Court in Manhattan before Judge Jed S. Rakoff, began on Monday and is expected to last about three weeks.

Mr. Trott’s testimony focused on the days surrounding Mr. Buffett’s investment in Goldman, a tumultuous time in the markets. But first, a prosecutor asked Mr. Trott to tell the jury who Mr. Buffett was.

“He’s the most respected businessman and investor in America,” Mr. Trott said.

Mr. Gupta’s lawyer objected to such a superlative.

“I didn’t think that was in dispute,” said Judge Rakoff, breaking into a smile.

Judge Rakoff posed his own question to Mr. Trott for the jury’s sake, exercising more restraint in his description: “Is he a very large and well-known investor?”

“Yes,” Mr. Trott acknowledged.

Mr. Trott, 53, has established a niche advising many of the country’s richest families, including the Wrigleys and the Pritzkers. As a Goldman banker, he began advising Mr. Buffett in 2002 and has advised his company, Berkshire Hathaway, on numerous deals.

“Byron is the rare investment banker who puts himself in his client’s shoes,” wrote Mr. Buffett in his 2008 investor letter. Five years before that, Mr. Buffett wrote that Mr. Trott “understands Berkshire far better than any investment banker with whom we have talked and — it hurts me to say this — earns his fee.”

The silver-haired Mr. Trott, at ease on the witness stand and at times flashing a broad smile, gave the jury an account of how Mr. Buffett’s investment materialized. He described the dark days of September 2008, when Lehman Brothers, which Mr. Trott described as a “second-tier investment bank,” had filed for bankruptcy and there were questions about whether other banks like Goldman could survive.

His purpose in testifying, according to people briefed on the prosecutors’ strategy, was to explain how quickly the Buffett deal came together and how few people knew about it — other than Mr. Gupta — before it was announced.

“This was about as top secret as you can get,” said Mr. Trott, who left Goldman in 2009 to start his own investment firm, BDT Capital Partners.

Mr. Trott, who lives in Chicago, testified that he was at a client meeting near O’Hare Airport on Sept. 22, 2008, when he received a call on his cellphone from Goldman’s co-president, Jon Winkelried. Mr. Winkelried told him that Goldman was planning to raise $10 billion in a common stock offering to help the bank address its problems and calm the markets.

Upon hearing the news, Mr. Trott said that he pitched Mr. Winkelried on having Mr. Buffett act as a “cornerstone investor” on the transaction. He said he would fly to New York immediately so he could discuss the idea with the rest of Goldman’s top officers.

The next morning, on the 30th floor of Goldman’s former headquarters at 85 Broad Street in Lower Manhattan, Mr. Trott outlined a deal that he thought Mr. Buffett would agree to and would also make sense for the bank.

“It was hugely credentializing,” he said. “It was like getting the Good Housekeeping Seal of Approval.”

Later that morning, Mr. Trott said, he had a conversation with Mr. Buffett. Earlier in the year he had floated the idea of investing in Goldman to Mr. Buffett, who rejected the proposal. This time around, Mr. Trott said, the terms would have to be sweeter.

“I have a different proposal for you,” Mr. Trott said, according to his testimony.

Mr. Trott offered Mr. Buffett a “preferred with warrants,” a complex security that gave Mr. Buffett 10 percent annual interest on a $5 billion investment plus the option to buy additional Goldman stock at a set price.

“I know Warren very well,” testified Mr. Trott. “We had done numerous deals together and I knew the structure that he would want.”

After Mr. Buffett accepted the terms, Mr. Trott testified, he took the deal back to the bank’s senior executives. Around lunchtime, the executives agreed to take the deal to the board for a vote. But before they could do that, they needed to inform Mr. Buffett that the deal had been officially agreed upon. But Mr. Buffett was unavailable until after 2:30 p.m. A prosecutor asked Mr. Trott why.

“He promised his grandkids that he would take them to Dairy Queen” — the ice cream and fast-food chain owned by Mr. Buffett — “and he did not want to be interrupted,” said Mr. Trott, eliciting laughter from the jury.

Mr. Trott said that after firming things up with Mr. Buffett, Goldman held a board meeting by telephone at 3:15 p.m. The board approved the investment. Minutes later, the government says, Mr. Gupta called Mr. Rajaratnam and told him to buy Goldman stock. Prosecutors have said Mr. Rajaratnam reaped nearly $1 million by trading before the announcement.

Outside the jury on Wednesday, the prosecution and defense focused on another Goldman employee — David Loeb, a salesman who worked closely with Galleon.

The prosecutor, Reed Brodsky, said that Mr. Loeb had passed illicit tips about Intel, Apple and Hewlett-Packard to Mr. Rajaratnam. A lawyer for Mr. Gupta said that Mr. Loeb can be heard on a secretly recorded telephone call giving confidential information about those companies.

The defense, which complained to Judge Rakoff that prosecutors had not disclosed evidence about Mr. Loeb, is using the government’s investigation of three other Goldman executives to suggest to the jury that there were other sources of inside information within the bank.

Prosecutors have countered that these executives, including Mr. Loeb, had no access to confidential information about Goldman. A Goldman executive declined to comment.

This post has been revised to reflect the following correction:

Correction: May 24, 2012

An earlier version of this article misspelled the surname of Jon Winkelried as Winkelreid.

