Tags: Jason Simpkins, Warren Buffett

Buffett's Fourth Quarter Investment Blitz

By , Money Morning •

By Jason Simpkins

Associate Editor

Warren Buffett, chairman of the renowned Berkshire Hathaway Inc. (BRK.A, BRK.B), was able to sneak a few last minute deals in just before the ball dropped to end 2007. Putting his $45 billion cash reserves to use, Buffett has once again displayed the patience of a polar bear, tempered with a decisive and nuanced touch in getting deals done at precisely the right time. 

His latest investments include a $4.5 billion outlay for a sizeable stake in industrial conglomerate Marmon Holdings, and $440 million for a reinsurance unit of ING Group NV (ING), the biggest Dutch financial services company. Also, a few weeks prior, Buffet bought $2.1 billion of debt issued by the TXU Corp., an energy holding company.

Buffet's $4.5 billion investment garnered him a 60% stake in Marmon. Marmon boasts a stable of about 125 companies that produce commercial and industrial electrical components, water-treatment equipment, and distribution services. In short, it's a reliable infrastructure business that has produced stable earnings and Buffett himself referred to it as a "very large bet on America over a long period of time." He is expected to acquire the remaining 40% of the company over the next several years.

"Marmon is our kind of company," Buffett said in an interview with CNBC, "It's in some very basic businesses, but good businesses.  It's got terrific management.  It's a chance to do a very big transaction, which I like, but there's nothing not to like."

Just days after acquiring his stake in Marmon, Buffett announced that Berkshire would enter the municipal bond insurance business as soon as it obtained its license from the state of New York. It's unlikely Buffet's bond business will put its capital, and its reputation, at risk to insure the bonds of structured mortgages the way MBIA Inc. (MBI) and Ambac Financial Group Inc. (ABK) have. Instead, Berkshire will employ the use of its sturdy triple-A rating to exploit favorable bond insurance rates. There's no doubt the company will be able to price some very attractive policies.

According to Buffett, the new insurer will charge premium prices for a premium product. In other words, the firm will rely on the Berkshire Hathaway name to attract the kind of investors who are willing to pay top dollar for such renowned assurances.  Early indications seem to be that the company will also return to the roots of municipal bond insurance by underwriting business to the once prominent "zero-loss standard."

It seems fair to assume that given the market lessons learned over the past few months, Buffet will be able to avoid the pitfalls that accompany collateralized debt obligations and asset-backed securities.  Instead, Berkshire will offer bond insurance solely to cities, states, and countries that issue bonds to finance infrastructure projects. While he has plans to expand his operation into other states such as California and Texas, Buffett reportedly has no plans to insure bonds covering derivatives or any financially backed product.

With the dying breath of 2007, Berkshire also closed the deal with ING Group to acquire its Dutch reinsurance unit NRG NV, which hasn't taken on new business since 1993.

Raymond Vermeulen, a spokesman for ING, told Bloomberg News that Berkshire would assume tobacco and asbestos liabilities, along with about $400 million of treasury bonds, he said.

Berkshire has avoided a myriad of financial institutions desperate for help; Buffett has refrained from bailing out the likes of Morgan Stanley (MS) and Citigroup Inc. (C); indeed, he's made a concerted effort to steer clear of "buying into anybody else's trouble."

His strategy is time-tested, as well as profitable. Over the past four decades, Buffett has built Berkshire into a $216 billion company. In that time, Berkshire's book value has soared more than 360,000%.

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