Buffett Uses Credit Crunch to Take Cheap Stakes in GE, Goldman

By Erik Holm

Oct. 2 (Bloomberg) -- Warren Buffett, the billionaire who says the U.S. economy suffered a heart attack, is betting General Electric Co. and Goldman Sachs Group Inc. are among companies that will thrive when the credit crunch eases.

Buffett, heralded as the world's preeminent stock picker, is striking when others are short of capital, putting Berkshire Hathaway Inc.'s cash to work. He spent $8 billion in the past week for stakes in GE and Goldman, extracted the promise of 10 percent dividends for buying preferred shares, and won the right to buy more stock.

The biggest housing slump since the Depression has spurred a wave of mortgage defaults and a yearlong contraction in global credit markets, driving down stock prices, forcing mergers and sending firms like GE and Goldman in search of funds. For Buffett, who had $44.3 billion in cash at the start of the year, it's also been a call to action.

``The prices make a lot more sense now,'' Buffett said in an interview from San Diego with PBS's Charlie Rose yesterday in which he described the economy as being ``flat on the floor'' from cardiac arrest. ``You want to be greedy when others are fearful and you want to be fearful when others are greedy.''

As home foreclosures have reached record levels, he's spent at least $28 billion this year to acquire companies, finance buyouts and purchase securities for Omaha, Nebraska-based Berkshire. Buffett is Berkshire's chairman.

``In my adult lifetime I don't think I've ever seen people as fearful, economically, as they are right now,'' he told Rose. ``They are not wrong to be worried.''

A lack of short-term credit is ``sucking the blood out of the economic body of the United States,'' Buffett said.

Dealing When Others Can't

Buffett, 78, is making deals at a time when others can't. A yearlong contraction in global credit markets has choked funding for leveraged buyouts and reduced corporations' ability to acquire rivals. The value of announced mergers shrank 28 percent to $2.37 trillion this year from the same period in 2007, Bloomberg data show.

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

Buffett is seizing the opportunity by demanding outsized payments for Berkshire's cash, and the implicit endorsement of the so-called ``Oracle of Omaha.'' The deals suggest that GE and Goldman both meet Buffett's standards as market-leading franchises with capable leadership, said Tom Kersting, an analyst for Edward Jones & Co in St. Louis, who follows Berkshire.

Keeping His Powder Dry

``Even high-quality companies like Goldman and GE are having to pay what appear to be pretty substantial amounts for new sources of funding,'' Kersting said. ``His philosophy is always to keep some powder dry. That allows him to take advantage of the current turmoil.''

In addition to the GE and Goldman deals, which earned him warrants to buy common stock at a price that's a discount to where they're currently trading, Berkshire on Sept. 18 agreed to buy Constellation Energy Group Inc. for $4.7 billion, or $26.50 a share.

Until the week Berkshire's MidAmerican Energy Holdings Co. made the deal, Constellation hadn't traded at a price that low since March 2003. The shares plunged 58 percent in the three days before the announcement of the acquisition on concern that turmoil in financial markets would wreck Baltimore-based Constellation's energy-trading business.

MidAmerican this week also agreed to spend $232 million for a 9.9 percent stake in BYD Co., China's biggest maker of rechargeable batteries, in a bet that the company will capitalize on growing demand for electric vehicles.

Iscar Metalworking

Berkshire's Iscar Metalworking Cos. agreed Sept. 21 to buy a 71.5 percent stake in Japan's Tungaloy Corp., a manufacturer of tools for cars and planes. The deal was for $1 billion, reported Globes, a newspaper in Israel, where Iscar is based.

Buffett said in the interview yesterday that regulators had ``basically'' taken the proper steps during the deepening economic crisis. With congressional action, the ``best case'' is that the economy begins to improve in six months, Buffett told Rose.

He said he supports a $700 billion financial-rescue package before the U.S. Congress that is designed to help the economy, and expects the legislation will pass. The rescue plan was approved by the Senate last night and is scheduled to go to the House for a vote tomorrow.

Buffett compared the economy to a heart-attack patient who needs attention now -- not later.

``Paramedics have arrived,'' Buffett said. ``And they shouldn't argue about whether to put the resuscitation equipment a quarter of an inch this way or a quarter of an inch that way, or they shouldn't start criticizing the patient because he didn't have blood-pressure tests.

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

To contact the reporter on this story: Erik Holm in New York at eholm2@bloomberg.net.