Warren Buffett believes his best deals during the economy's biggest belly flop since the Crash of 1929 may well turn out to be the ones he didn't do.
Mr. Buffett slammed the door on one opportunity after another during the most harrowing stretch of his storied career. That impulse, he says, left him with the financial firepower he needed last month to strike the biggest deal he has ever done -- Berkshire Hathaway Inc.'s $26.3 billion purchase of railroad Burlington Northern Santa Fe Corp.
In a series of interviews with The Wall Street Journal, Mr. Buffett gave his most complete account of his epic deal negotiations, including anxious phone calls he fielded from wounded companies such as Freddie Mac, Wachovia Corp. and Morgan Stanley.
"I bought my first stock in 1942, and this roller coaster surpassed anything that I've seen," says the 79-year-old investor. "We didn't do all the smartest things. We didn't do anything really dumb."
On March 28, 2008, Mr. Buffett, Berkshire's chairman, took a call from Richard Fuld, then head of Lehman Brothers Holdings Inc. Mr. Fuld wanted to know whether Mr. Buffett would inject about $4 billion into the investment bank to stanch losses.
That night, in his offices in Omaha, Neb., Mr. Buffett pored over Lehman's annual financial report. On the cover, he jotted down the numbers of pages where he found troubling information. When he was done, the cover was dotted with numbers. He didn't bite. Six months later, Lehman filed for bankruptcy protection.
"Everybody was looking for money in those days," Mr. Buffett recalls.
He didn't say no to everyone. He invested $5 billion in Goldman Sachs Group Inc. and $3 billion in General Electric Co. But for Berkshire shareholders, the bigger story may be the deals that he passed up.
"I don't think Buffett gets enough credit for all the pitches he doesn't swing at," says Paul Howard, an analyst at Janney Montgomery Scott. "And he gets a lot of pitches."
Some investors did strike big deals during the market turmoil, to their detriment. TPG, one of the world's largest private-equity firms, lost $1.35 billion on struggling thrift Washington Mutual Inc. In late 2007, investors in Abu Dhabi plowed billions into Citigroup Inc., whose shares plunged.
This account of Mr. Buffett's vetting of deals during the financial crisis was pieced together from interviews with him and representatives of some companies that approached him.
The requests for bailout financing began March 15, 2008, a Saturday. Mr. Buffett received a call at Berkshire's headquarters from New York private-equity investor J. Christopher Flowers. Mr. Flowers and a team of bankers were trying to arrange a last-minute buyout of Bear Stearns Cos., the struggling investment bank.
After listening to a pitch for about 10 minutes, Mr. Buffett said he wasn't interested. The next day, J.P. Morgan Chase & Co. struck its own deal to take over Bear.
Two weeks later, Mr. Buffett rebuffed the request from Lehman's Mr. Fuld. Mr. Fuld didn't respond to requests for comment.
As the housing market cratered, companies laden with securities backed by home mortgages were teetering. Later that spring, Morgan Stanley bankers representing Freddie Mac, the mortgage giant, reached out to Mr. Buffett for an investment. He thought Freddie Mac's troubles were too severe.
"I said no fast on that one," he recalls.
The Treasury Department took over Freddie and its sister lender, Fannie Mae, later that year. A spokesman for Freddie declined to comment on its request to Mr. Buffett.
Mr. Buffett remembers September 2008, when the financial crisis came to a head, as one of the most hectic months of his career. It started with a request from Robert Steel, then the chief executive of Wachovia, for an investment of as much as $10 billion. Mr. Buffett, who thought Wachovia had recklessly dived into subprime mortgages during the housing boom, turned him down.
Wachovia eventually was purchased in a fire sale by Wells Fargo & Co., in which Berkshire is a stockholder. A spokesman for Wachovia declined to comment.
Then, on Sept. 12, a Friday, Robert Willumstad, then the chief executive officer of troubled insurer American International Group Inc., called to ask Mr. Buffett for an investment of about $5 billion.
