Buffett’s Betrayal

August 4, 2009

When I was 14, Warren Buffett wrote me a letter.

It was a response to one I’d sent him, pitching an investment idea.  For a kid interested in learning stocks, Buffett was a great role model.  His investing style — diligent security analysis, finding competent management, patience — was immediately appealing.

Buffett was kind enough to respond to my letter, thanking me for it and inviting me to his company’s annual meeting.  I was hooked.  Today, Buffett remains famous for investing The Right Way.  He even has a television cartoon in the works, which will groom the next generation of acolytes.

But it turns out much of the story is fiction.  A good chunk of his fortune is dependent on taxpayer largess. Were it not for government bailouts, for which Buffett lobbied hard, many of his company’s stock holdings would have been wiped out.

Berkshire Hathaway, in which Buffett owns 27 percent, according to a recent proxy filing, has more than $26 billion invested in eight financial companies that have received bailout money.  The TARP at one point had nearly $100 billion invested in these companies and, according to new data released by Thomson Reuters, FDIC backs more than $130 billion of their debt.

To put that in perspective, 75 percent of the debt these companies have issued since late November has come with a federal guarantee. (Click chart to enlarge in new window)

buffett-bailout2

Without FDIC’s debt guarantee program, even impregnable Goldman would have collapsed.

And this excludes the emergency, opaque lending facilities from the Federal Reserve that also helped rescue the big banks. Without all these bailouts, the financial system would have been forced to recapitalize itself.

Banks that couldn’t finance their balance sheets would have sold toxic assets at market prices, and the losses would have wiped out their shareholder’s equity.  With $7 billion at stake, Buffett is one of the biggest of these shareholders.

He even traded the bailout, seeking morally hazardous profits in preferred stock and warrants of Goldman and GE because he had “confidence in Congress to do the right thing” — to rescue shareholders in too-big-to-fail financials from the losses that were rightfully theirs to absorb.

Keeping this in mind, I was struck by Buffett’s letter to Berkshire shareholders this year:

“Funders that have access to any sort of government guarantee — banks with FDIC-insured deposits, large entities with commercial paper now backed by the Federal Reserve, and others who are using imaginative methods (or lobbying skills) to come under the government’s umbrella — have money costs that are minimal,” he wrote.

“Conversely, highly-rated companies, such as Berkshire, are experiencing borrowing costs that … are at record levels. Moreover, funds are abundant for the government-guaranteed borrower but often scarce for others, no matter how creditworthy they may be.”

It takes remarkable chutzpah to lobby for bailouts, make trades seeking to profit from them, and then complain that those doing so put you at a disadvantage.

Elsewhere in his letter he laments “atrocious sales practices” in the financial industry, holding up Berkshire subsidiary Clayton Homes as a model of lending rectitude.

Conveniently, he neglects to mention Wells Fargo’s toxic book of home equity loans, American Express’ exploding charge-offs, GE Capital’s awful balance sheet, Bank of America’s disastrous acquisitions of Countrywide and Merrill Lynch, and Goldman Sachs’ reckless trading practices.

And what of Moody’s, the credit-rating agency that enabled lending excesses Buffett criticizes, and in which he’s held a major stake for years?  Recently Berkshire cut its stake to 16 percent from 20 percent.  Publicly, however, the Oracle of Omaha has been silent.

This is remarkably incongruous for the world’s most famous financial straight-shooter. Few have called him on it, though one notable exception was a good article by Charles Piller in the Sacramento Bee earlier this year.

Buffett didn’t respond to my email seeking a comment.

What saddens me is that Buffett is uniquely positioned to lobby for better public policy, but he’s chosen to spend his considerable political capital protecting his own holdings.

If we learn one lesson from this episode, it’s that banks should carry substantially more capital than may be necessary.  You would think Buffett would agree. He has always emphasized investing with a “margin of safety” — so why shouldn’t banks lend with one?

Yet he mocked Tim Geithner’s stress tests, which forced banks to replenish their capital. Why? Is it because his banks are drastically undercapitalized?  The more capital they’re forced to raise, the more his stake is diluted.

He points to Wells Fargo’s deposit funding model being more robust than investment banks’, but that’s no excuse for letting tangible equity dwindle to three percent of assets.  At that low level, the capital structure would have collapsed were it not for bailouts.

