Monthly Archives: December 2009

Beware the Gold Bubble

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The rally in gold prices has driven several analysts and famous investors (Jim Rogers in particular) to frenzied forecasts in recent days. Some say gold prices will reach $2,000 per ounce soon. Others are predicting a big boom (sounds familiar?), saying gold prices will zoom to $5,000 and eventually to even $15,000 per ounce in the years to come. For instance, Jim Rogers is saying gold will top $2,000, possibly go even as high as $10,000 per ounce in the next few years.  Have we already forgotten about the housing bubble?

As far as I know, there has been no economic shift on the demand or supply for gold. Nevertheless, the price has increased incredibly on the speculation of greater inflation in the future. A sign of the gold rush is the US Mint. Earlier this month, the Mint ended the sale of 2009 American Gold Buffalo Bullion Coins, telling customers in a memo that its inventory has been depleted and that no more of the coins would be produced.

Put simply, we think Jim Rogers is incorrect. Although we’re not sure what the future will hold, we believe the probability of lower gold prices in the future is higher than ever – just see the commercials below.

Happy New Year everyone!

 

Why Value Investing Works So Well – A Presentation by Tweedy Browne

New Graham Articles Added to ValueHuntr Collection

Several new articles, all originally written by Benjamin Graham, have been added to the Valuehuntr Collection under our “Resources” section. Two of the new articles are interviews conducted in 1976, the year Mr. Graham past away. Therefore, these documents provide readers with aclear  glimpse of Mr. Graham’s investing framework towards the end of his career. The added documents are:

Special Situations (1946)

Stock Market Warning: Danger Ahead! (1960)

The Renaissance of Value (1974)

A Conversation with Ben Graham (1976)

An Hour with Mr. Graham (1976)

Bill Ackman Rebuts Hovde’s Short Thesis for General Growth Properties

(Via Seeking Alpha)

A week or so ago we posted up hedge fund Hovde Capital’s short thesis on General Growth Properties (GGWPQ.PK). Immediately following that, we saw Todd Sullivan over at ValuePlays.net issue a rebuttal. Hedge fund manager Whitney Tilson of T2 Partners also issued a rebuttal. And finally, you now have one of the largest shareholders in Bill Ackman issuing a rebuttal on behalf of his hedge fund Pershing Square Capital Management.

In summary, Ackman has provided a wide range of GGWPQ’s equity value based upon fellow REIT valuations. He comes up with a price target of $24-43 per share which excludes the MPC segment of General Growth. He feels that high quality U.S. malls will continue to do well and he even recently laid out an entire presentation on the U.S. mall REIT industry. Ackman and Pershing Square are obviously refuting Hovde’s presentation since they have been long the equity and unsecured debt of General Growth since back when the stock was trading below $0.40 per share.

General Growth has been evaluating all options to reduce leverage and have been considering “all indications of interest in the company.” Ackman sits on the board of General Growth and obviously has been very close to this entire situation.

Pershing Square’s entire presentation has been posted below:

Fund Boss Made $7 Billion in the Panic

by Gregory Zuckerman (WSJ)

In this comeback year for investors, David Tepper may have scored one of the biggest paydays of all.

Mr. Tepper’s hedge-fund firm has racked up about $7 billion of profit so far this year—with Mr. Tepper on track to earn more than $2.5 billion for himself, according to people familiar with the matter. That is among the largest one-year takes in recent years.

Behind the wins: a bet worth billions of dollars that America would avoid a repeat of the Great Depression.

Through February and March, Mr. Tepper scooped up beaten-down bank shares as many investors were running for the exits. Day after day, Mr. Tepper bought Bank of America Corp. shares, then trading below $3, and Citigroup Inc. preferred shares, when that stock was under $1. One of his investors insisted more carnage loomed. Friends who shared his bullish beliefs were wary of aping his moves amid speculation that the government was about to nationalize the big banks.

“I felt like I was alone,” Mr. Tepper recalls. On some days, he says, “no one was even bidding.”

The bets paid off. A resurgent market has helped Mr. Tepper’s firm, Appaloosa Management, gain about 120% after the firm’s fees, through early December. Thanks to those gains, Mr. Tepper, who specializes in the stocks and bonds of troubled companies, manages about $12 billion, a sum that makes Appaloosa one of the largest hedge funds in the world.

Mr. Tepper, whose office overlooks the parking lot of a Hilton hotel in Short Hills, N.J., across from an upscale mall, now is taking aim at a new target. He’s purchased about $2 billion of beaten-down commercial mortgage-backed securities. Among his purchases are bonds backed by chunks of the debt of Peter Cooper Village & Stuyvesant Town and 666 Fifth Ave. in New York, two high-profile real-estate deals that have fallen in value over the past two years.

Some experts predict more bad news for commercial real estate—and say that if Mr. Tepper’s move doesn’t pan out, it could jeopardize a chunk of his recent gains. Mr. Tepper says he remains optimistic.

Hedge funds, once darlings of well-heeled investors, suffered dearly in 2008, dropping 19%. Nearly 1,500 funds, or 16% of the total, shuttered last year. This year, hedge funds are clawing back, with gains of 19% through November, on pace for their best annual gains in a decade, according to Hedge Fund Research Inc.

A handful of funds—including Everest Capital’s emerging-market funds and the stock-focused Glenview Capital—have racked up fat gains this year. In sheer dollars, though, none appear to have come close to matching Appaloosa’s winnings.

