Warren Buffett’s Home Capital deal kicked off by 82-year-old banker

"There's been far, far, far more money made by people in Wall Street through salesmanship abilities than through investment abilities," Buffett said.

TORONTO: Warren Buffett’s surprise investment in Home Capital Group Inc. all started with a single email from a Canadian investment banker who first met the billionaire 23 years ago.

Don Johnson, 82, an advisory board member at Bank of Montreal’s BMO Capital Markets unit, reached out to Buffett in a June 9 email, adding a photo of the two of them to remind Berkshire Hathaway Inc.’s chairman of their past connections.

“I just brought to his attention this Home Capital opportunity,” Johnson said of his message to Buffett. “I informed him that BMO Capital Markets had been retained as one of the financial advisers to Home Capital, and so I sort of summarized the opportunity and put him in touch with the head of our financial institutions group.”

Buffett clearly listened. The investor agreed to buy Home Capital shares at a deep discount and provided a fresh credit line for the struggling Canadian mortgage company, tapping a formula he used to prop up lenders from Goldman Sachs Group Inc. to Bank of America Corp. 

Berkshire will buy a 38% stake for about C$400mil (US$300mil) and provide a C$2bil credit line with an interest rate of 9% to backstop the Toronto-based lender.

Home Capital had been seeking financial stability after facing accusations by Ontario’s securities regulator in April of misleading shareholders on mortgage fraud some two years earlier. 

That sent its shares tumbling, accelerated deposit withdrawals and forced the firm to seek a costly emergency loan from a pension fund. Royal Bank of Canada and Bank of 

Montreal had been hired by Home Capital to advise on financing and other transactions.

Johnson remembered Buffett’s criteria that the best time to consider an investment is when no one else wants to buy -- and Home Capital seemed to fit the bill. He suggested Buffett reach out to BMO Capital Markets bankers including Bradley Hardie, who heads the financial institutions group at the Toronto-based firm.

“I just opened the door, that was all,” Johnson said. “I just made the introduction and he turned it over to one of his right-hand men and they contacted Brad Hardie on the Monday, right after my email on the Friday.”

Buffett had already been showing interest in Canada in recent weeks. He spoke to Prime Minister Justin Trudeau and Finance Minister Bill Morneau at a CEO summit hosted by Microsoft Corp. in Seattle last month, and asked several questions about the Canadian economy, according to a person familiar with the discussions who asked not to be identified. Buffett’s other investments in the country include AltaLink LP, an Alberta utility. A Morneau spokesman later confirmed the meeting.

Morneau and Buffett “talked about the strong Canadian economy, the fundamental advantages of Canada as an investment destination, and the risks to the economy from mortgage debt, which, while real, are different than in the U.S.,” Morneau said Thursday in a statement. The investment “is proof the system is working,” he said.

Buffett didn’t immediately respond to a message seeking comment.

Alan Hibben, a Home Capital director, said Thursday in an interview at Bloomberg’s Toronto office that Berkshire’s involvement was due to “outreach” by Bank of Montreal.

“We had the company on our list for quite a while, so it wasn’t exactly inbound,” said Hibben, who’s never met Buffett. “I had requested that our advisers touch base with him to see what we could do, and they did. And he came back very, reasonably quick.”

Buffett, 86, has been leaning more in recent years on his deputy investment managers, Todd Combs and Ted Weschler. Both are former hedge fund managers and were hired in the past decade to help pick stocks at Berkshire. Each runs a stock portfolio valued at about $10 billion. But they’ve also taken on special projects for the billionaire, vetting deals and serving as chairmen of some of Berkshire’s subsidiaries.

They’re also a cornerstone of Buffett’s succession plan at Berkshire. The billionaire -- who serves as the company’s chairman, chief executive officer and head of investments -- has said the deputies will one day oversee the company’s massive stock portfolio, which was valued at about $135 billion at the end of March.

Johnson’s connection to Buffett began more than two decades ago, when he was working on a potential Canadian deal and crossed paths with the investor. Johnson, who once was vice chairman of investment banking for the BMO Nesbitt Burns unit, stayed in touch over the years, attending one of Berkshire Hathaway’s annual meetings and seeing him in October 2007 when Buffett was a guest speaker at a fundraising dinner for the Royal Ontario Museum.

“I also invited him to my 80th birthday party, but Paul Anka was performing and he knows Paul Anka very well,” said Johnson, who turned 82 on June 18.

Johnson said he feels great to be able to play a role in the deal, and reached out to Buffett as it was announced.

”I just sent Warren an email congratulating him on the decision,” Johnson said. “It was a great investment for Berkshire Hathaway but it was also great for all the shareholders of Home Capital and all the stakeholders.”

Johnson began his career in the investment industry when he joined Burns Bros. and Denton Ltd. in 1963. Over the years, he held a series of management roles and became president of Burns Fry in 1984. In 1989, he became vice chairman of investment banking for BMO Nesbitt Burns and its predecessor companies. He retired as vice chairman in 2004, but continues his involvement as a member of the advisory board of BMO Capital Markets.

“I wouldn’t say I’m retired,” Johnson said. “I’m starting to slow down. I only go to the office five days a week, the other days I work from home.” - Bloomberg
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