Bailout Vote Leaves Big Wall Street Names Hanging: David Pauly

Commentary by David Pauly

Sept. 30 (Bloomberg) — The three most flummoxed people in the investment community today may be Warren Buffett, Jamie Dimon and Vikram Pandit.

They have just risked billions of dollars of their respective companies — Berkshire Hathaway Inc., JPMorgan Chase & Co. and Citigroup Inc. — in banking ventures on the assumption the U.S. government would ease the U.S. credit crisis with a $700 billion bailout.

The U.S. House of Representatives voted against the measure yesterday, sending stocks plummeting. The Standard & Poor’s 500 Index fell 106.59, or 8.8 percent, to 1106.42, giving it a 2008 loss of 25 percent.

No doubt the House and the U.S. Senate ultimately will pass a bailout bill. How else will markets, frozen by a series of disasters from slumping home values to failed credit-default swaps, be rescued?

Buffett, Dimon and Pandit certainly will keep praying.

Berkshire Hathaway, Buffett’s investment vehicle, last week bought $5 billion in preferred stock of Goldman Sachs Group Inc., an investment-bank-turned-commercial-bank that was crying for capital. Public investors then bought $5 billion in Goldman Sachs common shares at $123.

Buffett negotiated a good deal. His preferred stock pays dividends of 10 percent. He also got warrants to buy $5 billion in Goldman common shares at $115. That looked like an instant bonanza when Goldman stock jumped to $137.99. But in yesterday’s market debacle, the shares slumped to $120.70.

Taking on WaMu

Dimon made his bailout bet — with help from the U.S. Federal Deposit Insurance Corp. — by buying the assets of the biggest U.S. savings and loan, the disintegrating Washington Mutual Inc. He got WaMu for a song, but along with acquiring branches in California and Florida, he took on $176 billion in WaMu loans. JPMorgan says it will write off $31 billion in bad WaMu assets immediately.

Just hours before the bailout went down, Pandit’s Citigroup, also with the help of the FDIC, agreed to buy Wachovia Corp.’s bad loans and bank branches for $2.2 billion. Citigroup, which has already written off $61 billion in its own mortgage losses, will absorb as much as $42 billion in losses from the $312 billion in Wachovia loans it’s assuming.

Citigroup said it would raise $10 billion in new capital. Before the House vote, Pandit could hope he would have the same luck JPMorgan did after buying WaMu. Investors snapped up $10 billion in new Morgan shares at $40.50. The stock then jumped to $49 before dropping to $41 yesterday.

Sinking Deeper?

While Pandit’s takeover of Wachovia assets may have looked opportunistic, it’s a wonder that Citigroup wants to make any acquisition at all. Its adventure as an all-encompassing financial services company has been a flop. Kenneth Lewis, chief executive officer of Bank of America, who is aping Citigroup with his recent takeovers of stockbroker Merrill Lynch & Co. and mortgage giant Countrywide Financial Corp., please note.

John Mack, the CEO of Morgan Stanley, no doubt was also dismayed by the bailout vote. Like Goldman Sachs, Morgan Stanley has become a bank holding company and needs more capital after big mortgage losses. Yesterday, he struck an agreement with Mitsubishi UFJ Financial Group Inc. to sell a 21 percent stake in the firm for $9 billion.

Still, Mack hasn’t put huge stacks of money at risk as have Buffett, Dimon and Pandit. Once again, just when you think things have hit bottom, they get worse.

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