Mr. Tepper grew up in a middle-class neighborhood in Pittsburgh, the son of an accountant who worked seven days a week and once won a $715,000 lottery payout. In the late 1980s, he helped run junk-bond trading at Goldman Sachs. Mr. Tepper wears jeans and sneakers to work, and can be self-deprecating, playing down his successes. He claims to have popularized on Wall Street the phrase “it is what it is” to explain the need to adjust a portfolio if facts on the ground shift.

After he was repeatedly passed over for a partnership, Mr. Tepper left Goldman to start Appaloosa in 1993. By 2008, he had a track record of annual gains averaging about 30% and a net worth estimated at about $2 billion.

Mr. Tepper lives in a two-story home in New Jersey he bought in 1990 for $1.2 million. He recently purchased an ownership stake in the Pittsburgh Steelers football team, and flies to every home game. In 2004 he gave $55 million to Carnegie Mellon University’s business school, his alma mater, which renamed itself the Tepper School of Business.

The husky, bespectacled trader laughs easily, but employees say he can quickly turn on them when he’s angry. Mr. Tepper keeps a brass replica of a pair of testicles in a prominent spot on his desk, a present from former employees. He rubs the gift for luck during the trading day to get a laugh out of colleagues.

His biggest scores over the years have come from buying large chunks of out-of-favor investments. When Asian markets crumbled in 1997, Mr. Tepper added Korean stocks to a portfolio laden with Russian debt. The moves led to hundreds of millions of dollars in profits when markets rebounded two years later. He scored big on junk bonds in 2003, and his 2007 wager on steel, coal and other resource companies paid off in 2008 when commodity prices soared.

But because he sometimes places more than half of his portfolio in a single trade idea, Mr. Tepper also is prone to brutal, abrupt losses.

That approach cost him more than $1 billion last year. In January 2008, Societe General SA trader Jerome Kerviel was revealed to have lost €5 billion ($7.2 billion), one of the world’s largest trading loss. Mr. Tepper sold large chunks of his holdings, fearing a market tumble. Prices held up, though, hurting Appaloosa. In the spring of last year, he turned bullish on large-company stocks and did some buying, but suffered as markets declined.

Mr. Tepper made a big wager on Delphi in 2006. But in April of last year he and a group of investors withdrew from a deal to inject as much as $2.6 billion in the bankrupt auto-parts supplier, sparking a nasty legal battle that was resolved this summer. Appaloosa lost almost $200 million on its investment in Delphi.

Mr. Tepper’s largest fund dropped 25% for 2008, worse than the industry’s 19% average decline.

“Investing with David is like flying, with hours of boredom followed by bouts of sheer terror,” says Alan Shealy, a client of more than 18 years. “He’s the quintessential opportunist, investing in any asset class, but you have to have a cast-iron stomach.”

Mr. Tepper entered 2009 cautiously, with more than 30% of his firm’s assets in cash, or more than $2 billion. He itched to do some buying. Mr. Tepper explains his investment philosophy with a line from Allan Meltzer, a professor at his alma mater: “Trees grow.” In other words, growth is the natural state of economies, so optimism usually is rewarded.

On Feb. 10 of this year, Mr. Tepper read that the Treasury Department was introducing the so-called Financial Stability Plan. It included a commitment by the government to inject capital into banks by buying their preferred stock, or shares that carry less chance of reward but also less risk than common stock.

At the time, investors worried that the government ultimately would have to nationalize big banks. U.S. officials said they had no intention of such a move, which could wipe out common shareholders, but investors were dubious.

The news from the Treasury Department struck Mr. Tepper as proof that the government would stand behind the banks. He directed his traders to begin buying bank stock and debt.

Few investors were feeling as optimistic. The Dow Jones Industrial Average fell more than 382 points on the day Treasury Secretary Timothy Geithner introduced the plan, nearly 5%. Bank shares continued to tumble in the days that followed. Bank of America shares fell as low as $2.53 on Feb. 20. By March 5, Citigroup traded as low as 97 cents.

“This is ridiculous, it’s nuts, nuts, nuts!” Mr. Tepper recalls saying to Michael Lukacs, one of his partners, on the firm’s small trading floor. “Why would the government break its word? They’re not going to let these banks go under, people aren’t being logical!”

Mr. Tepper huddled with Mr. Lukacs and Jim Bolin, another top Appaloosa executive. Mr. Tepper insisted that stimulus spending and low interest rates would boost the economy. He said he estimated there was only a 20% chance that the U.S. would nationalize banks such as Citigroup.

Mr. Bolin, who people at the firm say tends to be more conservative than Mr. Tepper, was bullish about banks, but still thought it safer to stick to bank debt than to riskier shares. Mr. Tepper says he listened to the arguments, but said it was time to place a big bet.

Over several weeks, Mr. Tepper’s team bought a variety of bank investments, including debt, preferred shares and common shares. Just months earlier, the government had injected billions of dollars to keep companies such as American International Group Inc. going, much as they were now doing with the banks. But that didn’t prevent shares of those companies from tumbling.

At one point in March, the firm was down about 10% for the year, or about $600 million. Mr. Tepper got on the phone to make more trades, something he often left to subordinates. This time, he wanted to talk directly to Wall Street brokers to test how bad things really were.

