On March 28, 2008, Lehman Brothers asked Warren Buffett for $5 billion. Buffett said no.
171 days later, Lehman Brothers filed for bankruptcy — the largest corporate bankruptcy in U.S. history.
Before making his decision, Buffett sat down with Lehman’s 200-page annual report. He marked the pages that raised questions for him directly on the cover. By the time he finished reading, he had enough reasons to stay away.
Then, on September 13, just two days before Lehman collapsed, another proposal involving the bank reached Buffett.
Bob Diamond, a Barclays executive, called Buffett in Edmonton and asked Berkshire to temporarily insure Lehman’s trades.
Buffett couldn’t evaluate a deal like that over the phone, so he asked Barclays to fax him the terms. He returned to his hotel around midnight.
The fax never came.
Instead, Barclays left a message on Buffett’s flip phone. His daughter would discover that message the following summer.
On Monday, September 15, Lehman Brothers filed for bankruptcy.
Just eight days later, Berkshire Hathaway agreed to invest $5 billion in Goldman Sachs.
The difference was simple: this time, the terms and risks could be calculated clearly in advance.
The preferred shares paid 10% annually, while Berkshire also received warrants to purchase another $5 billion of Goldman common stock at $115 per share.
Buffett didn’t predict the exact day Lehman would collapse.
He simply did something more fundamental: he walked away from a deal whose risks he could not properly evaluate and accepted another whose terms were clear enough to calculate in advance.
Sometimes, an investor’s edge isn’t knowing what will happen next.
It’s knowing exactly what risk you’re taking.
171 days later, Lehman Brothers filed for bankruptcy — the largest corporate bankruptcy in U.S. history.
Before making his decision, Buffett sat down with Lehman’s 200-page annual report. He marked the pages that raised questions for him directly on the cover. By the time he finished reading, he had enough reasons to stay away.
Then, on September 13, just two days before Lehman collapsed, another proposal involving the bank reached Buffett.
Bob Diamond, a Barclays executive, called Buffett in Edmonton and asked Berkshire to temporarily insure Lehman’s trades.
Buffett couldn’t evaluate a deal like that over the phone, so he asked Barclays to fax him the terms. He returned to his hotel around midnight.
The fax never came.
Instead, Barclays left a message on Buffett’s flip phone. His daughter would discover that message the following summer.
On Monday, September 15, Lehman Brothers filed for bankruptcy.
Just eight days later, Berkshire Hathaway agreed to invest $5 billion in Goldman Sachs.
The difference was simple: this time, the terms and risks could be calculated clearly in advance.
The preferred shares paid 10% annually, while Berkshire also received warrants to purchase another $5 billion of Goldman common stock at $115 per share.
Buffett didn’t predict the exact day Lehman would collapse.
He simply did something more fundamental: he walked away from a deal whose risks he could not properly evaluate and accepted another whose terms were clear enough to calculate in advance.
Sometimes, an investor’s edge isn’t knowing what will happen next.
It’s knowing exactly what risk you’re taking.