Article source: http://dealbook.nytimes.com/2012/05/23/buffetts-goldman-deal-is-topic-in-an-insider-case/?partner=rss&emc=rss

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DealBook: Others Go, but Buffett Stays on President’s Side

October 3, 2011 by Leave a Comment

Kevin Lamarque/ReutersIn February, Warren E. Buffett was among those who received a Medal of Freedom from President Obama at the White House.

When it comes to business, everyone on Wall Street wants a piece of Warren E. Buffett. His presidential politics, however, appear to be another matter altogether.

On Friday evening, Mr. Buffett was the host of a fund-raiser for President Obama at the Four Seasons restaurant in Manhattan, typically a magnet for the who’s who of finance. Democrats had bet that the star power of one of the world’s richest men would draw an overflow crowd of Wall Street’s elite for an affair that ran $10,000 a plate, or $35,800 for one-on-one time with Mr. Buffett.

Yet organizers had trouble drawing the biggest guns of finance. The president’s campaign reserved space for 130 guests but only 116 (including Democratic staff members) attended, according to people with knowledge of the matter but not authorized to speak on the record. And there were few marquee names on the guest list. James Chanos, the hedge fund executive, was among the better known of those who attended.

The event — which included on the menu some of Mr. Buffett’s favorites, like Cherry Coke and Dairy Queen ice cream — was considered a sell-out success by the Obama campaign. It easily raised more than $1.5 million for the campaign and the Democratic National Committee.

Still, the turnout, strong but less than overwhelming, reflected the president’s broader struggles in attracting big-name support from those on Wall Street, whom he referred to as “fat cat bankers” in 2009. One person who attended described the atmosphere as subdued and said the event seemed to attract more Buffett followers than Obama supporters.

Mr. Buffett, a major investor in many of the nation’s biggest banks, remains undeterred. As others in business have moved to distance themselves from Mr. Obama, Mr. Buffett has found himself in a lonely role as the president’s ambassador among the moneyed set. He is endorsing not just Mr. Obama but also a policy like the so-called Buffett rule, which would increase taxes on the rich, as well as the view that America is exiting, not re-entering, a recession.

“I have always had people disagree with me on politics,” Mr. Buffett said in an interview. “You can go through life and just basically opt out of that field. I don’t blame anyone particularly, but I don’t want to do that. If I have views I will talk about them.”

Mr. Buffett’s more public embrace of Mr. Obama has cast a spotlight on this unlikely alliance between the Omaha-born son of a stockbroker turned Republican congressman and Mr. Obama, the Harvard-educated lawyer who forged his political career in Chicago.

Mr. Buffett said he first met Mr. Obama roughly six years ago, at a lunch arranged by the billionaire’s daughter, Susie. The pair broke bread at Kiewit Plaza in Omaha, where Mr. Buffett’s company, Berkshire Hathaway, is situated. At the time, Mr. Obama was only months into his freshman term in the Senate.

Mr. Buffett spotted a rising star, prophetically telling The Chicago Tribune in 2005 that Mr. Obama “has as much potential as anyone I’ve seen to have an important impact over his lifetime on the course that America takes.”

Another presidential hopeful, Hillary Rodham Clinton, also impressed Mr. Buffett. “I didn’t think both of them would run,” he recalled in the interview with The New York Times. During the contentious 2008 campaign, he lent his name — and wallet — to both candidates. In 2007, he headlined an event for Ms. Clinton in New York and another for Mr. Obama in Omaha.

As president, Mr. Obama has been known to tap Mr. Buffett for advice on the economy. In July 2010, during a meeting at the White House, Mr. Buffett even got a new tie. Mr. Buffett said he wore a tie that “looked like it had gone through a lawn mower.” Mr. Obama, noticing its condition, gave Mr. Buffett a new tie, replete with presidential seals.

A few weeks later, Mr. Buffett was back at the White House for a meeting that was also attended by Bill Gates, the chairman of Microsoft and an old friend of Mr. Buffett. Mr. Obama was quick to compliment Mr. Buffett, saying he was “looking sharper,” according to Mr. Buffett. Mr. Buffett laughed and pointed to Mr. Gates, who was wearing the old tie. Mr. Obama went and got a new tie with presidential seals on it for Mr. Gates. “This tie is very useful,” Mr. Buffett said of the frayed tie he now keeps in reserve in his closet for friends who may be visiting the White House.

This summer, Mr. Obama called Mr. Buffett from his vacation on Martha’s Vineyard to discuss ways to spur the economy. And after Mr. Buffett wrote an Op-Ed article for The New York Times, saying that politicians should stop “coddling” the “mega-rich,” the White House introduced plans to raise taxes for the wealthy.

Still, Mr. Buffett cautions against reading too much into the relationship. “We are not at all close,” he said. He estimates he has talked to Mr. Obama one-on-one just a handful of times, and no call has lasted more than about eight minutes. Mr. Buffett does not remember ever making a call to Mr. Obama. And Mr. Buffett does not personally solicit donations for the re-election campaign.

Mr. Buffett did agree to headline two fund-raisers for the president. The next one is scheduled for late October at the Chicago-area home of Byron Trott, a former Goldman Sachs executive known as “Buffett’s favorite banker.”

The fund-raisers are the Obama campaign’s latest efforts to restore the president’s relationship with Wall Street — once a heavy-hitting donor base. Earlier this year, Mr. Obama dined with financial executives at the opulent Upper East Side restaurant Daniel. The president also counts several bankers among his friends and fund-raisers, including Robert Wolf, the president of UBS’s investment bank.