The answer: really bad. Mr. Tepper says he was told that he was the only big investor doing much buying.

“Clients were nervous that the game had changed and capitalism wouldn’t be the same. There was real fear,” recalls Timothy Ghriskey, chief investment officer at Solaris Asset Management, a $2 billion investment firm, who says he only bought a small amount of bank shares during this period.

One day in late winter, Mr. Tepper heard from a skeptical client of his own, Mr. Shealy.

“This thing is far from over,” Mr. Shealy recalls saying, referring to the bank problems. Still, Mr. Shealy, who runs an investment firm in Boise, Idaho, stuck with Mr. Tepper. “I figured the positions were fairly liquid, so if he was wrong, he would get out.”

Mr. Tepper hadn’t paid his investors’ nerves much heed since 2000. That year, he bet that the tech-heavy Nasdaq index would fall. But so many investors complained that Mr. Tepper was straying from his roots in debt investing that he canceled his bets. When the Nasdaq collapsed months later, Mr. Tepper fumed.

By late March of 2009, Citigroup shares had tripled, and Mr. Tepper’s other holdings, including junk bonds, were rising. He and his team bought more, spending more than $1 billion, when various banks conducted share sales. Mr. Tepper says his average cost for shares of Citigroup was 79 cents; for Bank of America it was $3.72.

At one point in the summer, Mr. Tepper had recorded about $1 billion of profits in shares of just Citigroup and Bank of America, and his overall gains soared past $4.5 billion, or 70%, since January.

After Mr. Bolin, the Appaloosa executive, urged caution, Mr. Tepper did some selling to lock in gains. But the firm remains a big holder of both Bank of America and Citigroup shares, which now trade at $15.03 and $3.40, respectively.

Mr. Tepper remains upbeat. He says he expects interest rates to stay low, and argues that stocks and bonds are reasonably priced.

This belief is driving another risky bet. At the end of each quarter this year, Mr. Tepper noticed that investors were dumping holdings of troubled bonds backed by commercial properties. He had never dabbled in these investments, but he and his 10-person team did some research and judged them attractive, with some seemingly safe debt trading at yields above 15%.

Mr. Tepper slowly spent more than $1 billion to gain ownership of between 10% and 20% of highly rated slices of commercial mortgage-backed securities, or CMBS. He focused on debt backed by loans of properties including Stuyvesant Town and 666 Fifth Ave. in New York.

His bet: If the economy improves, he’ll earn hefty interest payments on the bonds. But if the properties can’t make their payments, Mr. Tepper believes he owns so much of the debt that he’ll have a big say in how the properties get restructured. That means he could ultimately end up ahead.

He’s taking a big risk, some analysts warn. The value of commercial real estate continues to fall. Owners of debt classes don’t always have much power to influence a commercial real-estate restructuring. And because the debt of these big properties was carved into many pieces, and many investors are involved, any battle for control will be complicated.

Mr. Tepper says the worrywarts have it wrong: “If you think the economy will be fine, as we do, then we’re going to do very well.”

My Dinner with Warren

By Ben Stein (CNN)

My pal Phil DeMuth and I flew into an unbelievably cold Omaha to meet and eat the next day with the maestro, Warren E. Buffett. The next day was even colder, but Warren greeted us in his trademark folksy manner at the door to Berkshire Hathaway’s old fashioned, but solid, offices in downtown Omaha. I know that space is limited so I will get right to what went on.

First, his office had changed a little bit since I was there a couple of years ago. He now has model trains everywhere, emblematic of his recent buy of Burlington Northern Santa Fe — apt gifts, because Warren has been a model train collector since his childhood. Phil had brought him a 1930s Lionel catalog, which Warren read eagerly, Citizen Buffett with his Lionel trains Rosebud.

I asked him why he thought Burlington Northern was such a great buy and he answered in characteristic fashion…with numbers. He explained that Berkshire had gotten so big that even a very successful small purchase would hardly affect earnings at all.

But a medium successful large purchase would be more helpful. (He explained this with numbers in such a rapid fashion that it was as if a computer were spitting out the analysis, which, in a way, it was. He is so astonishingly facile with numbers that it is almost eerie.)

Over dinner at the amazing Piccolo Pete’s, the Italian restaurant in a working class neighborhood that seems to set aside most of the restaurant just for him, he said the economy had really been in desperate shape last fall.

The man who saved it, he said, was Ken Lewis, beleaguered head of Bank of America. By buying Merrill Lynch just as everything at Lehman was falling apart, he put some confidence back into the system and stopped — or helped mightily to stop — a “run on the bank” which would have laid waste all of Wall Street.

If Merrill had failed, said Buffett, it would have been followed swiftly by Morgan and then by Goldman. By overpaying wildly for Merrill, Lewis essentially saved the nation from financial collapse.

Without that buy, commercial paper would have simply stopped dead and the banks’ slender capital would have been swamped by debt as that commercial paper could not be rolled over.

Buffett said he did not see signs, or at least not many signs, of recovery at his companies. The entities making home and construction projects were still slow, freight-car loadings were weak, and even in Omaha, a city hardly affected by unemployment, sales of jewelry and furniture were disappointing.

This, however, said Buffett, was not a reason to doubt the stock market’s 2009 comeback. Buffett noted that the biggest gain the Dow had ever notched in the postwar period came in 1954 when, according to him, the unemployment numbers were dismal (although nowhere near as bad as today’s) until late in the year, when a rapid recovery began.