And by the way, the strength of Wells’ funding model is a result of FDIC insurance, among the government subsidies Buffett complains about in this year’s letter.

To me this feels like a betrayal.  There’s a reason he’s Warren Buffett and not, say, Carl Icahn.

As Roger Lowenstein wrote in his 1995 biography of Buffett, “Wall Street’s modern financiers got rich by exploiting their control of the public’s money … Buffett shunned this game … In effect, he rediscovered the art of pure capitalism — a cold-blooded sport, but a fair one.”

But there’s nothing fair about Buffett getting a bailout, about exploiting the taxpaying public for his own gain.  The naïve 14-year-olds among us thought he was better than this.

What would Ben Graham say?

Comments

If you truly followed Warren’s career as an investor, as you claim, and what he generously and openly shared with us over the years you would have been more kind in your article. Our Government would have spent the bail-out money regardless of who benefited from it. Let’s not blame our own shortcoming, as active citizens, of letting our irresponsible Government, that has been on spending spree over the last thirty years, on an individual whose records speak for themselves.

Posted by Fred Hashtpari | Report as abusive
 

After all is said and done, Buffet has made a truck load of money in the stock market. Something that few people has done. The only thing this article proves is that Buffet is a greater investor than I thought.

Posted by J-R | Report as abusive
 

ET TU, BRUTE?

Posted by CEH | Report as abusive
 

While I admired Mr Buffet from afar I realize that he is just a cog in the wheel of a very crooked market designed to exploit the very ones who need to improve their financial wellness–and have untill recently trusted the system..Its time for change in the financial markets—

Posted by Mark Adams | Report as abusive
 

Over time Warren Buffett has lobbied hard and long for his Berkshire Group. Would you expect any less? He does not make the rules but understands how to use them to his advantage. He will give most of his money away upon his passing as will Bill Gates, and thank goodness he had the veracity to work behind the scenes of this crisis, one which by the way he did not cause.I too have received correspondence from the Oracle of Omaha on a real estate deal I proposed. He was polite in his declining, and I could tell he had bigger fish to fry. Who would you rather extol as an example. Some Gordon Gecko type hedge fund manager that comes out of left field to fleece his investors with untold immediate and outrageous fees and bonuses, or a mid-western hard working icon that has been at since 12 years old creating real wealth for his investors; ALL OF WHOM WISH THERE WERE MORE LIKE HIM. To me, and I suspect 99% of us that is a no brain-er. I do not own any Berkshire stock but wish I did. SG.

Posted by Steve Gravett | Report as abusive
 

Remember both Soros and Buffet chiding Americans to pay more taxes (Death tax,etc.). They’re both Democrats and both on the “redistribute the wealth” bandwagon. Don’t forget to take their advice regarding whom to vote for. I’m sure “Uncle Warren” and “Uncle George” just want what’s best for you. The Repubs are pathetic but at least they’re not in our faces and pockets every waking hour like the “reformers” in there now.Give me some old fashioned freedom and common sense.

Posted by Wayne Daniel | Report as abusive
 

Its About time someone called this fake. (Buffett).He had acess to the top information, and was down 30 to 40% even with taking taxpayer money. I had no inside information,or super computers and was up 10% for the year.The robber barons of the 20s, built libraries, and parks, to give Americans a boost up, This guy and gates, take taxpayer, and American money, and give it to creepy causes, to boost everyone , but Americans.They created American competitors, with American money, made by laying off American workers. Buffett, didnt even have the decency, to leave his Ill gotten gains to his own family.The American military, is risking their life, to protect world trade, at American taxpayer expense, while these guys loot America and give it to anyone except america.The world is getting a free ride, at taxpayer expense Where are the health clubs for American injured, military. Where are the new American Libraries, Where are th computer libraries, for out children? They are given to everyone but Americans.

Posted by R. Janowsji | Report as abusive
 

Buffett was way behind the blogs in outlining the huge housing bubble and what it would do to the US. He made some nice investments early on but has done more than his share of shady deals over the years. In the end he is another guy who made it rich the right way, then got corrupted by the need for more and more. Giving away a large part of his fortune was nice but it does not change his lifestyle…5 billion or 50 billion, you still live the same! And it was great PR.I read various blogs and followed their advice, getting out of the market at 13800 in June 2007, went into gold at 500 and out at 900, sold my 2 vastly overpriced Florida houses in 2006.So people following the blogs did A LOT better than Buffett the past few years, that is for sure!

