No beach stall for Buffett this time

Warren Buffett was asked at the Berkshire Hathaway annual meeting last weekend why an investing strategy he used with such success in the last recession — extending billions of dollars of financing to desperate companies, at very high interest rates — is not on his menu now.

His answer reveals the degree to which governments and central banks, including the Bank of Canada, have been successful at protecting the financial system against the effect of the Covid-19 recession and preventing a repeat of what happened in late 2008 — at least so far.

A shareholder wanted to know why Buffett was not acting as the lender of last resort for companies locked out of credit markets, as in 2008. Back then, as the tide went out and much of the corporate world was caught without swimming trunks, Berkshire set up shop on the beach.

Buffett said the opportunity simply isn’t there. Companies aren’t at his door begging for the privilege of borrowing at exorbitant rates. And they aren’t because the world’s central banks have taken action to prevent credit markets from freezing up, and to ensure low benchmark interest rates are filtering down to the rest of the market.

Buffett said 2020 is different to 2008 because in March “the debt market was frozen or in the process of freezing”, but “that changed dramatically when the Fed acted”. The US Federal Reserve and other central banks rolled out not just low benchmark interest rates, but also quantitative easing and other interventions.

It’s why, though there are many companies in trouble, Buffett unloaded his entire stake in the airline industry — there are no low-risk borrowers begging him for highrate financing. It is a reminder that, just as a Hollywood sequel doesn’t have the same script as its predecessor, no two recessions are exactly alike — though there’s always plot continuity. /Toronto, May 6

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