The same thing could be happening now, he said. (I checked this later and as usual, Buffett had it right about the recovery from the 1953-54 slowdown.)

Buffett had mostly praise for Goldman Sachs, a frequent object of my criticism. The firm gets its huge income, he said, because there are so few banks presently available to make immense trades, and therefore it can get bigger spreads than it could have a couple of years ago.

Plus, he said, it was extremely good and careful about hedging. He used examples of Goldman’s buying credit default swaps on Berkshire’s immense puts on the stock market, which are not due to mature for many years but so far are in the red as the stock market has lost so much value since Buffett sold the puts.

These swaps soared in value in the darkest days of 2008, on fear that Buffett would not ultimately be able to meet Berkshire’s obligations when the puts came due. Buffett said there was zero chance of that and advised Goldman to sell the credit default swaps at a major profit. But Goldman strictly held onto the hedge, he noted, with what seemed to me a mixture of admiration and amusement. (Berkshire Hathaway, of course, is a large holder of Goldman Sachs.)

Buffett told many stories of his childhood delivering newspapers in Spring Valley and Wesley Heights, two exclusive neighborhoods in Washington, D.C. He said he could almost instantly fold up a newspaper against his thigh and with one hand throw it exactly against the right door of apartments off New Mexico Avenue in 1943. He added, “And I still could.”

He also spoke of his caddying at the ultra tony Chevy Chase Club, carrying two bags for 54 holes. “I was the smallest and most pitiful looking caddy,” he said, “so the other caddies took pity on me and didn’t beat me up.” He said it was too exhausting, and he did it only one day. It surely must be the only thing he ever gave up on.

Buffett said that he did not see a good labor market for some time to come. Nevertheless, he said, he advised young people to “follow their passion” and do what they loved. If that did not provide a living, they should try something else.

President Obama still rates high with Buffett, despite his grandfather’s warnings about Democrats and people who don’t pay their grocery bills. (Buffett’s grandfather was a successful grocer and his father, among other achievements, was a three-term GOP congressman.) However, Buffett is extremely worried about nuclear proliferation, especially to terrorist groups and to Iran.

We all spent a good part of the dinner discussing ways the terrorists might greatly diminish life in this country. I won’t share these thoughts, but they are grim. (If my mother can read this from the afterlife, Buffett is the only human being I have ever met who puts FAR more salt on his food than I do.)

Now, for what you really wanted to know, Buffett thinks that for the ordinary, non-professional investor, a broad index fund still makes sense. For the professional, he still follows the advice of his mentor, Ben Graham, to look for value plays, where what you pay for a company is clearly less than it is worth.

I did not have the wit to ask him how one defined value in a constantly shifting world. We all agreed that interest rates would change towards the upside at some point, although we did not know when or by how much (of course).

Buffett, like everyone else, is mystified by the Japanese example of super high deficits, a huge national debt, and no inflation and ultra-low interest rates. Something like that is apparently happening here, he suggested, which we would all agree is true (although this week’s producer prices number was worrisome and had not come out as of our dinner). But why it is happening now and did not happen in the past (there was inflation between 1933 and 1937, in a far worse economic environment), no one knew.

We talked about the death of Paul Samuelson, the genius economist, and how he had been a longtime BRK stockholder even as he preached efficient market theory. (I did not know at the time that one of the economic greats, Lowell Harriss, my long-time teacher, mentor, and friend, from Columbia, had died the same day as our dinner. R.I.P., dear friend.)

The night air after dinner was brutally cold. Buffett, while still the smartest of the smart, did not seem to know how to turn on the windshield defroster in his wife’s Ford SUV and I think I may say I saved his life by showing him how to do it, since the windshield was rapidly icing over and the roads were slick.

Anyway, it was a dazzling evening. The only ready comparisons that come to mind are time spent with Milton Friedman and time spent with my father. A deeply, deeply impressive genius, statesman, and gentleman. He can caddy my investments anytime.

T7WHRNQUPCRR

Value Investing & Behavioral Finance

In memory of Christopher Browne, we are posting a speech he gave at Columbia Business School about why behavioral finance supports and justifies the value investing discipline. The speeh can be found HERE.

Christopher H. Browne, Value Investing Legend, Dead at 62

(WSJ)

To thrive as a value investor, Christopher H. Browne once said, you have to “risk being called a dummy from time to time.”

Mr. Browne, who died Sunday of a heart attack at the age of 62, was one of the most successful practitioners of buying stocks that the so-called smart money on Wall Street wouldn’t touch.

He spent 40 years at Tweedy, Browne & Co., succeeding his father, Howard, as senior partner. The firm and its mutual funds have long been known for finding unpopular stocks at unusually cheap prices.

Mr. Browne helped broaden the investment firm, which manages more than $10 billion, from its roots as a specialty brokerage house. He stepped down as a managing director earlier this year in the aftermath of a severe head injury sustained in a fall in 2007. He stepped down from Tweedy Browne’s management and investment committees in July, citing health reasons. “I took this as a wake-up call about the fragility of life,” Mr. Browne said, in a statement at the time.