Mr. Buffett says he was aware AIG needed to raise capital quickly. "Don't waste your time on me," he recalls telling the AIG chief.
Mr. Willumstad says Mr. Buffett "basically said the company was too complicated."
Mr. Buffett did, however, agree to consider making an offer for some of AIG's property-and-casualty businesses. Later that evening, Mr. Willumstad called back. "How about the whole thing?" he recalls asking Mr. Buffett, referring to all of AIG's property-and-casualty businesses. He said the price was $25 billion.
Mr. Buffett said he would look over information about the deal. He swiftly concluded it was too big. Berkshire would have to borrow a lot of money, potentially threatening its coveted AAA credit rating.
The next day, Mr. Buffett flew to Edmonton, Canada, for a charity concert, headlined by Seal and Paul Anka, for families with children who need organ transplants. At about 6 p.m., he got a call at his hotel from Barclays PLC President Robert Diamond Jr. and an adviser, former Citigroup Inc. banker Michael Klein. The bankers were trying to broker a last-minute deal for Barclays to buy Lehman, which was facing bankruptcy.
U.K. regulators wouldn't approve such a large deal without shareholder approval, they told Mr. Buffett, which could take several days or even weeks. Regulators were worried that Lehman's trading partners would panic, refusing to do any more business with the bank. Would Mr. Buffett, for a fee, guarantee Lehman's trading positions until a shareholder vote?
Mr. Buffett needed to leave for the concert. He asked the bankers to send him a fax laying out deal terms. When he returned to his hotel around midnight, he didn't find any fax, so the deal went nowhere.
Mr. Klein had left a message on Mr. Buffett's cellphone. But Mr. Buffett says he doesn't use cellphones much, so he didn't even realize the message was there. He says he didn't get it until 10 months later, when his daughter, Susan Buffett, discovered it. He declines to discuss what Mr. Klein's message was, other than to say that receiving it that night wouldn't have led to a deal.
Messrs. Diamond and Klein didn't respond to requests for comment.
That same weekend, another AIG deal was in the works. Berkshire executive Ajit Jain, who runs its massive reinsurance unit, held discussions with an investment group led by Mr. Flowers and Kohlberg Kravis Roberts & Co., the New York private-equity giant. They were trying to line up a deal to provide reinsurance for some AIG operations, which would have eased some of the company's capital constraints.
Back in Omaha on Sunday, Mr. Buffett thought a deal was likely and left for a dinner at the Happy Hollow Club, a local country club, with Google Inc. co-founder Sergey Brin and Mr. Brin's wife. He expected to review the terms afterwards. But the deal fell through because AIG's financial troubles proved too severe and complex. Later that week, the U.S. government announced an $85 billion bailout.
By this point, Mr. Buffett was beginning to worry about the entire financial system. In phone conversations, the normally loquacious Mr. Buffett was less talkative and sounded nervous, according to one person who was speaking with him regularly at the time.
Shares of giant investment banks Morgan Stanley and Goldman Sachs were spiraling lower amid worries that they would be the next firms to fail. The commercial-paper market, which helps finance the day-to-day operations of businesses around the country, was seizing up. On Sept. 16, the Reserve Primary Fund, a big money-market fund, revealed huge losses, due in part to holdings of Lehman's commercial paper.
If the commercial-paper market had frozen completely, more major financial institutions and possibly even household names such as GE would have failed, Mr. Buffett says, "because their checks would have failed to clear." That would have triggered panic in the nation's money-market funds, which held about $3.5 trillion in assets, because some of them held commercial paper. The resulting chaos, Mr. Buffett concluded, could have crashed global financial markets, threatening Berkshire.
"I felt that this is something like I've never seen before, and the American public and Congress don't fully understand the gravity" of the problems, he recalls. "I thought, we are really looking into the abyss."
At a birthday party for a wealthy friend in Omaha, several guests asked Mr. Buffett if their money-market funds were safe. He found the questions worrisome: They suggested widespread fears about the safety of funds long perceived to be invulnerable to losses.
"When people who drive Rolls-Royces are worrying about their piggy banks, you know you've got a problem," he says.
