Buffett Rakes in Billions From Crisis Bets

Monday, 07 Oct 2013 12:44 PM

By Michelle Smith

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During the financial crisis when many didn't know what to do, Warren Buffett became a lender of last resort. His rewards are an estimated $10 billion and counting, according to The Wall Street Journal.

Credit conditions tightened after Lehman Brothers collapsed in 2008, leaving companies that needed a lot of fast cash scrambling for alternative sources. For some, the answer was Buffett and the hefty coffers at Berkshire Hathaway.

Buffett's conglomerate is now raking in billions from those crisis-era investments. The latest windfall comes from the repayment of a loan to Mars Inc., The Journal reports.

Editor’s Note:
Opinion: Retirees to Be Hit With Social Security Cuts

In 2008, the candy maker wanted to acquire Wrigley and Buffett's Berkshire Hathaway doled out cash to help make it happen. Berkshire Hathaway's profit from that deal is believed to be in the neighborhood of $680 million.

That payoff comes on the heels of news that Berkshire Hathaway exercised a warrant for about 13.2 million common shares of Goldman Sachs, a move valued at about $2.1 billion. And that is only part of the return Buffett receives for the $5 billion injection in the investment bank during the crisis.

Under the deal, Berkshire Hathaway purchased 50,000 preferred shares, which provided $500 million in annual dividends, and warrants. Goldman Sachs redeemed the preferred shares in 2011 at a 10 percent premium, paying an additional $500 million.

To tango with Berkshire Hathaway cost Goldman Sachs dearly, according to Reuters, which notes that just the dividends amount to about $15 per second.

Two years after Berkshire Hathaway invested in Bank of America, Buffett has also reported a $5.2 billion dollar paper profit from that move, according to Business Insider.

Buffett's lifelines throughout the financial industry total about $24 billion, "one of the boldest and most successful bets" made on the U.S. financial sector.

To illustrate Buffett's investing prowess, The Journal points out that having raked in $10 billion already, the pre-tax income on his crisis-era investments is 40 percent. The U.S. government invested $420 billion in the Troubled Asset Relief Program (TARP) and its $50 billion dollar return amounts to only 12 percent so far.

"Be fearful when others are greedy, and be greedy when others are fearful," Buffett advises. The Journal says he believes, "you make your best buys when people are overwhelmingly fearful," as they were during the financial crisis.

"In terms of simple profitability, an average investor could have done just as well [as Berkshire] investing in the stock market if they bought during the panic period," Buffett says.

And though the markets are again plagued with uncertainty, Buffett plans to plow much of the money Berkshire Hathaway has earned back into new investments. Because "it's still better to have equities than cash," he tells The Journal.

Editor’s Note:
Opinion: Retirees to Be Hit With Social Security Cuts

Related Stories:

Buffett's Berkshire Set to Get Nearly $2.15 Billion of Goldman Stock

Buffett: Congress to Approach 'Point of Idiocy,' Not Cross It

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