In 2001, Mr. Browne raised questions about Conrad Black’s company, Hollinger International, which had been subsidizing the press baron’s lavish personal life. Tweedy Browne had a sizable stake in Hollinger, then the owner of Britain’s Daily Telegraph and the Chicago Sun-Times. Mr. Browne spearheaded a shareholder revolt that eventually led to an investigation by the Securities and Exchange Commission, a fraud conviction and a six-and-a-half-year prison sentence for Mr. Black.

Mr. Black is appealing.

From the 1930s through the 1950s, Tweedy Browne—originally Tweedy & Co.—was the favorite brokerage firm of Benjamin Graham, the founding father of value investing. Its specialty was dirt-cheap shares of closely held companies that rarely traded on major exchanges; Mr. Browne sometimes likened the firm in those days to a “pawnbroker” or “thrift shop.”

In the 1950s, Tweedy Browne began to serve Warren Buffett, who in 1965 traded through the firm to amass a controlling position in a tiny textile firm in New Bedford, Mass., Berkshire Hathaway Inc.

Mr. Browne joined his father’s firm in 1969, recording trades in Berkshire Hathaway at $25 per share. He came to specialize in such meticulous tasks as scouring financial statements to find stocks selling below the value of their current assets minus all liabilities.

“Investment management is for us a ‘grunt work’ business,” Mr. Browne wrote in a 2001 letter to shareholders. “Were you to visit our offices, you would be reminded more of the reading room in a college library than some frenetic trading room at a major brokerage firm.”

Since their inception in 1993, Tweedy Browne’s Value and Global Value funds both outperformed market averages.

Those results were achieved even as Mr. Browne’s funds held stocks for an average of five to six years at a time—at least five times longer than the typical mutual fund.

“He was something of a collector,” said analyst A. Michael Lipper of Lipper Advisory Services. “It took a lot of disappointment for him to get rid of an underperforming stock. Could somebody else have produced better results by getting rid of the losers? One might think so, but it wasn’t [Tweedy, Browne's] style.”

Mr. Browne’s skills didn’t come cheap; for years, the Tweedy Browne funds charged above-average expenses. In 1997, Mr. Browne negotiated the sale of a majority stake in the firm to Affiliated Managers Group.

A prolific writer, Mr. Browne produced the twice-yearly letters to fund shareholders that were widely read among professional investors. In “The Little Book of Value Investing,” published in 2006, Mr. Browne explained how to analyze financial statements and how accounting principles differ across nations.

He wrote that “value stocks are about as exciting as watching grass grow. But have you ever noticed just how much your grass grows in a week?”

Mr. Browne’s philanthropic gifts included $10 million to the University of Pennsylvania, his alma mater. He also funded research into HIV and AIDS at Rockefeller University, New York.

A political conservative, he was known for expressing strong views, and “liked nothing more than to discuss them with people who disagreed with him,” said Dr. Amy Gutmann, president of the University of Pennsylvania.

An enthusiastic amateur architect and aficionado of formal English gardens, Mr. Browne helped design the elaborate grounds of his home in East Hampton on New York’s Long Island.

In person, Mr. Browne was polite and reserved, but had a quick wit. He spoke frequently at investment-industry conferences, poking fun at professors who think that the market always prices stocks correctly and consultants who claim to be able to identify consistently superior money managers.

With a quizzically raised eyebrow, Mr. Browne described efficient-market theory, which holds that stock prices reflect all available information, as “garbage in, garbage out.” When another investment manager claimed to have made 250 company visits in the preceding year, Mr. Browne muttered, “What did you do? Drive by and wave?”

Abu Dhabi Bails Out Dubai World

(Bloomberg)

Abu Dhabi provided $10 billion to help Dubai World, the state-owned holding company, avoid defaulting on a $4.1 billion bond payment that roiled global financial markets during the past month.

Dubai World will use the money to cover debt of real-estate unit Nakheel PJSC that comes due today. The rest of the money will cover Dubai World’s interest and operating costs until the company reaches a standstill agreement with its creditors, Dubai’s government said in an e-mailed statement.

After the emirate and its state-controlled companies borrowed $80 billion to diversify away from dwindling oil supplies, Dubai’s ruler, Sheikh Mohammed Bin Rashid Al Maktoum, has been forced to seek Abu Dhabi’s help three times this year as the global financial crisis dried up credit and triggered a property crash in the city state.

“It comes as a relief for the market, underpinning hopes that the implicit government support for Dubai corporate issuance is intact,” said Jason Watts, head of credit trading at National Australia Bank Ltd. in Sydney. “Whilst we are not out of the woods yet, it is definitely a step in the right direction.”

The Dubai Financial Market General Index climbed 10 percent, the most in 14 months, leading a worldwide rally in equities that drove the MSCI World Index up 0.4 percent. Dubai’s Nov. 25 announcement that state-owned Dubai World would seek to delay debt repayments spurred the emirate’s steepest stock- market selloff in 13 months and Europe’s worst rout since April. Nakheel’s $3.52 billion sukuk tumbled as much as 62 percent in three days, according to Citigroup Inc.

Leeway to Dubai World

“The fund injection gives some leeway to Dubai World to put together an orderly debt restructuring plan as it tries to alter its debt profile,” said Abdul Kadir Hussain, chief executive officer of fund manager Mashreq Capital DIFC Ltd.

