In reference to Warren E. Buffet Comes to the Aid of a Big Canadian Mortgage Lender by Michael J. de la Merced on June 22, 2017 in the New York Times.
Warren Buffet, a man commonly referred to as one of the world’s most successful investors but how did he get this title? Quick and decisive decision making. He goes in while the confidence is low in a company and desperate for money. He then invests in the company to keep them afloat but with a very steep cost.
A Canadian mortgage lender, Home Capital Group, has hit rough times. They are one of the top lenders in Canada for borrowers with poor credit history and who are self-employed. This company was consistently making high yield loans attracting numerous investors. However, rumors almost closed the company. Ontario Securities Commission accused the executives that they were withholding information from investors because apparently there was an inquiry about fraudulent information in the loans.
This sent investors running and shares in the company dropped a significant 33 percent. As money was flying out the door of Home Capital Group, the company scrambled to make up for the loss including selling mortgages off their own books. The company have since denied this accusation but investors were still fearful.
This is where Warren Buffet comes in. A famous quote from him, “Be fearful when others are greedy and greedy when others are fearful”. He took his quote literally when he proposed Home Capital Group an offer. The offer: Berkshire, Buffet’s company, will buy around 40 percent of Home Capital Group’s shares with a 25 percent voting stake and a 2 billion Canadian dollar loan with a 9 percent interest rate. Berkshire buying the shares at a steep discount of 33 percent off of the market price. The share price quickly rose after information about the Warren Buffet’s agreement went public already raising 72 percent from what Berkshire acquired the shares for.
However, this agreement has yet to be agreed upon by the Home Capital Group shareholders. They will have a special meeting in September to vote on the bailout.
Home Capital Group may be saved from it’s current financial situation but will have to pay a steep price for it later on. Ever since the financial crisis, investors are vigilant on any fraud that could tank their investment. A slight rumor like what happened to this company has potential to ruin a company. The impact of the financial crisis still lingers and will for years to come.