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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 public US company after Exxon at the time, would have sent shockwaves through the American economy. Cohan provides a look inside the the crisis-stricken 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.
Former chief executive officer of RBC Dominion Securities Tony Fell is campaigning to require the Canadian financial industry to account for inflation in how it reports investment returns.Neville Elder/Handout
While the average Canadian is fixated on the price of gasoline and groceries, inflation may be quietly killing their investment returns.
Compounded across many years, even modest inflation can deal a powerful blow to a standard investment portfolio. And investors commonly underappreciate the threat.
But a legend of the Canadian investment banking industry is trying to change that.
Tony Fell, the former chief executive officer of RBC Dominion Securities, is campaigning to require the Canadian financial industry to account for inflation in how it reports investment returns.
“I think they will find this very hard to argue against,” he said in an interview. “It’s a matter of transparency and reporting integrity. But that doesn’t mean it will happen.”
Mr. Fell made his case in a recent letter to the Ontario Securities Commission, arguing that Canadian investors are being misled. He has not yet received a response from the regulator.
Canadians with an investment account receive a statement at least once a year detailing how their investments have performed. For the most part, rates of return are calculated on a nominal basis, meaning they have no inflation component factored in.
A real return, on the other hand, accounts for the hit to purchasing power from rising consumer prices.
These figures, Mr. Fell argues, would give investors a clearer picture of how much they have gained from a given investment.
And since Statistics Canada calculates inflation on a monthly basis, the investment industry would already have access to the data it needs to make the switch to real returns. It would be very little trouble and no extra cost, Mr. Fell said.
Still, he said he expects the investment industry will resist his proposal. “The mutual-fund lobby is so strong, and nobody wants to rock the boat too much.”
He points to the battle to inform Canadians of the investment fees they pay. For 30 years, investor advocates have been pushing for improvements to disclosure.
One major set of regulatory changes, which took effect in 2016, required financial companies to disclose how much clients paid for financial advice.
But the reforms left out one major component of mutual-fund fees. The cost of advice is there, but many investors still don’t see how much they pay in fund-management fees, which amount to billions of dollars paid by Canadians each year.
Total cost reporting, which should finally close the fee-disclosure gap, is set to come into effect in 2026. “It’s outrageous,” Mr. Fell said. “That should have been done years ago.”
So, it’s hard to imagine the industry warmly receiving his proposal, or the regulators enthusiastically pushing for its consideration.
The OSC said it agrees that retail investors need to be attuned to the effects of inflation, which is where investment advisers come in. “Professional advice requires an assessment of risk tolerance and risk appetite in order for an adviser to know their client, including the effect of the cost of living on achieving their financial objectives,” OSC spokesman Andy McNair-West said in an e-mail.
And yet, Mr. Fell said, the need exists for more formal reporting of inflation-adjusted performance.
Inflation often goes overlooked by the industry and investors alike. It can be seen in the celebration of stock indexes at all-time nominal highs, which wouldn’t look so great if inflation were factored in.
The inflationary extremes of the 1970s provide a stark illustration. In 1979, the S&P 500 index posted a total return of 18.5 per cent – a blockbuster year until you consider that inflation was 13.3 per cent.
That took the index’s real return down to a lacklustre 5.2 per cent.
More recently, investors in Canada and the United States piled into savings instruments promising 5-per-cent nominal rates of return. But the rate of inflation in Canada averaged 6.8 per cent in 2022, more than wiping out the return on things such as guaranteed investment certificates, in most cases.
“A lot of people don’t connect those dots,” said Dan Hallett, head of research at HighView Financial Group. “Over 10 years, even 2-per-cent inflation really eats away at purchasing power.”
He worries, however, that reporting after-inflation returns may confuse average investors, many of whom still fail to understand the basic investment fees they’re paying.
All the more reason to get Canadian investors thinking more about inflation, Mr. Fell argues.
“The impact of inflation on investing is sort of forgotten about,” he said. “The only way I can think of turning that around is to highlight it in investors’ statements.”
Capital gains tax hike a sure way to repel the tech sector
Published Apr 18, 2024 • Last updated 23 minutes ago • 4 minute read
If there’s an uncomfortable economic lesson of the past few years, it’s this: The vibes matter.
As much as economists point to data, the reality in politics and policy is that public expectations and perceptions are important too. And from a business perspective, the vibes of the 2024 federal budget are rancid.
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The budget document’s title is “Fairness For Every Generation” and in practice, what that meant was a “soak the rich” tax hike on capital gains.
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You can see how this looked like good politics. In her budget speech, Finance Minister Chrystia Freeland said that only 0.13 per cent of Canadians with an average annual income of $1.4 million will pay higher taxes — hardly a sympathetic lot, at a time when many Canadians are struggling to pay for food and housing.
