KEY POINTS:
As world markets hit a rough patch, the multi-billionaire giants of global capitalism are making hay.
The panic sell-off in the past few weeks represents a buying opportunity for the rainmakers, with reeling markets presenting a welcome chance to bolster stratospheric fortunes.
The biggest beast in the financial jungle is Warren Buffett. The Sage of Omaha, 77 this month, is gearing up for a US$60 billion ($82 billion) buying spree. His investment vehicle, Berkshire Hathaway, has amassed a cash pile to seize steel firms, energy outfits, insurers and undervalued retailers. Buffett has been busy as financial contagion has spread.
Along with aggressive corporate raiders Carl Icahn and Nelson Peltz, he has piled into the world's second-largest food maker, Kraft, prompting takeover speculation. He has also invested heavily in American rail firm Burlington Northern Santa Fe, which in the past three years has nearly doubled in value.
Buffett believes rail re-regulation and higher fuel prices have made railways more competitive than trucks.
Currency volatility has not escaped his notice. Hathaway has made a clear US$131.6 million profit by trading the New Zealand dollar.
After the Chinese Government, Buffett is the second-largest shareholder in PetroChina, but he's cut his stake in China's second-largest oil firm. Some say he is now bearish on China.
He may be gearing up for a buying binge but things have not gone entirely his way of late. Like Citicorp Venture Capital, he would be a big loser if Remy International, the global auto-parts maker, plans to file for bankruptcy protection. Remy wants a debt-for-equity swap that would wipe out CVC's 70 per cent stake and Hathaway's 20 per cent.
There's no one better at taking advantage of massive slides in currencies and equities than George Soros.
Possibly the world's most famous hedge fund investor, he was the man who bet against sterling and "broke the Bank of England" in 1992.
He also profited hugely from the Asian currency crisis 10 years ago. His flagship, Quantum Endowment Fund, has returned 13.5 per cent this year, against the industry's 4.6 per cent average gain, says Hedge Fund Research, of Chicago.
Soros has invested hugely in the emerging BRIC economies (Brazil, Russia, India and China). In recent weeks he bought 5 per cent of Indian telecoms firm Reliance Communications for £170 million ($467 million).
He also bought into Brazilian bioethanol plants and is the biggest investor in China's Hainan Airlines. The airline plans to expand internationally under the name Grand China Air, move its main operations to Beijing and list shares overseas.
Earlier this month, Soros backed UK property investor Jamie Ritblat, son of the former British land tycoon, who has just raised £1 billion from several investors - including Archie Norman, the former Asda boss - to invest in European property.
He has also taken a 5.52 per cent stake in Ultrapetrol, a Bahamanian marine transport firm.
One rainmaker who appears to be suffering in the current turbulence is Henry Kravis, joint founder of KKR, one of the world's biggest private equity firms. The New York-based firm led US$200 billion of leveraged buyouts over the past 12 months - more than the combined total of rivals Blackstone or Carlyle Group. Scalps included UK chemist Alliance Boots.
Kravis is a legendary investor whose exploits provided the inspiration for the film Barbarians at the Gate. The billionaire hoped to scoop a huge windfall by listing his buyout firm on the New York stock market.
But conditions could force KKR to abandon the float, though the firm will never publicly admit that. KKR also confirmed yesterday that it was the subject of a US Department of Justice probe for anti-trust violations.
It is an awkward situation, not just for Kravis but for the private equity sector. Buyout firms want to use the equity markets to raise money for more corporate raids and to reward partners, but the experience of Blackstone Group, another US private equity company, which floated on Wall Street last month, has been salutary.
Blackstone shares have tanked since they came to market.
Market Turmoil Q&A
What is the sub-prime crisis?
The US has had a massive housing market boom. In the past few years, millions of sub-prime loans have been arranged - they go to borrowers with a less-than-perfect credit record. Now that US interest rates have risen 17 times, and house prices are falling in many parts of the country, thousands of sub-prime borrowers cannot afford to pay back their debts.
Why should that matter to the rest of the world?
Lenders had bundled up these sub-prime loans and sold them to investors all over the world, to spread the risk. Many of those investors, including banks and hedge funds, are now sustaining hefty financial losses.
Why are the stock markets falling?
First, some of these financial instruments are so complicated the banks do not even know the size of their own losses. So investors are selling the shares of all financial firms just in case they turn out to be the next victims. Second, the scale of the sub-prime defaults has raised fears that all kinds of other investments might be riskier than thought, so these are being sold too. Third - sheer panic.
Could the financial meltdown cause a global recession?
It's very unlikely. The housing crash is already hurting the US economy, and that could get worse before it gets better, but other parts of the world, including Asia and Europe, still look pretty healthy.
Does that mean you get off scot-free, if you're not a share trader?
No, there will be other knock-on effects as the long period of cheap money comes to an end. Banks hit by sub-prime losses may tighten their mortgage lending rules, so squeezing the housing market.
What did the central banks do to help?
Last Friday both the European Central Bank and the Federal Reserve let banks borrow billions of dollars (or euros) of cash at cheaper rates than usual, to make sure buying and selling went on as normal. Short-term interest rates had shot up, suggesting cash was in short supply. Yesterday, the European Central Bank and the Federal Reserve lent out more cash.
Is it over?
No, many banks, hedge funds and other financial outfits have not been able to tot up their losses, let alone inform the markets. There is likely to be more bad news this year.
- Observer