Posted by Jon King | Report as abusive
 

All is well; Goldman has declared the beginning of the next Bull Market. Goldman has given a whole new meaning to “Bull” Market.

Posted by Pete | Report as abusive
 

What Rolfe fails to realize is that the financial companies that benefited from TARP were not operating companies of Bershire. They are minority equity investments. Buffett doesnt run those companies, and he doesnt have a say in whether the TARP money would be accepted.Anything Buffett draws attention and sells papers/draws clicks. Too much misunderstanding and poor logic with this article.

Posted by JLo | Report as abusive
 

Well articulated–would LOVE to see Buffett’s response!

Posted by msmith | Report as abusive
 

Attacking Buffet for supporting and pushing for the bailouts is ignorant. Regardless of Buffet’s focus on his self-interest, I believe that his self-interest coincided with the needs of the American Economy. Without the government bailouts for the financial sector there is an extremely high chance that the financial sector would have collapsed, in which case the American people would have had to pay for the FDIC to cover their own deposits.P.S. Everyone persues their own self interest.- Economics 101

Posted by Robert Ball | Report as abusive
 

From this article, one might form the opinions that Mr. Buffet singlehandedly engineered the bailouts and was a majority shareholder in the largest corporations in the US. In addition to his personal financial salvation from Recovery Act, billions more in investor wealth were preserved.Who else protected client investments that well through this financial abyss?What would have happened to our economy if there were no bank bailout?Banks do need regulation that protects depositors, investors, and the FDIC (the taxpayer).Mr. Buffet is a not-so-perfect, yet extremely successful, ethical, charitable “good-deed-doer” capitalist in the icon of capitalism. While I am sorry for your personal disappointment, I feel this was undeserved bashing by an idealistic writer.

Posted by GSH | Report as abusive
 

This article is a crock of cr^%. Buffet helped the banks far more than he should have. He probably should have stayed away when they were in financial trouble, but thought he had a responsibility to our country.The BANKS and the mortgage BROKERS are the crooks – banks backing bad loans made on no documentation in scary circumstances.If the government would not have intervened, our financial system would have melted down and ALL OF US would be out, not just Buffett.Not only did he protect HIS holdings, but he protected MINE too, so thanks Warren.

Posted by doug | Report as abusive
 

Very interesting story. Something everyone should keep in mind: All those people we are now criticizing for their roles in the financial meltdown have operated under the rules enacted by our representatives in Washington, D.C. Perhaps we should all look in the mirror to see the culprits.Lemonade

Posted by Joel Neecke | Report as abusive
 

Welcome to CAPITALISM!! New age USA style. Lets face it, its going to be a cold day in hell when the Buffetts of the world will not do what needs to get done in order to save their Empire. hell I would have done the same thing because I would have been legally allowed to do it. One would like to think, that when the Oracle passes on he will leave a lasting legacy to the people of the USA, where his funds profits are put back into the Community, Lock, Stock and Barrel!

Posted by Nick kapes | Report as abusive
 

Talking about Goldman et al collapsing – there’s so much talk about debts – but what about CREDITORS – the people holding all the WINNING derivatives?And by the way, our so-called “representatives” who deregulated or looked the other way were installed by computerized vote-rigging machinesCheck out the HBO documentary AMERICAN BLACKOUT:http://video.google.ca/videopla y?docid=-5965670944815984616Or:Blackboxv oting.orgvotefraud.org

Posted by glo | Report as abusive
 

Yeah, Lets not give bail outs, lets have most Americans bank accounts closed.

Posted by Brandon | Report as abusive
 

Buffett also has lobbied for securing loose nukes. No doubt greedily trying to protect his investments by making sure US cities are not vaporized.Self-interest is not always contrary to public interest. We need continuity in the banking system, even when they don’t deserve it. So a rescue, or at least an attempt, was foregone. He traded on a certainty, and lobbied for rationality.Recapitalizing banks through debt, rather than equity, adds vast amounts of risk capital that is senior to Buffett’s equity. If that capital goes bad, he loses everything, so his incentives are well aligned.I’m amazed I need to write this to Reuters.

