3 Companies Warren Buffett Turned Down During the Financial Crisis

Warren Buffett (Trades, Portfolio)’s charmed deals with financial institutions in turmoil like Bank of America (BAC, Financial) and Goldman Sachs (GS, Financial) during the financial crisis are well-documented. But as markets swooned and executives of troubled companies dialed his number in 2008, Buffett also turned down many offers that might not have panned out so well, including with Lehman Brothers, AIG (AIG, Financial), and Fannie Mae and Freddie Mac.

Lehman Brothers

Lehman Brothers Holdings’ collapse occurred 10 years ago on Sept. 15. Then the fourth-largest bank in the U.S., it ranks as the largest bankruptcy in U.S. history. Most experts have concluded that the bank fell victim to too much leverage, not enough liquidity and heavy exposure to the subprime mortgage market.

Buffett had at least three chances to come to the $639 billion bank’s aid in 2008, according to a bankruptcy proceedings examiner’s report. The first time, Lehman Brothers CEO Dick Fuld called Buffett on March 28 about a $2 billion investment. Buffett became wary of the deal when Fuld would not agree for Lehman executives to buy in on the same terms. Fuld also complained about short-sellers attacking his stock, which Buffett called “a failure to admit to one’s own problems.”

Buffett then grew concerned with parts of the company's 10-K on March 28, such as “real estate and high yield investments, lending”related commitments, derivatives and their related credit”market risk, Level III assets and Lehman’s securitization activity.”

Buffett officially decided against striking a deal after learning of a $100 million problem in Japan Fuld had not disclosed to him the next day, though Fuld was the one to end talks on March 31 when he found better offers for Lehman's April capital raise.

Buffett again heard from Lehman in late August or early September as Lehman's problems intensified. Hugh McGee, Lehman Brother’s head of investment banking, called David Sokol with a “game plan” and needing an investor. The strategy involved creating a “bad bank” called SpinCo with some of Lehman’s mortgage assets and $24 billion from Lehman and outside investors. When Sokol briefed Buffett on the idea, Buffett said that it “would not solve Lehman’s problems.”

The last time, McGee called Sokol a week before Lehman’s bankruptcy with a “Hail Mary” pass.

According to the files, “McGee asked, ‘Do you have any ideas to save us?’ Sokol, who was bear hunting in Alaska at the time, told McGee that he did not.”

American International Group (AIG, Financial)

AIG, the American multinational finance and insurance corporation, was eventually rescued in a $182 bailout by the government, but first it called Buffett for help twice.

The company’s then-CEO Robert Willumstad asked Buffett in September 2008 to bid on some of its U.S. property-casualty operations. It took Buffett less than two hours on a Friday night to decide against participating.

Turning down the offer “wasn’t very tough,” Buffett said on Bloomberg. “They needed more than we could supply by far. I didn’t know the extent of it, but I knew that.”

He added:

"Sometimes you know it isn't going to happen," Buffett said. "The time pressures, the degree of uncertainty, the depth of the possible hole, the need to get it through a regulatory body, it wasn't going to happen."

A second offer came two days later, but failed to go through due to a third party.

Of the three Buffett refused, he would have had the best chance at profiting on AIG. Its share price ranged between $59 and $367 in September 2008 and returned to $59 by May 2015. Having never risen above $66 in the aftermath of the crisis, shares closed at $52.70 Friday, down 11% for the year.

Fannie Mae (FNMA, Financial) and Freddie Mac (FMCC, Financial)

Once the largest shareholder in Freddie Mac, Buffett rejected the mortgage giants’ call for help in 2008, he told CNBC. Similar to the case of AIG, his primary reason was the size of their problem.

“And they were told to look for money and--but even the amount of money they were told to look for would be inadequate,” he said in the August 2008 interview. “I mean, $5 ½ billion at Freddie would be, you know, that'd be like taking a spoonful out of the Atlantic to try and save the Titanic.”

But as the two reported billions in net losses, Buffett had additional reasons for not investing.

“So that doesn't mean that the equity can't get wiped out, and it almost has in the stock market, and in practical sense as institutions, they don't have any net worth,” he said. “I mean, if you look at their obligations and look at the fact they have big deferred tax assets as assets. They would've been gone in any market where the government wasn't behind them long, long ago.”

See Warren Buffett (Trades, Portfolio)'s portfolio here.