Buffett Angle Heightens Goldman Mystery, Stakes

Warren Buffett and Goldman Sachs

3 May 2010. Through David Caploe PhD, Chief Politics Economist, EconomyWatch.com

3 May 2010. By David Caploe PhD, Chief Political Economist, EconomyWatch.com

While well-known in order to Americans and those who trade in All of us equities, many non-American readers of this site may not know who Warren Buffett is, so I hope the first group will forgive a SHORT introduction to the man and his importance.

Buffett is currently listed as the third richest man in the world, and CEO / main shareholder of Berkshire Hathaway,

a conglomerate holding company in whose individual shares are worth approximately USD 100,000, mostly because the company has never paid a dividend nor divided its shares.

He is also one among the leading, because most successful, proponents of “value investing,” which he originally defined as “buying stocks below their intrinsic value” – at first delineated as “the discounted value of all future distributions.”

Over the last Twenty five years, however, he has taken the idea even further, to define it as being "finding an outstanding company at a sensible price" rather than generic businesses at a bargain price.

But, aside from the worship Americans give wealth in general, Buffett is beloved for basically four reasons, and, in the current context, one notable comment in particular.

The first is that, in spite of his huge fortune, he has not moved to any of the locations usually associated with big money – eg, New York, Los Angeles, Miami, Vegas etc –

but has remained in his hometown of Omaha, Nebraska, where the winter seasons are freezing and snowy, and the summers revoltingly humid.

The second, consequently, is that he has seemed to retain the personal characteristics from the alleged “homespun” Midwesterner: unpretentious, straight-talking, not a snob, and very accessible to people from all walks of life.

Not that most Midwesterners are actually like that – that’s just the stereotype, and Buffett’utes public personality conforms to it perfectly. Whether it’s a good “act” or not, no one can say.

Given this, the third reason Americans adore him is that, despite all his money, he has continually expressed profound mistrust of – if not contempt for – Wall Street and everything that goes on there.

Fourth, he is an incredibly generous philanthropist, whose politics are usually liberal – in the US framework – top him to be a major donor to all sorts of “do-gooder” groups and activities,

as well as, for example, an earlier supporter of Barack Obama, that gave the latter a significant blast of credibility in the early stages of the endless American campaign season.

And finally, Buffett has been seen most recently as a fount of common-sense economic wisdom for regularly calling types “financial weapons of bulk destruction.”

As a result of all these, Buffett is regularly referred to as “The Oracle of Omaha”, or even, as we like to call him “St Warren of Buffett”.

Now, why do we go through all this ???

The reason is that, since the announcement of the SEC civil indictment of Goldman Sachs –

generally considered the MOST evil of the many dubious denizens associated with Wall Street –

Buffett, and the vice-chair of Berkshire, Charlie Munger, have been among the most vocal as well as forthright defenders of the investment company.

Now provided everything that we have said regarding why Buffett is such a beloved figure, his defense of GS raises a lot of questions, especially:

If Buffett is so anti-Wall Street in general, then why is he so fond of the company that even individuals on Wall Street think about – perhaps with envy –

to be the sharpest operator in an environment usually considered “shark-like” at best ???

Even more disturbing:

If Buffett is such a militant foe of derivatives, then how possibly can he be therefore pro-Goldman when they –

along with the now-defunct Lehman Brothers, as you may know from the whole Repo 105 scandal –

have been among the most consistent and very first users of what he has therefore famously been quoted as calling “financial weapons associated with mass destruction” ???

Now part of it is that Buffett is simply defending his massive individual stake in GS:

He got a large sweetheart deal from them in the height of the panic throughout Black September 2008, when he gave them five million dollars,

in return for which he got favored shares that pay a yearly dividend of USD 500 million –

which means he will get his entire investment back in 10 years, whatever happens,

AND he got 43,478,260 – that’s right, Forty three MILLION – warrants for common inventory at a strike price of $115,

which means he also has a very definite risk in Goldman’s share price sustaining / increasing its worth.

So how does all this fit with each other –

St. Warren of Buffett, the “regular guy”, homespun, Midwestern millionaire exponent of “value investing”, on the one hand,

and, alternatively, Goldman Sachs, prime user of types, and the most reviled and disliked of the many Wall Street companies,

whose high-level employees have been raking within millions in compensation,

while the majority of the rest of the world sits mired within the Great Recession ???

Well, not to pat ourselves on the back an excessive amount of, but we raised this three months ago, well before the actual SEC suit –

long before anybody else was even thinking along wrinkles –

wondering how these two seemingly opposite poles of the US / worldwide financial system could fit with each other so seamlessly.

The answer all of us came up with at that time, not surprisingly, had been basically a question,

taken directly from the immortal words of Senator Howard Baker, when he asked about Richard Nixon’s involvement with Watergate –

then a scandal which, by today’s standards, would barely raise eyebrows –

namely, “what did he know, so when did he know it ???”

And using the announcement of the SEC scams suit –

whose legal strength we originally questioned, but which has been strongly endorsed by some knowledgeable financial world bloggers –

we Might have begun to get some answers about how much due diligence St Warren did before jumping into bed with what Matt Taibi has so notoriously called a “vampire squid”.