Nakheel’s Islamic bonds due 2011 surged to 67.5 cents on the dollar after halving in value to as low as 37.5 cents, according to Citigroup prices. Dubai’s benchmark share index jumped to 1,871.2. The measure had lost 19 percent since Dubai World on Nov. 25 sought a “standstill” agreement on its debt.

The cost of protecting investors against Dubai defaulting on its debt tumbled the most since February. Five-year credit- default swaps on Dubai’s debt fell 135.5 basis points to 405, according to CMA DataVision prices.

Internal Transfer

Abu Dhabi’s support “provides funding and a stable basis for the restructuring process, which continues,” Dubai World said in a separate e-mailed statement. The terms of today’s transaction won’t be disclosed it was an internal transfer between the two governments, a source close to the Dubai government told reporters in a conference call today.

Abu Dhabi is the largest of the seven emirates that formed the United Arab Emirates in 1971 and owns more than 90 percent of its oil reserves, the world’s sixth largest. Dubai, the second-largest emirate, has traditionally guarded its autonomy, maintaining a separate army until 1996 and keeping full control of economic affairs.

The latest $10 billion bailout followed the sale of $10 billion in Dubai bonds to the national central bank based in Abu Dhabi in February and a $5 billion loan by two Abu Dhabi-owned commercial banks on Nov. 25.

European Bank

Dubai’s bailout announcement sent European banking stocks higher, led by Standard Chartered Plc and HSBC Holdings Plc. Royal Bank of Scotland Group Plc was the biggest underwriter of loans to Dubai World, while HSBC has the most at risk in the U.A.E., according to JPMorgan Chase & Co. RBS, the largest U.K. government-controlled bank, arranged $2.3 billion, or 17 percent, of Dubai World loans since January 2007, JPMorgan said in a report on Nov. 27, citing Dealogic data.

HSBC on Nov. 27 said it had $15.9 billion in loans to customers in the U.A.E. at the end of June. Standard Chartered has $18 billion of loans to the Middle East and South Asia, of which two thirds relates to the U.A.E., the bank said last week.

Nakheel, which is building palm tree-shaped islands off the emirate’s coast, posted a first-half loss of 13.4 billion dirhams ($3.65 billion) as revenue fell and it wrote down the value of land and property. The firm’s repayment of the $3.52 billion bond was the biggest debt obligation for a Dubai entity since global credit markets froze after the September 2008 collapse of Lehman Brothers Holdings Inc.

Losing Money

“The vast majority of investors have lost money here,” said Luis Costa, an emerging markets debt strategist at Commerzbank AG in London. “Imagine the number of investors who actually had to get rid of this paper under the default pressure. This outcome will raise red flags on Dubai’s ability to make independent decisions.”

Rating firms have downgraded some of Dubai-owned firms to junk levels since Dubai World entered into negotiations with lenders to renegotiate debt terms.

“We don’t anticipate any knock-on effects on the other government related entities’ ratings” from Dubai’s announcement that it received cash from Abu Dhabi, Standard & Poor’s credit analyst Farouk Soussa said in an interview.

While Dubai’s government owns 100 percent of Dubai World, it hasn’t guaranteed the company’s debt and creditors must help it restructure, Abdulrahman Al Saleh, director general of Dubai’s Department of Finance, said Nov. 30.

Dubai also said today it will announce a new bankruptcy law based on international standards that state-owned Dubai World may use to restructure debt. The new law will be available “should Dubai World and its subsidiaries be unable to achieve an acceptable restructuring of its remaining obligations,” the government of Dubai said.

Dubai’s government issued a decree setting up a special tribunal to complete Dubai World’s restructuring and to settle disputes between the company and its creditors. The court will be headed by Anthony Evans and will use insolvency laws of the Dubai International Financial Centre, a business park for financial services companies. Evans is chief justice of DIFC Courts.

In Year of Investing Dangerously, Warren Buffett Looked ‘Into the Abyss’

By Scott Patterson (WSJ)

Warren Buffett believes his best deals during the economy’s biggest belly flop since the Crash of 1929 may well turn out to be the ones he didn’t do.

Mr. Buffett slammed the door on one opportunity after another during the most harrowing stretch of his storied career. That impulse, he says, left him with the financial firepower he needed last month to strike the biggest deal he has ever done — Berkshire Hathaway Inc.’s $26.3 billion purchase of railroad Burlington Northern Santa Fe Corp.

In a series of interviews with The Wall Street Journal, Mr. Buffett gave his most complete account of his epic deal negotiations, including anxious phone calls he fielded from wounded companies such as Freddie Mac, Wachovia Corp. and Morgan Stanley.

“I bought my first stock in 1942, and this roller coaster surpassed anything that I’ve seen,” says the 79-year-old investor. “We didn’t do all the smartest things. We didn’t do anything really dumb.”

On March 28, 2008, Mr. Buffett, Berkshire’s chairman, took a call from Richard Fuld, then head of Lehman Brothers Holdings Inc. Mr. Fuld wanted to know whether Mr. Buffett would inject about $4 billion into the investment bank to stanch losses.

That night, in his offices in Omaha, Neb., Mr. Buffett pored over Lehman’s annual financial report. On the cover, he jotted down the numbers of pages where he found troubling information. When he was done, the cover was dotted with numbers. He didn’t bite. Six months later, Lehman filed for bankruptcy protection.

“Everybody was looking for money in those days,” Mr. Buffett recalls.