But the campaign has received a tepid response from other deep-pocketed donors on Wall Street, some of whom have shunned the president’s push for regulation and his talk about lavish bonuses. The nation’s biggest banks, which cut many large checks for Mr. Obama’s 2008 run, are mainly on the sidelines for now.

“In the last election, people were tripping over themselves to get on the Obama bandwagon,” said Michael J. Driscoll, a former senior trader at the Wall Street firm Bear Stearns who now teaches at Adelphi University. “Things have changed; Wall Street is not happy being under attack by the administration.”

Republican candidates hope to lure away Wall Street’s money. Last week, the Republican contender Mitt Romney, a former private equity executive, met privately with JPMorgan Chase’s chief, Jamie Dimon, once a big-name supporter of Mr. Obama. Mr. Dimon has not yet endorsed any candidate. Anthony Scaramucci, a hedge fund manager who previously donated to Mr. Obama, has shifted allegiance to Mr. Romney.

Mr. Buffett said he was not surprised that Wall Street’s sentiment had shifted so much against the president. “People need to face up to the country’s problems. Once what you start pointing and explaining what your part is in it, you start losing a few people,” he said, laughing.

Still, he says he believes Mr. Obama will win the next election, and may even get some help from an improving economy, an idea that goes against the view of many in America.

“We are coming out of this one, I am virtually certain,” Mr. Buffett said. “I see figures on 70-some companies daily. I have a lot of information coming in and basically everything to do with home construction is as bad as it has ever been, and everything else is getting better.”

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DealBook: Others Go, but Buffett Stays on Side of President

October 3, 2011 by Leave a Comment

When it comes to business, everyone on Wall Street wants a piece of Warren E. Buffett. His presidential politics, however, appear to be another matter altogether.

Kevin Lamarque/ReutersIn February, Warren E. Buffett was among those who received a Medal of Freedom from President Obama at the White House.

On Friday evening, Mr. Buffett was the host of a fund-raiser for President Obama at the Four Seasons restaurant in Manhattan, typically a magnet for the who’s who of finance. Democrats had bet that the star power of one of the world’s richest men would draw an overflow crowd of Wall Street’s elite for an affair that ran $10,000 a plate, or $35,800 for one-on-one time with Mr. Buffett.

Yet organizers had trouble drawing the biggest guns of finance. The president’s campaign reserved space for 130 guests but only 116 (including Democratic staff members) attended, according to people with knowledge of the matter but not authorized to speak on the record. And there were few marquee names on the guest list. James Chanos, the hedge fund executive, was among the better known of those who attended.

The event — which included on the menu some of Mr. Buffett’s favorites, like Cherry Coke and Dairy Queen ice cream — was considered a sell-out success by the Obama campaign. It easily raised more than $1.5 million for the campaign and the Democratic National Committee.

Still, the turnout, strong but less than overwhelming, reflected the president’s broader struggles in attracting big-name support from those on Wall Street, whom he referred to as “fat cat bankers” in 2009. One person who attended described the atmosphere as subdued and said the event seemed to attract more Buffett followers than Obama supporters.

Mr. Buffett, a major investor in many of the nation’s biggest banks, remains undeterred. As others in business have moved to distance themselves from Mr. Obama, Mr. Buffett has found himself in a lonely role as the president’s ambassador among the moneyed set. He is endorsing not just Mr. Obama but also a policy like the so-called Buffett rule, which would increase taxes on the rich, as well as the view that America is exiting, not re-entering, a recession.

“I have always had people disagree with me on politics,” Mr. Buffett said in an interview. “You can go through life and just basically opt out of that field. I don’t blame anyone particularly, but I don’t want to do that. If I have views I will talk about them.”

Mr. Buffett’s more public embrace of Mr. Obama has cast a spotlight on this unlikely alliance between the Omaha-born son of a stockbroker turned Republican congressman and Mr. Obama, the Harvard-educated lawyer who forged his political career in Chicago.

Mr. Buffett said he first met Mr. Obama roughly six years ago, at a lunch arranged by the billionaire’s daughter, Susie. The pair broke bread at Kiewit Plaza in Omaha, where Mr. Buffett’s company, Berkshire Hathaway, is situated. At the time, Mr. Obama was only months into his freshman term in the Senate.

Mr. Buffett spotted a rising star, prophetically telling The Chicago Tribune in 2005 that Mr. Obama “has as much potential as anyone I’ve seen to have an important impact over his lifetime on the course that America takes.”

Another presidential hopeful, Hillary Rodham Clinton, also impressed Mr. Buffett. “I didn’t think both of them would run,” he recalled in the interview with The New York Times. During the contentious 2008 campaign, he lent his name — and wallet — to both candidates. In 2007, he headlined an event for Ms. Clinton in New York and another for Mr. Obama in Omaha.

As president, Mr. Obama has been known to tap Mr. Buffett for advice on the economy. In July 2010, during a meeting at the White House, Mr. Buffett even got a new tie. Mr. Buffett said he wore a tie that “looked like it had gone through a lawn mower.” Mr. Obama, noticing its condition, gave Mr. Buffett a new tie, replete with presidential seals.

