AP Photo/Nati Harnik
- Warren Buffett’s financial-crisis bailouts inspired a key element of the US government’s rescue deals with the “big four” airlines this week.
- The famed investor handed billions to the likes of Goldman Sachs and demanded warrants in return, which he used to buy their shares at a discount years later and make a healthy return.
- Sen. Jack Reed of Rhode Island told Business Insider that Buffett’s bailouts “absolutely” spurred him to write warrant provisions for the rescue bill in 2008 and the one passed last month, empowering the US Treasury to seek warrants in exchange for relief funds.
- “When the airlines bounce back, the taxpayers should realize the benefits,” Reed said.
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Warren Buffett’s corporate bailouts during the financial crisis inspired a key aspect of the US government’s rescue deals with the “big four” airlines this week.
The famed investor and Berkshire Hathaway boss handed billions to Goldman Sachs and General Electric in 2008, and Bank of America in 2011.
His terms included warrants allowing him to buy their shares at a fixed price in the future. Buffett exercised the warrants years later after the companies’ stock prices rebounded, raking in big profits.
Sen. Jack Reed of Rhode Island told Business Insider that Buffett’s dealmaking “absolutely” spurred him to write a warrant provision for the Troubled Asset Relief Program (TARP) in response to the financial crisis, “so that taxpayers might be able to profit should the firms flourish after selling their bad debts to the government.”
Sen. Chuck Schumer highlighted Reed’s proposal during the Senate debates on the bailout package in September 2008. He also pointed to one of Buffett’s deals to justify the government seeking equity in return for aid.
“This morning, Warren Buffett got an equity share in Goldman Sachs and it didn’t stop Goldman Sachs from making the deal with Warren Buffett,” Schumer said.
“It seems only fair that we reward taxpayers, if, as we hope, this plan succeeds,” he added.
Reed told Business Insider that the warrants generated a $10 billion profit for the US Treasury. Buoyed by the strategy’s success, he penned a similar provision for the recently approved $2 trillion stimulus package in response to the novel coronavirus outbreak.
The senator pointed to Buffett when he introduced the Protecting Taxpayers’ Return on Investment Act last month.
“When Warren Buffett makes investments in struggling companies that eventually turn around, he is lauded as an astute investor and reaps billions in profits,” Reed said.
“Similarly, if taxpayer capital is needed, the terms must be fair to taxpayers, and they should be rewarded for helping struggling companies turn around,” he added.
Treasury officials wielded Reed’s provision in bailout talks with American Airlines, Delta Air Lines, United Airlines, and Southwest Airlines, demanding warrants in return for grants and loans.
All four carriers, facing dwindling passenger numbers due to the pandemic, accepted the terms in principle this week.
Government officials could exercise the warrants, keep the shares, and join Buffett as a “big four” airline stockholder.
However, they’re much more likely to wait until airline stocks rally, use the warrants and sell the resulting shares for a profit, then return that money to the Treasury.
Warrants are a “mechanism to pay back the taxpayers,” Reed told Business Insider. “When the airlines bounce back, the taxpayers should realize the benefits.”