Mad Maverick Warren Buffet - Gambling or Arbitrage?

Berkshire Hathaway survived the great depression, how will it fare this time around?!
by John Seo
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On the brink of a massive stock market crash third quarter, the maverick investor Warren Buffet announced plans to buy $3 billion General Electric (GE) preferred stock as part of a $15 billion effort by General Electric to raise capital. The deal will allow Berkshire Hathaway the option of buying an additional $3 billion of GE common stock at $22.25, which may be exercised within the next five years. This deal comes just weeks after Buffet invested more than $5 billion in a deal with Goldman Sachs investment bank. These cash infusions allow large companies like GE and Goldman the liquidity to acquire undervalued companies during the prevailing market crash. "GE is the symbol of American business to the world," Buffett said in a statement. "I am confident that GE will continue to be successful in the years to come."

GE lowered its guidance last week to a 10 percent decrease in profit to between $19.5 and $21 billion ($1.95 to $2.10 per share). Shares have fallen 8 percent GE has significant exposure to market activity with half of the $221.54 billion company's revenue coming from investing activities. GE's holdings include a large finance division with business loans and real estate. Deutsche Bank stated that "under its assumptions, GE looked expensive." Jeff Immelt, CEO of GE stated that this is "the opportunity to play offense in this market should conditions allow." GE is expected to retain its AAA credit rating.

While primarily an insurance company, Berkshire Hathaway is known for its successful ownership of Wells Fargo, GEICO, American Express and Coca-Cola. The company has averaged and unprecedented annual return greater than 21 percent to its shareholders for 42 years. Berkshire stock has been steadily climbing during the market crash and is currently sold for $138,000 per share, even after Buffet famously announced he himself would not buy his companies stock at $115,000 per share citing "a too high multiple of earnings, now and in the foreseeable future."

Berkshire Hathaway (BRK.A) has a $35 billion war chest to invest in such deals.