J.P. Morgan is considered one of the great villains of American history because his fortune let him control huge enterprises like pawns on a chessboard and take huge chunks of profit in the process.
He was fictionalized in It’s a Wonderful Life and portrayed by Lionel Barrymore, pitted against James Stewart’s everyman.
If Stewart’s George Bailey had evolved into Barrymore’s Henry Potter, he would be today’s Warren Buffett — who was an Omaha teen when the movie came out. Buffett began as a Bailey-like stock picker but has become a Potter-like swashbuckler in his age to keep stockholder returns competitive at Berkshire Hathaway (NYSE:BRK.A,NYSE:BRK.B).
His latest deal is pure Morgan, and pure Buffett. He’s putting $10 billion to work funding the Occidental Petroleum (NYSE:OXY) bid for Anadarko Petroleum (NYSE:APC), trumping a bid from Chevron (NYSE:CVX) that would have given it — along with Exxon Mobil (NYSE:XOM) — a controlling interest in the Permian Basin.
The deal came together in days, and Buffett says he would have put in $20 billion.
Chevron never knew what hit them.
The Berkshire Share
Buffett’s terms, however, are stiff. J.P. Morgan stiff. Henry Potter stiff.
Berkshire is getting preferred shares in Occidental that pay a dividend of 8%, convertible into common stock. Some of Occidental’s biggest shareholders are protesting, calling Buffett’s price too high.
But that’s how it must be. Big bets require big pots and big profits. They also require big risks, and the biggest risks must be borne by the company getting the money, not the person putting it in.
It’s just what Buffett did 8 years ago, putting $5 billion into Bank of America (NYSE:BAC), then digging itself out of the hole of the 2008 financial crisis. His money brought dividends of 6% and warrants that let him buy 700 million shares at $7.14 per share, the bank’s stock price at the time. When he cashed in, in 2017, Bank of America was at $24.33, a profit of $12 billion. On May 7, 2019, Bank of America was trading at over $30 per share.
Why Such Deals Are Necessary
One-sided deals are necessary for Berkshire Hathaway to keep beating the S&P 500, which is up 56% over the last five years. Berkshire shares are up 68% during that time.
This third act in Buffett’s career began during the 2008 financial crisis, when he led an injection of capital into the country’s biggest banks that may have staved off a second Great Depression. It reminded critics of J.P. Morgan’s own performance in a 1907 panic, where he put his own money to work saving the then-unregulated U.S. banking system. It was a real-life version of the bank run scene from Wonderful Life.
Buffett is sanguine about all this. Panics will happen, he predicts, so long as people see folks dumber than they are getting rich, and buy things just because they’re going up, not because they understand what they’re investing in.
The Bottom Line on Warren Buffy and Anadarko
In the case of Anadarko, Buffett says he’s making a long-term bet on the U.S. oil industry, just like his long-term bet on banks a decade ago. Buffett is now 88 and may not be around to see if the latest bet pays off. Even if it pays off 2-1, it’s a gain of less than 2% on Berkshire Hathaway’s current market cap.
The biggest winner will be the future, as was true with Morgan as well.
Dana Blankenhorn is a financial and technology journalist. He is the author of a new environmental story, Bridget O’Flynn and the Bear, available now at the Amazon Kindle store. Write him at email@example.com or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this article.