He didn’t say no to everyone. He invested $5 billion in Goldman Sachs Group Inc. and $3 billion in General Electric Co. But for Berkshire shareholders, the bigger story may be the deals that he passed up.

“I don’t think Buffett gets enough credit for all the pitches he doesn’t swing at,” says Paul Howard, an analyst at Janney Montgomery Scott. “And he gets a lot of pitches.”

Some investors did strike big deals during the market turmoil, to their detriment. TPG, one of the world’s largest private-equity firms, lost $1.35 billion on struggling thrift Washington Mutual Inc. In late 2007, investors in Abu Dhabi plowed billions into Citigroup Inc., whose shares plunged.

This account of Mr. Buffett’s vetting of deals during the financial crisis was pieced together from interviews with him and representatives of some companies that approached him.

The requests for bailout financing began March 15, 2008, a Saturday. Mr. Buffett received a call at Berkshire’s headquarters from New York private-equity investor J. Christopher Flowers. Mr. Flowers and a team of bankers were trying to arrange a last-minute buyout of Bear Stearns Cos., the struggling investment bank.

After listening to a pitch for about 10 minutes, Mr. Buffett said he wasn’t interested. The next day, J.P. Morgan Chase & Co. struck its own deal to take over Bear.

Two weeks later, Mr. Buffett rebuffed the request from Lehman’s Mr. Fuld. Mr. Fuld didn’t respond to requests for comment.

As the housing market cratered, companies laden with securities backed by home mortgages were teetering. Later that spring, Morgan Stanley bankers representing Freddie Mac, the mortgage giant, reached out to Mr. Buffett for an investment. He thought Freddie Mac’s troubles were too severe.

“I said no fast on that one,” he recalls.

The Treasury Department took over Freddie and its sister lender, Fannie Mae, later that year. A spokesman for Freddie declined to comment on its request to Mr. Buffett.

Mr. Buffett remembers September 2008, when the financial crisis came to a head, as one of the most hectic months of his career. It started with a request from Robert Steel, then the chief executive of Wachovia, for an investment of as much as $10 billion. Mr. Buffett, who thought Wachovia had recklessly dived into subprime mortgages during the housing boom, turned him down.

Wachovia eventually was purchased in a fire sale by Wells Fargo & Co., in which Berkshire is a stockholder. A spokesman for Wachovia declined to comment.

Then, on Sept. 12, a Friday, Robert Willumstad, then the chief executive officer of troubled insurer American International Group Inc., called to ask Mr. Buffett for an investment of about $5 billion.

Mr. Buffett says he was aware AIG needed to raise capital quickly. “Don’t waste your time on me,” he recalls telling the AIG chief.

Mr. Willumstad says Mr. Buffett “basically said the company was too complicated.”

Mr. Buffett did, however, agree to consider making an offer for some of AIG’s property-and-casualty businesses. Later that evening, Mr. Willumstad called back. “How about the whole thing?” he recalls asking Mr. Buffett, referring to all of AIG’s property-and-casualty businesses. He said the price was $25 billion.

Mr. Buffett said he would look over information about the deal. He swiftly concluded it was too big. Berkshire would have to borrow a lot of money, potentially threatening its coveted AAA credit rating.

The next day, Mr. Buffett flew to Edmonton, Canada, for a charity concert, headlined by Seal and Paul Anka, for families with children who need organ transplants. At about 6 p.m., he got a call at his hotel from Barclays PLC President Robert Diamond Jr. and an adviser, former Citigroup Inc. banker Michael Klein. The bankers were trying to broker a last-minute deal for Barclays to buy Lehman, which was facing bankruptcy.

U.K. regulators wouldn’t approve such a large deal without shareholder approval, they told Mr. Buffett, which could take several days or even weeks. Regulators were worried that Lehman’s trading partners would panic, refusing to do any more business with the bank. Would Mr. Buffett, for a fee, guarantee Lehman’s trading positions until a shareholder vote?

Mr. Buffett needed to leave for the concert. He asked the bankers to send him a fax laying out deal terms. When he returned to his hotel around midnight, he didn’t find any fax, so the deal went nowhere.

Mr. Klein had left a message on Mr. Buffett’s cellphone. But Mr. Buffett says he doesn’t use cellphones much, so he didn’t even realize the message was there. He says he didn’t get it until 10 months later, when his daughter, Susan Buffett, discovered it. He declines to discuss what Mr. Klein’s message was, other than to say that receiving it that night wouldn’t have led to a deal.

Messrs. Diamond and Klein didn’t respond to requests for comment.

That same weekend, another AIG deal was in the works. Berkshire executive Ajit Jain, who runs its massive reinsurance unit, held discussions with an investment group led by Mr. Flowers and Kohlberg Kravis Roberts & Co., the New York private-equity giant. They were trying to line up a deal to provide reinsurance for some AIG operations, which would have eased some of the company’s capital constraints.

Back in Omaha on Sunday, Mr. Buffett thought a deal was likely and left for a dinner at the Happy Hollow Club, a local country club, with Google Inc. co-founder Sergey Brin and Mr. Brin’s wife. He expected to review the terms afterwards. But the deal fell through because AIG’s financial troubles proved too severe and complex. Later that week, the U.S. government announced an $85 billion bailout.

