Is the global banking crisis a billionaire’s opportunity?

The global banking crisis has brought its high-profile victims and a general flight from “financials”. However, if you have the money, and by that we mean billions, there appears to be opportunity and several of the famed billionaire ranks have grasped it with both hands. While the earlier howls of pain delivered by global banking giants were soothed at the hands of Arab, Chinese and Singaporean sovereign funds, the latest shrieks, results of the dire state of financials internationally, have been answered by several of the world’s wealthiest individuals themselves. Pre-eminent last month was the deal struck by famed investor and, depending where and when you look, the world’s richest individual, Warren Buffet. Through his holding company Berkshire Hathaway, Buffet reached agreement to buy $5bn (E3.9bn) of preferred stock in Wall Street’s leading investment bank, sorry bank, Goldman Sachs. Sachs appeal The deal also included warrants enabling Buffet to purchase a further $5bn of common stock at a later date. Historically, Buffet has warned against investing in financials but the appeal of Goldman, at a time when its stock was caught up in negativity at financials, is testament to that particular bank’s strength. Mr Buffet, however, was not the only billionaire to get in on the act, or spot the possible opportunity. Russian billionaire Mikhail Prokhorov bought a 50 per cent stake in leading Russian investment bank Renaissance Capital for $500m. Mr Prokhorov, even in light of the continued market downturn in Russia, might have bagged himself a bargain – just one year ago Renaissance was valued at $4bn. Its fall from those lofty heights is a result of the global uncertainty and, more specifically to Russia, on-going investor panic driven by oil price falls, margin calls, liquidity concerns and fears over potential losses, particularly in banking stocks. Of course, the interest from the super rich in propping up banks is not new; we have been here several times before. Perhaps the highest profile example in modern times was the saving of Citi in early 1990s by Saudi Prince Al-Waleed bin Talal bin Abdul Aziz Al Saud. Prince Al-Waleed injected $590m into what was then known as Citicorp for a near 15 per cent stake when its stock was priced at $9. He remained Citi’s largest individual shareholder until Abu Dhabi’s investment arm paid $7.5bn for a 4.9 per cent stake. However, where there is opportunity, there is risk, as two recent standout examples highlight. The most dramatic was UK billionaire investor Joseph Lewis, no doubt spotting a similar, though more short-term, opportunity in Bear Stearns in September 2007. Mr Lewis invested $1bn plus in the fifth largest US investment bank at the time when its shares were trading at $100. When it subsequently fell in March 2008, Mr Lewis’s loss amounted to $1.16bn. Next was Qatari royal family member Sheikh Mohammed Bin Khalifa Al-Thani with a $280m stake purchase in the now failed Icelandic bank Kaupthing. The deal gave him a 5.01 per cent stake to become the bank’s third largest individual shareholder at the time. On failure, his status as an equity holder has left him very little protection from a massive loss. The point in all this, of course, is that super wealthy long-term investors clearly see great opportunity. However, markets are not always a billionaire’s friend and those seeking short-term gain may not be best placed to win out. Others considering similar plays will be looking to a long-term investment strategy, like Prince Al-Waleed with Citi and Mr Buffet with Goldman. Stephen Wall is a senior associate at wealth management strategy think-tank Scorpio Partnership