A few weeks later, Mr. Buffett was back at the White House for a meeting that was also attended by Bill Gates, the chairman of Microsoft and an old friend of Mr. Buffett. Mr. Obama was quick to compliment Mr. Buffett, saying he was “looking sharper,” according to Mr. Buffett. Mr. Buffett laughed and pointed to Mr. Gates, who was wearing the old tie. Mr. Obama went and got a new tie with presidential seals on it for Mr. Gates. “This tie is very useful,” Mr. Buffett said of the frayed tie he now keeps in reserve in his closet for friends who may be visiting the White House.

This summer, Mr. Obama called Mr. Buffett from his vacation on Martha’s Vineyard to discuss ways to spur the economy. And after Mr. Buffett wrote an Op-Ed article for The New York Times, saying that politicians should stop “coddling” the “mega-rich,” the White House introduced plans to raise taxes for the wealthy.

Still, Mr. Buffett cautions against reading too much into the relationship. “We are not at all close,” he said. He estimates he has talked to Mr. Obama one-on-one just a handful of times, and no call has lasted more than about eight minutes. Mr. Buffett does not remember ever making a call to Mr. Obama. And Mr. Buffett does not personally solicit donations for the re-election campaign.

Mr. Buffett did agree to headline two fund-raisers for the president. The next one is scheduled for late October at the Chicago-area home of Byron Trott, a former Goldman Sachs executive known as “Buffett’s favorite banker.”

The fund-raisers are the Obama campaign’s latest efforts to restore the president’s relationship with Wall Street — once a heavy-hitting donor base. Earlier this year, Mr. Obama dined with financial executives at the opulent Upper East Side restaurant Daniel. The president also counts several bankers among his friends and fund-raisers, including Robert Wolf, the president of UBS’s investment bank.

But the campaign has received a tepid response from other deep-pocketed donors on Wall Street, some of whom have shunned the president’s push for regulation and his talk about lavish bonuses. The nation’s biggest banks, which cut many large checks for Mr. Obama’s 2008 run, are mainly on the sidelines for now.

“In the last election, people were tripping over themselves to get on the Obama bandwagon,” said Michael J. Driscoll, a former senior trader at the Wall Street firm Bear Stearns who now teaches at Adelphi University. “Things have changed; Wall Street is not happy being under attack by the administration.”

Republican candidates hope to lure away Wall Street’s money. Last week, the Republican contender Mitt Romney, a former private equity executive, met privately with JPMorgan Chase’s chief, Jamie Dimon, once a big-name supporter of Mr. Obama. Mr. Dimon has not yet endorsed any candidate. Anthony Scaramucci, a hedge fund manager who previously donated to Mr. Obama, has shifted allegiance to Mr. Romney.

Mr. Buffett said he was not surprised that Wall Street’s sentiment had shifted so much against the president. “People need to face up to the country’s problems. Once what you start pointing and explaining what your part is in it, you start losing a few people,” he said, laughing.

Still, he says he believes Mr. Obama will win the next election, and may even get some help from an improving economy, an idea that goes against the view of many in America.

“We are coming out of this one, I am virtually certain,” Mr. Buffett said. “I see figures on 70-some companies daily. I have a lot of information coming in and basically everything to do with home construction is as bad as it has ever been, and everything else is getting better.”

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DealBook: Berkshire Hathaway to Buy Back Shares

September 26, 2011 by Leave a Comment

Warren Buffett, chief of Berkshire Hathaway.Charles Dharapak/Associated PressWarren E. Buffett, chief of Berkshire Hathaway.

It looks as if Berkshire Hathaway’s “elephant gun” of $43 billion in cash will also be pointed at itself.

Warren E. Buffett’s company announced on Monday that its board had authorized the repurchase of the company’s class A and class B shares at premium of as much as 10 percent over the current book value.

The company did not disclose how big the buyback would be, but said the repurchases would not be made if they reduced Berkshire’s cash holdings below $20 billion.

As of June 30, Berkshire had more than $43 billion in cash.

The cash war chest was highlighted in February, when Mr. Buffett told investors he was on the hunt for acquisitions. “Our elephant gun has been reloaded, and my trigger finger is itchy,” he wrote.

The use of cash for share buybacks is unusual for Berkshire, which has preferred to use it for acquisitions.

Berkshire Hathaway’s class A and class B shares.

In its 2000 annual letter, the company said “we will not repurchase shares unless we believe Berkshire stock is selling well below intrinsic value,conservatively calculated.”

Shares of Berkshire, however, have slumped this year. The class A shares are down 12.2 percent, while the class B shares are down nearly 10 percent.

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Wealth Matters: ‘Buffett Rule’ Is More Complicated Than Politics Suggest

September 24, 2011 by Leave a Comment

Wealthy investors and their advisers pondered these questions this week, after President Obama included the “Buffett Rule” in the budget plan he sent to Congress. The rule stipulates that people who make more than $1 million a year should pay at least the same percentage of their earnings as middle-class Americans.

The prospects of the rule ever becoming law are poor — there is strong opposition to it among Republicans in Congress. But some variation is possible. And that prompted David Scott Sloan, co-chairman of private wealth services at the law firm Holland Knight, to spend his lunch hour earlier this week trying to calculate how much Mr. Buffett’s secretary would have to make to pay a higher percentage of her income than one of the richest men in the world. Assistants to high-powered financiers often make six-figure salaries, which put them in a top tax bracket (and presumably out of the middle class).

But Mr. Sloan gave up. “It’s so nonsensical,” he said. “It’s not rich, poor. It’s source of income.”

