Warren Buffett's Berkshire Hathaway Inc. came to the aid of Home Capital Group Inc. this week, signing an agreement to inject up to $400-million in equity into the distressed mortgage company. The deal allows the famous investor to buy an initial stake of almost 20 per cent in Home – and, if shareholders approve, another 18 per cent this fall.
Berkshire also agreed to advance a credit line of $2-billion to help replace a more expensive emergency loan that Home Capital received in April, when it was on the verge of collapse.
Mr. Buffett spoke with The Globe and Mail's James Bradshaw and Andrew Willis from his office in Omaha, Neb., on Thursday. Here is a partial transcript, edited for length and clarity.
To begin with the big-picture question – does this reflect a particular view of yours on the Canadian housing market?
Prices have gone up a lot, and if you're lending money on housing, you'd rather not have it having gone up that much. And you've got to be more careful, obviously, the higher prices get.
But no, it's not any specific evaluation by me as to whether the next move in house prices will be up 10 per cent or down 10 per cent. I do not know that.
It does reflect [a] belief on my part – I'm bullish on Canada. Now, I'm bullish on the United States and we got into trouble in our housing market, so being bullish on a country doesn't automatically make you bullish on the housing market. But I do like Canadian investment. It wasn't very long ago I actually was with your Prime Minister and Finance Minister out in Seattle, and we had a long talk. I always have been enthusiastic on Canada generally, but I felt even more so after talking to both of them.
Then I watched, on YouTube, your Prime Minister with that famous prize fight [Justin Trudeau's charity boxing match against Senator Patrick Brazeau in 2012]. He looked pretty effective to me.
When did you first get the approach about this particular deal? How long have these talks been going on?
Well, you're not going to believe this, but it's true … The deal was made on Wednesday [June 14], essentially, in terms of what we would do. And the truth was, I only had heard about it and got my interest aroused on the Monday before that. So we're talking a week ago this past Monday. So about 10 days ago.
I had an e-mail from a fellow that I'd met some years ago who is close to my age, retired. And he'd sent me a couple of other thoughts through the mail. He's a Canadian. And this one wasn't long, but it was to the point and that got my interest.
I talked with Ted [Weschler, a Berkshire investment manager] about it. We both did some thinking on it, and we literally made an offer on Wednesday. As I remember, the stock then was trading a little maybe under $12. I know our price was based on essentially 15 per cent off that, which is what the Toronto Stock Exchange allowed.
Was there something specific in that first e-mail that caught your eye?
There was no remotely non-public information or anything like that, but there's a fair amount of public information which we dug through. You know, they had a run [on the bank] a couple of months ago. I have seen financial institutions [lose] confidence, and I really thought that we could bring something to the party in addition to money in restoring confidence.
So I thought it made sense from their standpoint, and I thought it made sense from our standpoint, so Ted went up to see them and presented our ideas. And we had to learn something about some of the rules and everything in Canada, [which are] in some ways a little different from the United States … in terms of how much stock could be bought and that sort of thing.
Essentially, I feel Berkshire's participation is very likely to improve an already reasonably stabilized position.
This is a fragmented market, the alternative mortgage market in Canada. Do you see potential to expand this business?
It's too early to know that. Obviously, six months from now or a year from now, as we see how this develops, you always think about that in any industry. But I have absolutely no grand plan now. I will learn more about their competitors as we go along, and we'll learn more about the public acceptance of Home as we go along.
How do you do due diligence on this in 10 days?
We've bought a lot of entire businesses here with what would look to a typical lawyer or investment banker as being a very peculiar way of doing due diligence. But, essentially, we've got our own way of evaluating facts and sometimes we make mistakes. And, hopefully, our batting average is decent over time. It's not conventional.
Was the deal, as you presented it, the deal that's being done now, or was there much negotiation to change the terms?
We had no idea when Ted went up there what the reaction would be. We did not know the people personally or anything ahead of time. So we figured out what we thought made sense for the company and made sense for us, and we presented that. We're used to that.
We're sort of a limited negotiation type of place. We really try to figure out a deal that makes sense for both parties. And if the other parties agree, we've got a deal, and if they don't agree, we don't have a deal and we're still friends. Our style is not to go in – we've never really haggled over price or that sort of thing.
You started out by saying you're bullish on Canada right now, more than the residential real estate market
I always have been, actually. My dad was, too, going way back to the 1940s. I just showed my tax return to somebody from when I was 13 years old, and I think there was some Noranda Mines. I had like four stocks when I was 13 and one of them was Noranda. We used to talk about stocks and my dad always had some Canadian stocks. I wish we'd held onto them!
This particular company, Home Capital, it focuses on Canadians who can't get loans from traditional banks. So it's recent immigrants, the self-employed. Is that a sector you are investing in in any other parts of Berkshire?
Well, it's like lending of any kind, you know. You have to be careful but you also have to be willing to loan. It's something where it makes it very important who the people are running the organization and their evaluation of risk, and having people under them, the loan officers, that really have the same qualities. And it depends on the culture of the place.
But we've had a lot of investments in financial institutions over a 50- or 60-year period, and most of the time the managements have done a good job. I mean, it's certainly possible to, particularly, to lend to people that have financial resources but don't have [high incomes]. I'm not sure whether I'd qualify very well on loans, when you get right down to it.
I'd loan you a few bucks, sir.
If you look at my salary and everything, it might look like a fairly limited means. [He takes a salary of $100,000 (U.S.) to run Berkshire.]
You must have a fair bit of confidence about the board, because there isn't really a management team in place at Home Capital. They're searching for a CEO, they have an interim CFO. Where do you get your confidence on that?
Well, I think Ted felt very good about the board members he met. In fact, I know he did, he called me a couple of times from up there.
While he is certainly not going to be a voting member or anything on who becomes the CEO, I think probably he'll meet him or her before they take the position. But it's not his decision to make. But I do not think he's worried about the board making an intelligent choice on it.
If we were to compare this investment to investments you've made in the past at Berkshire, the one that comes to mind was your investment in Goldman Sachs during the financial crisis. [Berkshire injected $5-billion into the investment bank at the height of the financial meltdown in 2008.]
You're right in a sense. Now, it was a system-wide problem where Goldman Sachs actually was one of the stronger firms. But still, if the fire spread, they were in the path.
That was a classic run on the country. But the principles involved are somewhat the same. Goldman Sachs was a totally sound institution … and our participation at that time in September of 2008, I think, did something to restore confidence in an entity that deserves confidence.
I wouldn't push it too far, but I think if you're looking for similar-type investments, there's some similarity there.
Your hold period [on the Home Capital shares] is only four months, but traditionally Berkshire Hathaway has not been a company that buys and sells shares quickly. Can you give us a sense of your time frame in making this investment?
I don't even know where the four months comes from. I can tell you, we have no intention whatsoever of getting out in four months or eight months or 12 months. That language you just mentioned is new to me. It must have been something the lawyers stuck in. We're not buying it to resell in four months or next year or anything of the sort.