Skip to main content

Buffett a Long Shot for Bear Stake

Some doubt the Oracle of Omaha wants any part of a troubled structured finance book.

Don't hold your breath for the announcement of Warren Buffett's big investment in

Bear Stearns



Shares of the struggling brokerage firm roared 8% higher Wednesday afternoon as reports swirled about an outside investor taking an interest in Bear. Rumors initially focused on a deep-pocketed financial institution from Europe or Asia buying a chunk of Bear's stock, before

The New York Times

reported that a group led by Buffett is in talks for a 20% stake in the Wall Street firm.

A spokesman at Bear Stearns declined to comment on the rumors, and an assistant for Buffett said that he was unavailable for comment.

But market watchers say a Bear investment would be uncharacteristic for the Sage of Omaha. Buffett, these people point out, has almost always tried to buy simple, easy-to-understand businesses when they're out of favor among investors.

Bear Stearns' stock is somewhat out of favor, to be sure, having lost more than 20% of its value since January. But the stock has risen sharply since it plunged below $100 a share briefly during an August panic tied to the firm's steep losses in the subprime mortgage market.

Moreover, there's nothing very simple about Bear's business right now. The firm has spent recent years dealing in esoteric, hard-to-parse securities such as collateralized debt obligations, or CDOs. The business pumped out record profits earlier this decade when the debt market was healthy, but that all changed this past summer

CDOs lost a tremendous amount of value in the credit crunch that descended on Wall Street in the wake of the subprime mortgage mess. But even at their best, these types of so-called structured finance products are the antithesis of the sorts of plays the legendary Buffett has forged his reputation on -- in businesses like soft drinks (


(KO) - Get Free Report

), razors (Gillette) and insurance (Geico). Earlier this week, Buffett's

Berkshire Hathaway


boosted its stake in railroad

Burlington Northern



Another factor weighs against a big Bear stake: Buffett has gone down the brokerage investment road before, and found it not to his liking.

Nearly 20 years ago, Buffett shelled out some $700 million for a 12% stake in Salomon Brothers in order to prevent Ron Perelman from taking over the then-troubled brokerage house, which is now a part of


(C) - Get Free Report

. Buffett is widely credited with saving Salomon, having served as CEO to save the firm from an indictment for its involvement in rigging bids in the Treasury bond market. But the investment wasn't a home run and is seen as having turned into a ride Buffett would just as soon not repeat.

That said, talk that someone will end up taking a stake in Bear remains compelling. Last week, Punk Ziegel analyst Dick Bove noted that Bear needs a new deep-pocketed partner who can provide funds to stabilize its balance sheet and offer much-needed geographic diversity.

Wednesday's action in the rumor mill caused Bove to raise his rating on Bear from sell to market perform, with a price target of $120 per share from $96. The stock rallied Wednesday afternoon to $123.

For a look at all of Buffett's stock holdings, including Wells Fargo (WFC) - Get Free Report and Bank of America (BAC) - Get Free Report, check out the Warren Buffett portfolio at Stockpickr.