On the morning of Sept. 19, Morgan Stanley Chief Executive John Mack phoned Mr. Buffett in hopes of arranging a deal, possibly a large credit line Morgan could tap. Exact terms weren't discussed. Mr. Buffett told Mr. Mack he wasn't interested because he wasn't familiar enough with the bank.
Mr. Buffett says he still felt the government had the tools to head off calamity. He stayed in close touch with government officials, fielding phone calls from then-Treasury Secretary Henry Paulson, who was cobbling together a bank-bailout package and was interested in Mr. Buffett's thoughts about structuring it. Senators seeking guidance about the package also phoned him.
As the government swung into action, Mr. Buffett recalls, he gained confidence that the crisis would be resolved. A government guarantee of assets in money-market funds, which came days after the Reserve fund's troubles emerged, was a big step forward, he says.
In late September, Mr. Buffett decided to strike.
Goldman Sachs, like Morgan Stanley, was in need of cash. The bank already had made several pitches to him. None had enticed him. But he remained open to offers, partly because he was familiar with Goldman's operations, having worked with the bank for many years on various deals.
On Sept. 23, Goldman banker Byron Trott, who had long worked closely with Mr. Buffett, called to ask what it would take to do a deal.
Mr. Buffett laid out his terms. Hours later a deal was struck. Berkshire purchased $5 billion of Goldman preferred shares with a 10% annual dividend, as well as warrants to buy $5 billion worth of Goldman shares for $115 apiece. The shares now trade at about $166.
The deal, Mr. Buffett says, was based partly on his faith that the government would stave off the kind of financial catastrophe that could have endangered even Goldman. Another factor: attractive terms for Berkshire.
Not long after that deal, Mr. Buffett agreed to buy $3 billion of General Electric preferred shares with a 10% annual dividend. He also got the right to buy $3 billion of common stock at $22.25. GE's shares rose 31 cents Friday to $15.92 on the New York Stock Exchange.
Having put $8 billion into those deals, Mr. Buffett went on a public-relations offensive, in what appeared to be an effort to bolster markets and urge the government to take strong action.
On public television's "The Charlie Rose Show," he called the market turmoil an "economic Pearl Harbor" and reiterated his faith in the nation's long-term strength. In a New York Times opinion piece, he wrote that he was buying U.S. stocks in his personal account.
On Oct. 6, he sent a letter to Treasury's Mr. Paulson laying out a plan for relieving the financial system from some of the pressure created by billions of dollars of toxic mortgage assets held by banks. He proposed pooling private assets, including Berkshire's, with Treasury funds to purchase mortgage securities from banks.
Mr. Paulson thought it was "the seed of a good idea," says one person familiar with the matter, but the Treasury was scrambling to put out brush fires and didn't have time to pursue it.
Continuing stock-market declines were taking a toll on Berkshire.
In February, the company reported that its book value per share -- a measure of asset values it uses to gauge performance -- had dropped 9.6% in 2008. That was the steepest decline since Mr. Buffett took over Berkshire in 1965. It suffered major losses on its stock holdings, including American Express Co. and Moody's Corp., and a big paper loss on derivative contracts it had written to insure customers against long-term declines in global stock indexes.
The toughest blow came in April, when Moody's stripped Berkshire of its AAA rating, citing the stock-market decline. The move has constrained Berkshire's vast insurance operations from writing some policies against major losses. Berkshire's stock also has suffered, down about 30% since mid-September 2008.
The Burlington railroad deal reduced Berkshire's earnings-growth potential, analysts say, since railroads tend to track overall economic growth. But it also trimmed Berkshire's exposure to risk-prone financial operations, potentially giving it a more solid foundation for when the next crisis hits.
Mr. Buffett has some regrets about his decisions during the financial crisis. He says if he'd waited to deploy his cash until March 2009, when the market hit bottom, he could have made a killing.
"I made plenty of mistakes," he says. "I didn't maximize the opportunities offered by the chaos. But in the end, it worked out OK."