The problem is that the proposed capital gains tax hike won’t only soak a handful of rich Canadians as advertised. In its current design, it broadly punishes individuals and families of small business owners, tech entrepreneurs, dentists and countless others who have often spent decades trying to build their businesses for a potential once-in-a-lifetime capital gains event. Together, our analysis suggests that those people represent closer to 20 per cent of Canadians.
This tax proposal simply amounts to a systemic tapping on the brakes on the investment in a productive and prosperous future, being made by innovative, hardworking Canadians. And it does so at the very time Canada needs them to accelerate their investing.
But among the innovators and business leaders I talk to in the Canadian tech sector, this week’s budget was a chilling shock. There is a sincere and widespread belief that if something does not change, the budget will do widespread and irreparable damage to Canada’s tech sector.
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That’s why more than 1,000 CEOs have signed a public letter to Prime Minister Trudeau and Deputy Prime Minister Freeland at ProsperityForEveryGeneration.ca, calling on the government to stop this tax hike. Innovators understand what’s at stake.
Firstly, we are at a moment when capital is harder to access than at any time in the past generation. Higher interest rates and economic uncertainty mean that many high-growth companies with innovative products struggle to secure growth capital on favourable terms.
South of the border, we’re seeing strong growth, driven by significant government investment through strong industrial policy, alongside significant growth in bleeding-edge artificial intelligence applications. The U.S. is an exciting place to invest right now.
And capital is highly mobile. If Canada is seen as an unfriendly place to invest, due to high taxes, investors will simply take their money elsewhere, and propel the growth of promising tech companies in other countries.
What’s more, highly skilled talent is more mobile than ever before, and among innovative high-growth companies, stock options — subject to capital gains tax — are a key form of compensation.
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We’re not talking purely about CEOs and tech founders here either. The dedicated early players of a promising tech startup earn their stock options with sweat equity. Their dedication, taking a risk in the prime of their career, is often the key ingredient for the success of future innovation champions.
Innovators are intimately aware of these concerns, because this isn’t the first time the Liberal government has tried to tax stock options. Nearly a decade ago, they promised to hike taxes on stock options in their 2015 campaign platform, and it took years of public advocacy from tech leaders to help the government understand the potential unintended damage that a reckless tax hike could do on the ability to attract and retain talent.
All along the way, we were assured by the government that they knew what they were doing, and there was nothing to worry about. In truth, after many frank conversations, they changed course.
In the days and weeks ahead, I’m expecting to hear the same kind of thing again. Already we’ve heard from government officials pointing to the “Canadian Entrepreneurs’ Incentive” carve-out, which will soften the blow of higher capital gains tax rates overall. The details of this carve-out are not yet fully clear, and it’s possible that the government will tinker with the thresholds to help mitigate the damage of a tax hike on capital gains.
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But the reality is that without a significant change in messaging, the danger to Canada’s economy is real.
Capital gains are taxed at a different rate because they are taxes on investment. Every investment comes with risk; you are not guaranteed to make a profit. The tax code takes this into account.
If the vibes are off, and the global perception of Canada is that we’re not a place where the investment risk is worth it, because the federal government is just going to tax you to death, then we simply won’t see capital or talent flow to Canada.
Innovation and entrepreneurship are about hope. You fundamentally need to be an optimist to risk it all, and invest yourself in growing a business. Right now, Canada’s federal government is not sending a hopeful vibe. And the vibes matter.
Benjamin Bergen is president, Council of Canadian Innovators.
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‘If I try to put myself back into the shoes of me as a 21-year-old, all I can tell you is this: I was hungry,’ writes Gary Stevenson in his recently released memoir, The Trading Game, which tells the story of how the son of a Post Office worker briefly became the highest-paid trader working on Citi’s bond trading floor at London’s Canary Wharf. He sits down with host Claer Barrett to talk about what he learned about trading and how the wider economy works – and why he’s worried.
Find Gary @garyseconomics on YouTube, X, Facebook, Instagram and TikTok. Read Gary Stevenson’s recent FT Magazine profile by Miles Ellingham.
For more tips on how to organise your money, sign up to Claer’s email series ‘Sort Your Financial Life Out With Claer Barrett’ at FT.com/moneycourse.
If you would like to be a guest on a future episode of Money Clinic, email us at money@ft.com or send Claer a DM on social media — she’s @ClaerB on X, Instagram and TikTok.
Want more?
Check out Claer’s column, The hunt for good value UK stocks.
Listen to more episodes, such as Investment Masterclass: An insider’s view of the City of London, Investment masterclass: what’s one of the world’s leading investors buying?, and more.
Presented by Claer Barrett. Produced by Tamara Kormornick. Our executive producer is Manuela Saragosa. Sound design by Breen Turner, with original music from Metaphor Music. Cheryl Brumley is the FT’s global head of audio.
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