As Mr. Buffett explained last month, “What I paid was only 17.4 percent of my taxable income — and that’s actually a lower percentage than was paid by any of the other 20 people in our office.” His income comes mostly from his investments, which are taxed at the capital gains rate of 15 percent. His secretary is most likely paid a salary and bonus, which would be taxed as ordinary income, at a rate that goes as high as 35 percent.

Yet behind the entertaining political theater, some complicated tax questions are being raised. Here is a look at a few.

PRACTICAL CONSIDERATIONS The number of people who fall under the Buffett Rule is quite small, only about 60,000 people. And the amount of revenue that would be generated over the next 10 years from raising their taxes is equally small — just $13 billion over the next decade, if people like private equity, venture capital and hedge fund managers, who receive the bulk of their income from investments, were taxed at the ordinary income tax rate instead of the capital gains rate of 15 percent.

But the president’s plan also has several unintended consequences for people who make far less than $1 million a year. Interest on municipal bonds, for instance, is now tax-free. Under the president’s proposal, only taxpayers who pay an income tax rate of 28 percent or less would continue to get the tax exemption.

Limiting the deduction would surely raise the cost of borrowing for municipalities, a cost that would presumably be passed on to city and state taxpayers. It might also limit the number of people interested in municipal bonds.

Chris Ryon, managing director at Thornburg Investment Management, which manages $6.7 billion in municipal bonds, said he took consolation in knowing that owners of municipal bonds were split fairly evenly between people who made more than $200,000 — the cutoff for higher taxes — and those who made less.

But given how poorly the municipal bond market has performed recently, he said, Mr. Obama’s plan only added “more uncertainty to a market that doesn’t need it.”

Still unknown, too, is what the repeal of the Bush tax cuts would mean for the tax on dividends. That tax is set to rise in 2013 to the ordinary income rate, from the capital gains rate of 15 percent. But assets like stocks that pay dividends are not owned only by the rich. In fact, they have recently become an alternative to low-yielding Treasury bonds for people who need income in their portfolio.

“The vast majority of my clients are retired and living on a fixed income,” said Drew Kanaly, chairman and chief executive of Kanaly Trust in Houston. “If you raise taxes on dividends and capital gains, my clients’ income goes down.”

BUSINESS IMPACT Both political parties like to claim they look after the interests of small-business owners, but what will higher taxes mean to that group?

In reality, most business owners are more focused on how to make their businesses grow than on what Washington is doing. “My belief is I can double my income faster than Obama can confiscate it,” said Mark Matson, whose firm Matson Money manages $2.9 billion. “I think people become negative too fast.”

But higher taxes might dissuade serial entrepreneurs from starting another company. Leslie Quick III was the fourth employee at his father’s discount brokerage, Quick Reilly, which was sold in 1997 for $1.6 billion, with the family’s stake valued at $680 million.

He said 85 percent of the stock he owned had a basis of zero, so basically its entire value was subject to capital gains. But Mr. Quick, who described himself as a centrist Republican, said he and his new partner spent $2 million of their own money to start Massey Quick, a wealth manager and investment adviser — something they might not have done if tax rates were higher.

“If income taxes were at 50 percent and capital gains rates were back to the 1960s, I might have wanted to think about how I’d risk money,” he said. The capital gains tax rose to 39.9 percent in the late 1970s from 25 percent in 1967. “We’re nowhere close to that now, but if you don’t get your arms around spending in Washington, that’s where I fear we’ll end up.”

Increased capital gains taxes could also affect people who have owned assets for a long time. The capital gains rate is set to increase to 20 percent in 2013. At the same time, a new 3.8 percent Medicare tax on investment income is being added.

Advisers say that the current Washington back and forth has led clients with appreciated stock or long-held real estate to consider selling the assets and paying the lower tax. But the decision is more complicated for small-business owners.

“In many ways, it’s part of their identity,” said Stephen Ziobrowski, a partner at Day Pitney, a law firm. “It’s a deep emotional decision.”

ACTIONS For most people, fretting over higher taxes is a waste of time since there is little they can do about it. But the wealthiest have the most to gain by looking at what they can do now.

On the same day Mr. Obama released his plan, a crucial interest rate used for transferring money tax-free to heirs hit its lowest level ever. The applicable federal rate, used for a tax-planning vehicle known as a grantor retained annuity trust, will be 1.4 percent for October.

Richard A. Behrendt, director of estate planning at Robert W. Baird Company, a wealth adviser, said someone who put $10 million in a grantor retained annuity trust for three years could pass $960,444 tax-free to heirs if the assets grew at just 3 percent a year. If the assets grew at 6 percent a year, the trust would give $2,039,343 to heirs.

The Buffett Rule “is just a proposal that may come to something or nothing or something very different than what is written,” Mr. Behrendt said. “Why waste the resources on something that may not happen when we can leverage to tremendous results this one small data point for the wealthy?”

Taking advantage of a tax break that may disappear is something Mr. Buffett can certainly appreciate. In the 1950s and 1960s, he told The New York Times, his partnership was taxed at 25 percent. “I knew I was getting favored treatment compared to the local doctor, lawyer or C.E.O.,” he said. “But I made no voluntary payments to the Treasury, nor does any hedge fund manager of whom I’m aware.”