And it seems like the answer is, “quite a lot.”

The occasion was Berkshire’utes annual meeting in Omaha hold’em, where Buffett – to give the man his due –

did NOT shy away from challenging questions coming from either his – admittedly, usually worshipful – shareholders nor the media.

NB: We are including almost all of this piece from the influential Deal Book function of the New York Times – admittedly with our emphases –

just to reassure our more skeptical readers regarding our portrait of Buffett and exactly how in which people view him:

The first question asked during Berkshire Hathaway’s 2010 shareholder meeting had been unsurprisingly about Goldman Sachs,

which is below fire from the Securities and Exchange Commission to have an alleged act of securities fraud.

A bit more surprising is when strongly Berkshire’s head, Warren At the. Buffett, is defending the company.  

He told Bloomberg Television before the meeting that he backed Goldman’s leader, Lloyd C. Blankfein, “100 percent.”

Mr. Buffett said that he or she felt little sympathy for that firms the S.At the.C. says were harm by what the agency calls Goldman’utes lack of adequate disclosure.

Of one company, ABN Amro, Mr. Buffett said: “It’s a hardship on me to get terribly supportive when a bank makes a foolish credit bet.”

What Mr. Buffett thinks about Goldman is something the investment community has been buzzing over for days.

Again, which was a question we raised a few three months ago.

Berkshire has invested $5 million in Goldman preferred shares, and Mr. Buffett is notoriously suspicious of Wall Street mores.

As we noted above … at least presumably …

In the case of Goldman, Mr. Buffett and the chief lieutenant, Charles Munger, made it clear they’re on the firm’s side.

Goldman as well as Berkshire have a long history, with Mr. Buffett relying on Goldman as his longtime investment bank.

He has stated that Byron D. Trott, a long time Goldman banker who left to begin his own shop, is one of the couple of Wall Street bankers he or she trusts.

According to DealBook’s Andrew Ross Sorkin, who’utes one of three panelists asking questions at the conference,

Mr. Buffett essentially took Goldman’s defense that everybody involved in the deal under scrutiny, Abacus, was a sophisticated investor completely capable of evaluating the risks in the subprime mortgage investment.

Instead of needing to find out that a hedge fund manager who suggested which bonds should form the underpinnings of the Abacus collateralized debt obligation was also short the actual bonds,

the investors should have trusted their own due diligence, Mr. Buffett stated.

“If I have to care who’s on the other side of the trade, We shouldn’t be insuring bonds,” he said.

Mr. Buffett added an implicit rebuke of a line of questioning raised by several senators during this week’s Goldman hearings.

An investment bank could very well be short the securities Berkshire is buying, and a buyer like Berkshire should be perfectly aware of that in any case.

Mr. Munger added that were he on the Utes.E.C., he would not have access to voted to press charges.

That isn’capital t to say that Mr. Buffett as well as Mr. Munger think Goldman is blameless right here.

Mr. Munger suggested that there was a difference between breaking the law and behaving unethically — and that simply following the law shouldn’capital t be the basis of a business’s carry out.

He added that many investment banks had taken on “scuzzy” customers they shouldn’t have.

Well, scuzzy is as scuzzy will, and this makes pretty obvious Buffett knew QUITE A BIT about Goldman prior to he came in and rescued them in the dark days of Dark September 2008,

as is only to be expected, given both their history and, in this particular case, their explicit endorsement of the demand for due diligence.

Which brings us back to the important thing question of derivatives and St Warren’s attitude towards them.

And right here the story gets even more dark.

Another DealBook item from about a 7 days before the one quoted above indicates maybe St Warren no more feels these “weapons associated with mass destruction” are as bad because he supposedly thought:

As Democrats relocated closer to an overhaul of financial rules, The Wall Street Journal documented that 

Warren Buffett — the man who once branded derivatives as “financial weapons of mass destruction” — has been combating the deal.

Mr. Buffett’s company, Berkshire Hathaway, has been lobbying for changes to the overhaul that would prevent his finances from being overly impacted by the bill, The Journal said.

Berkshire would like a provision to the bill ensuring that existing derivative agreements would not be affected by the suggested rules.

Berkshire has $63 billion price of derivatives on its publications, according to Barclays Capital, The Journal reported.

WHAT ???

Financial weapons of mass damage WORTH USD 63 Million on Berkshire’s books ???

Hmmmm …

What does THAT say ???

Unfortunately for St Warren, that effort was declined, and Democrats included a provision that made charges on EXISTING derivatives agreements part of the “financial reform” bill.

Of course, the fight on that “effort” has just started, and, from this clip through CNBC –

whose Becky Quick actually had the actual gumption to mention the “mass destruction” portrayal to Buffett as he was leaving the stockholder’s meeting –

it’utes clear Buffett is a long way from quitting.

Which probably could also be inferred from the fact that the ONLY Democratic Senator to vote WITH the Republicans and Towards his own party on the initial vote on this legislation

was – you’ll never guess – Ben Nelson, through Buffet’s own – apparently in lots of senses of the word – condition of Nebraska.

David Caploe PhD

Chief Political Economist

EconomyWatch.com

President / acalaha.com