An interview with Warren Buffett at the MPW Summit - Part 2

Buffett also talked about the purchase of US energy company Constellation Energy. Constellation Energy is US largest energy company. The company headquarters is in Baltimore City, it is one of Fortune selected top 200 most competitive energy companies.

A few weeks ago, Constellation Energy stock price dropped from about 50 USD per share to about 14 USD per share. Following that, Mid American Energy gave Buffett a call to report about the incident as talks of bankruptcy surrounded the company as generally enterprises have a series of market valuation ratings, if the ratings were to drop, it means that the company has to provide more collateral.

So Buffett after learning that the company could be in trouble gave Mid American Energy top management a call. The chairman's assistant picked up the call and said that David Sokol (David Sokol officially joined BYD's board of directors) was in a very important meeting and that he was not to be disturbed. She also said that David Sokol said that even if she were to pass a note with 2 words to him and interrupt the meeting, she will be fired. However, the assistant still took Buffett's advise and informed David Sokol.

That night the whole company was very excited as they can quote a price and funds will be injected and they know that Berkshire can do it. The same is with other companies. When they are sinking in the sea, Berkshire can easily pull them out of it. Buffett said that initially they rejected the offer, which he say using their word is hesitation. However, that night, the deal was signed.

Today is an economy 'Pearl Harbor'
Since the start of the sub-prime crisis, how bad can the US economy be is an unavoidable topic. But Buffett was confident. He said he hope that if he is around, the word will not be too bad.

Buffett said that he never saw the credit market like today. So he thinks that today is an economy 'Pearl Harbor'. A lot of capital is needed. He said to take note that we are talking about the whole world and not just only US, the whole world is lowering financial leveraging. If everyone were to increase leveraging, then they will get the money they want, at anytime, between lending and spending, this is the truth widely used. Everyone wants to reach a higher target. Now, everyone is lowering their leveraging (the broken financial system is adjusting towards a good direction), and the only obstructing force to such de-leveraging is the US government, only the US government can stop it and increase leveraging. This is what the whole world economy needs. Whatever type of funding is not perfect and so Buffett believes that the 700 billion USD stimulus package will be approved.

As to how to spend the 700 billion USD, Buffett believes that the key is to buy at market price. Because if bought at market price, the US treasury will definitely have profit. Buffett say that you may see the situation that if the fund were to buy at a loss from those who want to increase leveraging but not capable of doing it, that is, if arbitrage funds were to buy Merrill Lynch at 22 cents, they have to get funding at 3/4 the price. Buffett's meaning is that it is not possible to funding from the market in the name of the assets.

As such, if those assets were to be sold at a loss, with no leverage adjustment, arbitrage funds or other institutions will buy in small portions, about 15%-20% of the deal. If the treasury department were to buy at market price, and to buy at the treasury low end buying price, then all forces will have a leveraging adjustment effect and make a lot of money. Buffet said that he can have a 1% chance, that is to say, he can earn or loose 7 billion, but he is willing to do such a thing because the government can do something he cannot. The government can lend out unlimited amount of funds, they can lend unlimited amount of money based on the cost price, no one else can do it. And even if they can buy at market price, it will also be a great opportunity. Because of the government's intervention, maybe the market price could be lifted up a little. But they cannot buy some company at cost price or book value, that is when the supervision committee member should come in.

[An interview with Warren Buffett at the MPW Summit - Part 1 here.]
[An interview with Warren Buffett at the MPW Summit - Part 3 here.]