Article source: http://feeds.nytimes.com/click.phdo?i=6760dda74c9d909daf9188458a69798e

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DealBook: Chasing Buffett Is Not Always So Golden

September 14, 2011 by Leave a Comment


An investment by Warren E. Buffett is often seen as a harbinger of good fortune for a company’s shareholders.

When Berkshire Hathaway made a $5 billion investment in Bank of America last month, the stock quickly jumped — a phenomenon known as the Buffett bounce.

But it does not always pay to follow Mr. Buffett’s moves, at least when he buys preferred shares rather than common stock.

Consider his General Electric deal. Mr. Buffett, who in 2008 swooped in with a $3 billion investment for the troubled conglomerate, will net a tidy profit when G.E. pays back the money next month.

Warren Buffett, chief of Berkshire Hathaway.Charles Dharapak/Associated PressWarren E. Buffett, chief of Berkshire Hathaway.

Along with his principal, Mr. Buffett will take home an extra $300 million, as well as any accrued and unpaid dividends. During the course of his investment, the preferred shares paid a 10 percent annual dividend, or roughly $300 million a year.

Investors in the common stock have not fared as well over the same period. At the time of Mr. Buffett’s investment, shares of G.E. were trading at about $24.50. Today, they are down nearly 40 percent, at about $15.40.

It is a similar story with Goldman Sachs, which took a $5 billion lifeline from Mr. Buffett during the depths of the financial crisis.

The investment bank returned the cash earlier this year. As in the G.E. deal, Mr. Buffett and Berkshire Hathaway banked an annual 10 percent dividend, plus some extras when Goldman paid back the money. In all, Mr. Buffett took home $1.7 billion on the investment, or about $190,000 a day.

Goldman investors have not been as fortunate. When Mr. Buffett stepped onto the scene, the stock was selling for about $125 a share; it is now at about $104.

Of course, Mr. Buffett has an interest in seeing the stocks of Goldman Sachs and G.E. do well.

In both cases, he has warrants to purchase common shares of the companies at specific prices, which can be exercised through 2013. At current levels, those warrants are essentially worthless.

While it remains to be seen how Mr. Buffett will ultimately fare on his investment in Bank of America, the deal has all the hallmarks of those for Goldman and G.E. There is a 6 percent annual payout and a premium at redemption of $250 million.

And once again, Berkshire will share in any upside in the stock. Over the next 10 years, the company has the right to purchase 700 million shares at a strike price just north of $7.14. (The shares are currently at $7.)

But those stock gains would mainly be gravy.

Article source: http://feeds.nytimes.com/click.phdo?i=119ed4faf2a09e1358bf64599c3e6a9d

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DealBook: Buffett Investment Could Erode Confidence in Big Banks

September 1, 2011 by Leave a Comment

Warren BuffettLucas Jackson/ReutersWarren E. Buffett announced a $5 billion investment in Bank of America last week.

Last week, our financial Superman, the mild-mannered Midwesterner Warren E. Buffett, swooped in again to save another bank, the financial markets, the American economy and just maybe our precious way of life.

Mr. Buffett’s purchase of $5 billion worth of Bank of America preferred stock (on his usual generous terms, including long-lasting warrants to buy common stock at an attractive price) immediately stiffened the upper lips of chattering investors and pundits. Bank of America’s chairman hailed it as a “vote of confidence” in the bank. It was also celebrated as a signal that the worst was over in the rout recently experienced by the American financial sector.

For the moment, that all seems right: Bank of America’s stock is up 17 percent from the Aug. 25 announcement, and stocks of the other three major American banks — JPMorgan Chase, Citigroup and Wells Fargo — are also up.

But as the news is digested, it could set off the opposite effect. The Buffett investment just might turn out to erode, not increase, confidence. And not only for Bank of America, but for the banking sector as a whole.

Mr. Buffett’s investment reveals something both infuriating and scary. Bank of America has not been talking straight about its need for capital.

“You cannot have the largest bank in the country saying, ‘We don’t need the money,’ and then paying this kind of price to Warren Buffett for capital they say they don’t need, “ said Daniel Alpert, who runs the investment firm Westwood Capital.
“Industrywide, it’s a potential boomerang because we think, ‘Why should we believe any of these guys when they say they don’t need the money?’”

“We’ve been through a massive crisis in 2007 and ’08 where executives of major financial institutions tried to hide their insolvency,” he added. “They said, ‘No, no, a thousand times no, we’re fine.’ And then they were gone.”

Sure, Mr. Buffett reportedly approached Brian T. Moynihan, Bank of America’s chief executive, who initially rebuffed the investment offer — suggesting that Bank of America didn’t really need capital. Even so, Mr. Moynihan’s reticence didn’t last long. And if the bank truly didn’t need capital, why make such an expensive deal that could dilute other shareholders?

The more investors think about it, the more Mr. Buffett’s announcement will intensify, not allay, their fears about Bank of America’s capital position. Indeed, Mr. Buffett is making something more resembling a loan than an equity investment. His $5 billion doesn’t count in the important measure of capital that regulators look at, called Tier 1.

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That is perhaps why Bank of America’s money-raising has not stopped with Mr. Buffett. On Monday, the bank sold about half of its stake in China Construction Bank for more than $8 billion. And over the last year, Bank of America has been jettisoning multiple businesses to raise cash and shore up its capital.

