Would you like to loan Warren Buffet cash and pay him interest?

By DAVID MOON, Moon Capital Management
June 30, 2002

If there was anyone who could sell a weird investment in this economic environment, it is Warren Buffett.

With Wall Street's recent record of 3.7 scandals per day, it is easy to look elsewhere for investment opportunities. But with interest rates so low, it's hard to get excited about buying bonds.

How far would interest rates have to drop before you finally quit buying CDs or bonds? Are you frustrated with money market fund yields below two percent? Would you be willing to invest in a bond that pays as little as one half percent?

How about this? Would you invest in a bond that required you to pay interest, rather than receive it? You say someone would have to be crazy to buy such a bond? Warren Buffett's Berkshire Hathaway just sold $400 million worth of these securities, each bond obligating the holder to pay Warren three quarters of a percent interest per year for five years. Buffett borrowed $400 million and the lenders are paying him interest.

In exchange for paying Berkshire three quarters of a percent a year, each investor does have the right to purchase shares of Berkshire Hathaway common stock. But the price at which they can buy the stock is fifteen percent above Berkshire's current price. In effect, these securities are old-fashion convertible bonds, with one twist: they pay negative interest. In a press release, Buffett explained, 'despite the lack of a precedent, a negative coupon security seemed possible in the present interest rate environment.' That was an understatement. Berkshire initially planned to raise only $250 million, but increased the size of the offering due to strong demand.

Some investors are so concerned about traditional investments they are willing to pay someone else for the right to buy a stock they could purchase at a lower price in the open market. But it is not just any stock. It is Warren Buffett's stock. The reason is confidence. WorldCom may go bankrupt and Martha Stewart may not be who we thought she was. Our state government might shut down and maybe that smooth talking guy at Michael's won't respect you in the morning. But Warren Buffett is the gold standard of investment trustworthiness. Years ago when Salomon Brothers' credibility was questioned following a Treasury bond scandal, Salomon turned to its shareholder and board member Buffett to restore credibility and confidence. Is Wall Street looking to Buffett again?

I would love to have been a fly on the wall when Buffett hatched this idea. 'Hey Charlie, I have an idea. Just listen to me. This may sound crazy, but let's see if we can get people to pay us interest for loaning us money. I bet we could get a couple hundred million dollars. And it will be better than free; they'll pay us.' I'm sure Guglielmo Marconi sounded crazy too, when he said he could send information through the air, rather than on a wire. The really big ideas always sound impossible. It is easy to underestimate the simple, yet enormous, potential of honest genius.

David Moon is president of Moon Capital Management, a Knoxville-based investment management firm. This article originally appeared in the News Sentinel (Knoxville, TN).

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