Sunday, November 29, 2009

Did Paulson Disuade Warren Buffett from Investing in Lehman Brothers?

It looks like it to me.

I am just starting to work my way through Andrew Ross Sorkin's new 600-page book, Too Big To Fail. I'm not sure there is much in the way of deep analytical insights in the book, but he clearly had access to major players. It will definitely fill in many pieces to the puzzle.

The first thing that really popped out for me from the pages occurred on page 56. To me it is pretty clear from what Sorkin writes that Warren Buffett was considering an investment in Lehman Brothers and then-treasury Secretary Hank Paulson called Buffett and nixed the deal.

With Lehman desperately needing to raise cash, Lehman CEO Dick Fuld was keeping Paulson abreast of what he was doing. At one point he tells Paulson that he is going to approach Buffett and ask him for funds. With Fuld knowing that Paulson was close to Buffett, he asked Paulson to call Buffett and put in a good word for Lehman.

Buffett had started reading Lehman Brothers' annual report after Fuld's proposal when Paulson called Buffett, and this is where things get interesting as reported on page 56 of Sorkin's book. Paulson pitches Buffett on Lehman, but Buffett notes Paulosn is not overly enthusiastic. He felt Paulson was talking "code." Now, I have written before on how the elite talk code. They are very careful with their words so no one can nail them on anything. But the person on the receiving end of the code knows full well the meaning behind the subtle clues in the message.

Buffett got the message from Paulson. Suddenly, after the call, Buffett continues to read the Lehman annual report and now sees all kinds of questions, too many, he concludes, to invest in Lehman.

Lehman, at that point in time, found some money from other sources, but as Sorkin notes it wasn't like getting money from Buffett and getting that stamp of approval.

Eventually, of course, Lehman collapsed, and Paulson's old firm, Goldman Sachs, went to Buffett and got an investment from him.


  1. I've just reached the same page in the book. My take was a little different. It seemed that Buffet was not highly disposed to the Lehman investment from the start. Paulson's call, to me, seemed just one factor that caused Buffet to walk away. In any case, the terms Buffet stipulated were unacceptable to Fuld, the first of many terms for capital injections or outright sales of a stake in Lehman that Fuld nixed as he grew increasingly unrealistic about Lehman's options.

    Joseph Tibman,
    Author, The Murder of lehman Brothers, An Insider's Look at the Global Meltdown

  2. The point still remains that Paulson called Buffett and Buffett thought Paulson was talking in "code" to him and was not that enthusiastic about the deal.

  3. Robert, yes i got the exact same impression.