Prudent, yes, and we can hope the bank’s management has learned a lesson about credibility. Last year, Mr. Moynihan suggested that the bank would be able to raise its dividend after it passed the Federal Reserve’s second round of stress tests. No such luck. That plan was blocked, rightly, by the Fed, whose exams revealed, among other perils, Bank of America’s overexposure to the sickly real estate sector.

Yet Mr. Moynihan and Bank of America persisted, with analysts expecting the bank to come back in the middle of the year to push the Fed to revisit the dividend issue. So much for that now.
Still, even with these moves, some investors and analysts do not think the bank’s actions will be sufficient, and that it will have to sell common shares to raise capital.

Bank of America disagrees. Yes, the stock has “an overhang” thanks to economic and legal uncertainty, but “we understand that and are working very aggressively to address that,” said Jerome F. Dubrowski, a spokesman. “We have more than enough capital to run our business” based on current rules, he said.

The bank has clearly explained to investors and regulators how it will reach compliance with the new rules ahead of schedule, he added. The Buffett opportunity was too good to pass up, Mr. Dubrowski said: “There’s only one Warren Buffett. We are very happy to have him, but it wasn’t driven by capital.”

Yet Bank of America investors had whipped themselves into a panic in August because of the giant legal liability faced by the bank. The Buffett investment does not remove that, let alone any of the bank’s other millstones.

Not only does the bank still face billions in legal settlement costs from Countrywide Financial deals, but it also has to buy back billions in faulty mortgages. Bank of America’s questionable foreclosure practices continue to drag it down, and, in addition, it faces Securities and Exchange Commission investigations into the actions of its subsidiary, Merrill Lynch, in the lead-up to the financial crisis. Bank of America acquired Merrill in 2008, under heavy pressure from the Federal Reserve and the Treasury Department.

The big problem, however, is not the unknown legal costs, but the exceedingly well-known exposure to real estate, both home mortgages and home-equity lines of credit.

The bears will return, armed with a soft economy and the declining housing market. As they do, what is to stop them from jumping from bank to bank?

Compared with Bank of America, Wells Fargo has more exposure to real estate and less capital. The bank classifies about 19 percent of its residential mortgage loans as either delinquent or nonperforming, a number similar to that of Bank of America. Wells Fargo says it’s fine, but where have we heard that before?

Of all the big American banks, JPMorgan Chase, perhaps surprisingly, has the highest proportion of bad mortgages, at about 24 percent, according to Bankregdata.com. Citigroup is lowest at less than 14 percent. But JPMorgan’s balance sheet is more solid than that of any of the country’s other megabanks.

Even if the major banks do not experience additional capital crises, the Fed plans to keep interest rates low for years. That will almost certainly depress bank lending rates, squeezing profits.

That is, if the banks lend at all. In one of the most important business lines for Bank of America and the other big banks,Big Three, residential mortgages, the banks are pricing themselves out of the market, offering uncompetitive rates. The mortgage market remains shattered.

Why aren’t the banks lending? They fear potential future litigation, for one. And they claim there is not enough demand from high-quality borrowers. But if they had conviction that the economy and housing markets were recovering, those concerns would ebb.

So if bank leaders are not exhibiting confidence, why should the rest of us?

Jesse Eisinger is a reporter for ProPublica, an independent, nonprofit newsroom that produces investigative journalism in the public interest. Email: jesse@propublica.org. Follow him on Twitter (@Eisingerj).

Article source: http://feeds.nytimes.com/click.phdo?i=a1db111cd907d96cda817b6045e84ddc

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Economix Blog: Risks, Rescues and Remorse

August 26, 2011 by Leave a Comment

Warren Buffett rode to the rescue of Bank of America today, as he did for Goldman Sachs in the dark days of September 2008.

FLOYD NORRIS

FLOYD NORRIS

Notions on high and low finance.

B of A will pay less to be saved, but that can be explained by the fact there is less panic to contend with this time. This time the rumors were that the bank needed to raise capital; back then, the rumors were that Goldman was the next Lehman Brothers.

The terms of the two deals are similar. Berkshire Hathaway, Mr. Buffett’s company, invests $5 billion in straight preferred stock, and gets a warrant allowing him to invest another $5 billion in common stock at a set price. The preferred stock is perpetual, but the company can buy it back at a premium whenever it wishes to do so.

At Goldman he got a 10 percent coupon on the preferred, and it would cost Goldman a 10 percent penalty to buy it back. At B of A, he gets 6 percent coupon and a 5 percent premium for a buyback.

The warrants are different, and reflect that B of A was in a better position. B of A stock closed on Wednesday at $6.99. The warrants are at $7.142857. So at least B of A gets a little premium to market price at the time of the deal if the warrants are exercised.

Goldman shares were at $125.05 when the deal with Mr. Buffett was announced. His warrant was at $115 per share. He got a discount exercise price.

How has Mr. Buffett done at Goldman? Fine on the preferred. Not so fine on the warrant. Goldman bought the preferred back in April. Add in the interest and the repurchase premium, and Berkshire made $1.75 billion over two and a half years. Anything it collects on the warrants will be gravy, but at the moment there is none available. Goldman shares trade around $110.

The warrants had five-year terms, so Berkshire has until October 2013 to exercise them.

Mr. Buffett did do a little better on one term of the warrants at B of A. They are 10-year warrants, twice as long as at Goldman. So he has a lot longer time for the share price to work out.

When Mr. Buffett made his first Wall Street rescue, of Salomon Brothers amid a scandal two decades ago, he was reported to have called his investment a Treasury bill with a lottery ticket attached. He would get a solid return if the company merely survived, and a great one if it prospered.

