Warren Buffett should perhaps change his famous nickname to the Financial Fireman of Omaha, though it doesn't have quite the same ring.
Early Thursday, Home Capital Group Inc., the embattled Canadian lender that a regulator accused of misleading shareholders about mortgage fraud, announced that it was getting a $300 million investment from a unit of Berkshire Hathaway. Buffett's conglomerate will also extend a $1.5 billion line of credit. But it's clear that more than the money, which Home Capital certainly needed, what the lender wanted was the Buffett seal of approval. Home Capital's press release mentions Berkshire or Buffett in nearly every one of its 26 paragraphs, a total of 29 times.
The press release's first bullet point says the investment is "a very strong validation and endorsement of Home Capital from world renowned long-term value investor." Brenda Eprile, chair of Home Capital's board, calls the deal a partnership, even though the two companies aren't doing any actual business together. Buffett is quoted as saying Home Capital has "strong assets" and that "its ability to originate and underwrite well-performing mortgages" is what makes it a "very attractive investment."
It's pretty clear why Home Capital wants Buffett's endorsement. The company's stock sunk from more than C$30 at the beginning of the year to just less than C$6 after Canadian regulators accused the company of knowingly funding loans from dozens of brokers who falsified documents. Short-sellers have been saying it will go out of business. And Home Capital is paying up for that endorsement. Buffett, through a private placement, is getting the right to buy shares for an average price of C$10. That was a 33 percent discount to the just less than C$15 the stock was trading at before the deal. Home Capital's shares closed at C$19. All told, Buffett was looking at a paper gain of $272 million on a $300 million investment, a 91 percent return -- or 33,100 percent annualized -- in less than 24 hours. And that's before Berkshire pockets as much as another C$180 million interest on the line of credit in the next 12 months.
Buffett received his Oracle of Omaha moniker from his nearly unmatched investment ability over decades to predict which stocks will go up. His stated philosophy is that he buys good companies with good managements at good prices and holds on to them for years. And he does it in a generally good-natured, America-and-apple-pie sort of way.
But in the past few years, Buffett has added financial rescue deals to his investment repertoire. He bought shares of Goldman Sachs Group Inc. during the financial crisis and struggling Bank of America Corp. a little later. And in a similar vein, he and his shareholders have been paid to lend his name to some deals that critics found less than savory. Buffett, the advocate of a fairer tax code and raising tax rates for the rich, lent money to the tax-inversion-lite deal that combined Burger King with Canada's Tim Horton's.
That has not stopped the spread of the idea that Buffett buys quality and sticks around. It's regularly broadcast, both by him and others. So it makes sense that companies desperately in need of credibility would seek out Buffett's public approval. But the problem with these financial rescue deals is that they likely mean less than they appear. Buffett didn't buy shares of Home Capital. He bought something that is a share of Home Capital with 33 percent protection. And investors who have followed Buffett's financial rescues haven't done so well. Goldman's shares rose just 17.5 percent in the five years after Buffett invested $5 billion in the company. Buffett, though, because of the special warrants he received and a 10 percent dividend, was up 67 percent on the investment in the same period.
Some have said that Buffett has lost his investment touch. That's probably overstated. But Berkshire's book value, which Buffett has long said is a pretty good proxy for his investment performance, has underperformed the S&P 500 in four of the past five years. Buffett has also had some high-profile investment flubs, like IBM, which Berkshire has been selling and Buffett has said probably doesn't have the potential he once thought.
Nonetheless, Buffett as an investment brand still has a lot of sheen. The Home Capital deal shows that. But Home Capital is no Goldman or even Bank of America. Buffett is having to reach down significantly deeper in quality to draw returns from his investment brand. Buffett's not likely to lose money on this deal. But the chance that others will be able to make much following him into Home Capital is also pretty low, despite his endorsement that it's "a very attractive investment."
After more than 50 years, the Oracle's wishing well that companies can drink from is quite large. But if Buffett lets too many questionable companies dip in, even his magic elixir can run out.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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