By this point, Mr. Buffett was beginning to worry about the entire financial system. In phone conversations, the normally loquacious Mr. Buffett was less talkative and sounded nervous, according to one person who was speaking with him regularly at the time.

Shares of giant investment banks Morgan Stanley and Goldman Sachs were spiraling lower amid worries that they would be the next firms to fail. The commercial-paper market, which helps finance the day-to-day operations of businesses around the country, was seizing up. On Sept. 16, the Reserve Primary Fund, a big money-market fund, revealed huge losses, due in part to holdings of Lehman’s commercial paper.

If the commercial-paper market had frozen completely, more major financial institutions and possibly even household names such as GE would have failed, Mr. Buffett says, “because their checks would have failed to clear.” That would have triggered panic in the nation’s money-market funds, which held about $3.5 trillion in assets, because some of them held commercial paper. The resulting chaos, Mr. Buffett concluded, could have crashed global financial markets, threatening Berkshire.

“I felt that this is something like I’ve never seen before, and the American public and Congress don’t fully understand the gravity” of the problems, he recalls. “I thought, we are really looking into the abyss.”

At a birthday party for a wealthy friend in Omaha, several guests asked Mr. Buffett if their money-market funds were safe. He found the questions worrisome: They suggested widespread fears about the safety of funds long perceived to be invulnerable to losses.

“When people who drive Rolls-Royces are worrying about their piggy banks, you know you’ve got a problem,” he says.

On the morning of Sept. 19, Morgan Stanley Chief Executive John Mack phoned Mr. Buffett in hopes of arranging a deal, possibly a large credit line Morgan could tap. Exact terms weren’t discussed. Mr. Buffett told Mr. Mack he wasn’t interested because he wasn’t familiar enough with the bank.

Mr. Buffett says he still felt the government had the tools to head off calamity. He stayed in close touch with government officials, fielding phone calls from then-Treasury Secretary Henry Paulson, who was cobbling together a bank-bailout package and was interested in Mr. Buffett’s thoughts about structuring it. Senators seeking guidance about the package also phoned him.

As the government swung into action, Mr. Buffett recalls, he gained confidence that the crisis would be resolved. A government guarantee of assets in money-market funds, which came days after the Reserve fund’s troubles emerged, was a big step forward, he says.

In late September, Mr. Buffett decided to strike.

Goldman Sachs, like Morgan Stanley, was in need of cash. The bank already had made several pitches to him. None had enticed him. But he remained open to offers, partly because he was familiar with Goldman’s operations, having worked with the bank for many years on various deals.

On Sept. 23, Goldman banker Byron Trott, who had long worked closely with Mr. Buffett, called to ask what it would take to do a deal.

Mr. Buffett laid out his terms. Hours later a deal was struck. Berkshire purchased $5 billion of Goldman preferred shares with a 10% annual dividend, as well as warrants to buy $5 billion worth of Goldman shares for $115 apiece. The shares now trade at about $166.

The deal, Mr. Buffett says, was based partly on his faith that the government would stave off the kind of financial catastrophe that could have endangered even Goldman. Another factor: attractive terms for Berkshire.

Not long after that deal, Mr. Buffett agreed to buy $3 billion of General Electric preferred shares with a 10% annual dividend. He also got the right to buy $3 billion of common stock at $22.25. GE’s shares rose 31 cents Friday to $15.92 on the New York Stock Exchange.

Having put $8 billion into those deals, Mr. Buffett went on a public-relations offensive, in what appeared to be an effort to bolster markets and urge the government to take strong action.

On public television’s “The Charlie Rose Show,” he called the market turmoil an “economic Pearl Harbor” and reiterated his faith in the nation’s long-term strength. In a New York Times opinion piece, he wrote that he was buying U.S. stocks in his personal account.

On Oct. 6, he sent a letter to Treasury’s Mr. Paulson laying out a plan for relieving the financial system from some of the pressure created by billions of dollars of toxic mortgage assets held by banks. He proposed pooling private assets, including Berkshire’s, with Treasury funds to purchase mortgage securities from banks.

Mr. Paulson thought it was “the seed of a good idea,” says one person familiar with the matter, but the Treasury was scrambling to put out brush fires and didn’t have time to pursue it.

Continuing stock-market declines were taking a toll on Berkshire.

In February, the company reported that its book value per share — a measure of asset values it uses to gauge performance — had dropped 9.6% in 2008. That was the steepest decline since Mr. Buffett took over Berkshire in 1965. It suffered major losses on its stock holdings, including American Express Co. and Moody’s Corp., and a big paper loss on derivative contracts it had written to insure customers against long-term declines in global stock indexes.

The toughest blow came in April, when Moody’s stripped Berkshire of its AAA rating, citing the stock-market decline. The move has constrained Berkshire’s vast insurance operations from writing some policies against major losses. Berkshire’s stock also has suffered, down about 30% since mid-September 2008.

The Burlington railroad deal reduced Berkshire’s earnings-growth potential, analysts say, since railroads tend to track overall economic growth. But it also trimmed Berkshire’s exposure to risk-prone financial operations, potentially giving it a more solid foundation for when the next crisis hits.

Mr. Buffett has some regrets about his decisions during the financial crisis. He says if he’d waited to deploy his cash until March 2009, when the market hit bottom, he could have made a killing.

“I made plenty of mistakes,” he says. “I didn’t maximize the opportunities offered by the chaos. But in the end, it worked out OK.”