Seen that way, this is not nearly as risky as a bet as a purchase of B of A stock would be. That may be the essential point that led the early euphoria to fade. B of A stock leaped to $8.80 soon after the opening this morning, but was under $8 by 11 a.m.

It is a sign of both the prestige of Mr. Buffett and of the fragility of markets that either of these deals were available to him.

Of course, there are risks in being a rescuer. A rescuer needs to use cash it can afford to lose, and it needs to have the judgment and courage to refuse to throw good money after bad if things do not go according to plan.

In August 2007, Countrywide Financial, a major home lender, was bailed out by B of A, which invested $2 billion in convertible preferred stock. It was convertible at a discount to current market value. B of A stock rose on the news.

A few months later, with Countrywide in deeper trouble, B of A agreed to take over the whole company for stock then worth $4 billion. The deal closed July 1, 2008. By then B of A was trading for about half what it was worth when it first invested in Countrywide. It had a lot further to fall.

It was one of the worst mergers ever. B of A has yet to reach the bottom of the sinkhole of legal liability created by Countrywide’s reckless lending policies.

But for that rescue by Bank of America, this one — of Bank of America — would not be necessary.

Article source: http://feeds.nytimes.com/click.phdo?i=a44c0dceca1979679e02d2e25fbd62d0

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Wall Street Lower Despite Buffett’s Bet

August 25, 2011 by Leave a Comment

The stock market in the United States has been overwhelmed by the prospects of a global economic slowdown, a euro zone debt problem and other issues, but on Thursday there were new developments to contend with: the resignation of Steven P. Jobs as chief executive of Apple and the investment by Berkshire Hathaway, which is run by Mr. Buffett, in Bank of America.

The two surprises came as investors were trying to align their expectations for Friday’s address by the chairman of the Federal Reserve, Ben S. Bernanke, at a symposium in Jackson Hole, Wyo. Some are betting on clearer guidance, at the least, on possible stimulus measures, but there was no certainty that any would be forthcoming.

The news that Mr. Buffett had made the investment in preferred stock in the bank took place before the opening bell on Wall Street, sending futures higher. The stock reached as high as $8.80, a 27 percent gain, but the heights could not be sustained. Bank of America was trading at $7.83 by midday, and financials in general settled back to about 0.5 percent higher.

The injection from Mr. Buffett “should dampen the heightened volatility” in recent trading of the stock, said Glenn Schorr, an analyst with Nomura. He added that it was a “clear vote of confidence for the stability of Bank of America’s franchise.”

By midday, the Standard Poor’s 500-stock index and the Dow Jones industrial average were both just over 1 percent lower, with energy stocks performing the worst as crude oil prices fell.

The technology-heavy Nasdaq composite index fell 1.25 percent. Apple stock was down 1.3 percent, much less than it had fallen in overnight trading. Late Wednesday Mr. Jobs, who has been on a medical leave, announced his resignation as chief executive. “Based on the share reaction, we believe that investors had been bracing for this,” said William Kreher, senior technology analyst at Edward Jones. “In a strange way, this does create some certainty,” he said, adding that the stock had a “buy” rating.

Gold, usually a safe haven asset, continued to fall, partly because of a rise in margin requirements, which can affect trading. Comex futures were down just over 1 percent at about $1,730 an ounce. Jason D. Pride, the director of investment strategy at Glenmede, said the metal had been overpriced recently.

Yet the rush to safety seemed evident in bonds, as the 10-year Treasury price rose and its yield fell to 2.226 percent.

The outlook for the economy was somewhat soured on Thursday with a government report showing new claims for unemployment benefits in the United States rose more than expected last week, lifted mostly by striking Verizon Communications workers.

Mr. Pride said that there was enough risk of slow growth that the chances for recession were “higher than normal.”

“I think there is a lot of volatility right now because of all these uncertain factors we have,” he said. “Hopes are built in for Ben Bernanke to do something big,” he said. “If he doesn’t, it is a negative surprise to the market because enough people have factored it in.”

In Europe, markets lost ground through the afternoon, while Asia-Pacific indexes closed up more than 1 percent.

Anticipation that Mr. Bernanke could outline more stimulus measures for the ailing American economy was enough to help calm markets this week after four weeks of sharp declines.

“People are becoming a little more cautious that maybe we don’t get that big move” from the Fed, said Edmund Shing, head of European equity strategy at Barclays Capital. The Euro Stoxx 50 index was 1 percent lower Thursday and France’s CAC 40 index was down 0.7 percent.

Some banking stocks in Europe rose after Crédit Agricole, one of France’s biggest banks, reported earnings that beat analysts’ expectations. In London, shares in the commodities giant Glencore and the liquor maker Diageo rose after the companies reported higher earnings, helped by growing demand from emerging markets.

In Japan, the Nikkei 225 closed up 1.5 percent at 8,772.36 points, while the key indexes in Australia and South Korea added 1.1 percent and 0.6 percent, respectively.

The Hang Seng in Hong Kong gained 1.5 percent, while the Shanghai composite index closed 2.9 percent higher.

Julia Werdigier reported from London and Bettina Wassener contributed reporting from Hong Kong.

Article source: http://www.nytimes.com/2011/08/26/business/daily-stock-market-activity.html?partner=rss&emc=rss

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