Warren Buffett on Lehman Brothers

Warren Buffett was recently interviewed at Fortune’s Most Powerful Women Conference. The video of the interview is available below and I highly recommend it.

The main topic of the interview concerned the failure of Lehman Brothers. According to Mr. Buffett, the government indicated they didn’t have the authority to bail out Lehman. British authorities said that such a large transaction would have required a shareholder vote. Warren Buffett stated that he felt that Lehman should have been transferred in a more orderly fashion. A lot more value was lost due to the chaotic nature of the way things ended with Lehman Brothers. If Merrill Lynch wasn’t sold, Buffett speculates that it too would have failed at the same time and potentially even caused more chaos in the markets.

Apparently, Mr. Buffett was contacted before Lehman Brothers declared bankruptcy about a deal. The head of Barclay’s called Mr. Buffett the weekend before with a transaction to help them acquire Lehman. The transaction was just too complicated for him to understand. Mr. Buffett asked for more details, but never received a fax he requested with more details regarding the transaction. If Mr. Buffett didn’t understand it, who knows how convoluted it must have been.

AIG also wanted help from Warren Buffett. He turned down their first offer for their property and casualty business. Then AIG came back shortly with a reinsurance transaction, but that ultimately blew up even though Buffett was interested in that deal.

When asked what worse things didn’t happen in the crisis, Warren Buffett thinks that it would have been much worse if the Fed didn’t act to guarantee commercial paper. Merrill could also have gone the same day as Lehman Brothers. If that happened, who knows what might have happened in the markets. The real heroes of the financial crisis according to Mr. Buffett were Bernanke and Paulson. We made it through this “economic Pearl Harbor” with their help.

Mr. Buffett thinks we are a lot better off than we were one year ago. When asked about the chances of a second downfall, Mr. Buffett thought the odds were against that unless there is a terrible exogenous event. “We are on the mend,” he quipped. Mr. Buffett also indicated that residential real estate has gotten much better. I was a bit surprised at Mr. Buffett’s assessment of the current economic situation. I’m a bit more skeptical of this recovery, but I’m starting to rethink that now.

When asked about what indicator of economic activity he would watch, if he could only choose one, Mr. Buffett stated that freight carloadings and truck tonage moved would be the ones he would track. I’ve been keeping an eye on air freight, but now I’m considering adding those two metrics to my tracking radar. After a quick search, I found the Weekly Railfax Rail Carloading Report.

The topic of Kraft’s (KFT) offer for Cadbury (CDY) came up. Interestingly, Warren Buffett stated that he thinks Kraft’s stock is undervalued. Mr. Buffett believes that this undervalued stock price is what is disadvantaging Kraft in its attempt to acquire Cadbury. Mr. Buffett thinks Kraft’s offer for Cadbury is “full price,” and the CEO will need to do a lot of things right to justify this price. If Kraft doesn’t end up acquiring Cadbury, buying shares of Kraft (KFT) below $26 a share might be a no-brainer.

Disclosure: I own shares of Kraft (KFT) at the time this article was posted.