- Warren Buffett’s $3 billion investment in General Electric saved the company, a new book reveals.
- GE Capital faced a potential default and bankruptcy in 2008, Bill Cohan writes in “Power Failure.”
- Buffett’s cash and vote of confidence enabled GE to survive the financial crisis, Cohan reported.
Warren Buffett plowed $3 billion into General Electric at the height of the financial crisis — and the famed investor’s support likely saved the industrial titan from melting down, author Bill Cohan reveals in his new book.
The collapse of GE, the second-most valuable US company after Exxon at the time, would have sent shockwaves through the American economy. Cohan delves into what happened inside the storied conglomerate in “Power Failure: The Rise and Fall of an American Icon.”
GE’s troubles stemmed from GE Capital, its financial-services arm. The division capitalized on GE’s AAA credit rating to borrow cheaply from commercial-paper markets, then lend money out at much higher interest rates.
Over the years, GE Capital expanded from financing household purchases of fridges and dishwashers, to executing leveraged buyouts and overseeing a $90 billion commercial real estate portfolio. By October 2008, GE Capital commanded $650 billion of assets, owed $550 billion of debt, and generated around 50% of its parent company’s profits.
When the housing bubble burst and credit markets froze up, GE Capital faced a liquidity crunch that threatened to force it into default and bankruptcy.
Despite being one of the largest financial institutions in the country, it wasn’t classified as a bank. As a result, it wasn’t regulated by the Federal Reserve, which could have helped it to access emergency capital, and it was excluded from the US government’s bank bailouts.
That raised the prospect of a catastrophic meltdown.
“The implications for corporate America were astonishing,” a top lawyer advising GE at the time told Cohan. He was referring to the risk of GE Capital folding, and the financial sector’s woes cascading through the wider economy.
GE CEO Jeff Immelt hoped to avoid that grim outcome by raising $15 billion via an equity offering, but widespread fear in markets threatened to scupper the plan. He decided to invite Buffett to be an anchor investor, a role the Berkshire Hathaway CEO had served in a deal with Goldman Sachs a week earlier.
“If Buffett says no, we’re fucked,” CFO Keith Sherin told Immelt at the time.
“They were freaking out, because had they not got the stock issued, they were probably toast,” a senior Goldman banker involved in the offering told Cohan about GE’s leadership team.
Fortunately for GE, Buffett agreed to invest $3 billion in return for preferred stock paying a 10% annual dividend, and warrants allowing him to buy common stock at a fixed price during the next five years. He also required Immelt and Sherin to retain 90% of their GE stock until his preferred shares were redeemed, Cohan reported.
Immelt told Cohan that Buffett’s backing was “like having an underwriter in a sea of shit.”
Berkshire ultimately made about $1.5 billion — a 50% return — from the deal. Buffett could have squeezed harder, but he cut GE some slack given its dire situation, he noted during Berkshire’s annual shareholder meeting in 2018.
“They were going to take the terms we offered,” Buffett said. “But we actually didn’t push it to the limit because there really wasn’t anybody else around.”
Buffett may have left some money on the table, but it seems his cash and vote of confidence saved one of America’s largest companies from collapsing, and stopped the beaten-down US economy from suffering another devastating blow.