Posted by Odious Swaggering GSBer | Report as abusive
 

YOUR US GOVERNMENT IS THE FOOL…WHY WOULD THEY BAILOUT THOSE LOSING COMPANIES?IN A CAPITALIST ECONOMY LET THE MESS UNDO ITSELFDon’t YOU ALL HEAR TIME HEAL ALL WOUNDS?

Posted by David Trisnadi | Report as abusive
 

I find the numerous comments that choose to whitewash morality quite funny. The notion that by taking advantage of what one has classed a morally suspect option because it is profitable and available one has somehow bypassed the original moral dilemma requires some incredibly flexible morals. To put the absurdity in clearer light, let’s take a profitable enterprise that is generally universally condemned as immoral: slavery. The argument that some here are taking is that if an investment were available in some slave-holding operation in a country that had not made it illegal, it would be immoral as a fund manager to NOT invest in it if it increased your investors net worth.

Posted by Gregor Former | Report as abusive
 

What is truly sad is that it takes this sort of behavior before Buffet is seen as greedy and selfish.How is it that in a world in which much of humanity lives on one or two dollars a day, and some forty thousand children die each day from avoidable causes, we worship those who hoard literally BILLIONS of dollars in assets and live in absurd and wasteful luxury?That Warren Buffet is a hero for anyone is a measure of how sick we’ve become (or perhaps always were). That this comment will be ignored suggests that there is no hope for us.

Posted by Jon Gerst | Report as abusive
 

I think the main point of Rolfe’s article is Warren doesn’t practice what he preach when it’s not in line with his interest. I leave the moral judgment to someone else though.

Posted by Parry | Report as abusive
 

I just do not get it. Why is everyone at all surprised? Is Warren Buffet truly a role model for anyone…seriously?!This guy is seriously deranged. He has billions and still needs more? Anyone see anything wrong with that? Let me say it again, he has billions, he does not need anymore, and in his little mind he still needs more. How miserbale can one already get?So why be surprised when hacks like this say what is printed above in his meeting? Why should he be different? It is this mentality that got him his money in the first place…in a world of greed a guy like this is touted as some kind of role model.Give me a royal break.

Posted by Keith | Report as abusive
 

….The tide went out and now we see who has been swimming naked……Good article. About time.

Posted by A.S. | Report as abusive
 

Nice article, but a bit offside. As far as Buffett lobbying for something that is in his best interest, sure he did, but it was also in the best interest of the country at large.What do you think would happen if the banks you mentioned in your article, collapsed? It would filter down so quickly and violently, that you would be writing an article about how the government should have stepped in to stop the carnage.As for Buffett, last I checked, his will stipulates that a sizeable portion of his holdings be given to charity.That sounds pretty greedy to me…..sarcasm!

Posted by j mathew | Report as abusive
 

With billions of tax payer money being paid out in corporate bonuses in the worst year in American Capitalistic history I do not feel all that bad about walking from my home. However the real poetic revenge is knowing that Buffet is truly condoning these bonuses that should have gone to share holders creating a real catch 22. Buffet has been my role model for years when it came to investing, but it goes to show that the bigger they are the harder they fall.We are going to see another fiasco happening soon in the banking climate. Why? Well Joe and Jane walk from their homes which they owed 500K on and then it was sold in foreclosure for 300K, but the banks are still counting the 200K difference as a long term recievable which the banks put in as asset in the balance sheet and future income on the income statement. They are again tricking the FED to lend them more money than the have backing for. Correct accounting should dictate that they are never going to collect from Joe and Jane. The banks are still up to their same old tricks.Watch the real collapse come again, but next time no government cash to fill the pockets of CEO’s

Posted by Yabba Daba Doo | Report as abusive
 

class war? Yeah, there/s a class war going on. An WE are F|ing winning!/WB

Posted by Springer08 | Report as abusive
 

I seem to recall that Berkshire is exempt from having to make timely reports on its investments, so that such news will not roil the markets. Just another example of too big to have to follow the rules that apply to the small timers.

Posted by swaps | Report as abusive
 

Ty móc strona internetowa o nowy i opóźniony model i projekt Replika fake Omega nasz strona internetowa.

 

Insightful article and so NECESSARY.Similar conflict of interest is apparent in Buffet’s estate-tax stance.When Buffet always talks about how he’s for the death tax (because it’s supposedly so “fair”), keep in mind that he personally benefits from the death tax because it hits so many small family-owned companies that he likes to buy up or “rescue.”Nobody in the media ever calls him on this. Instead, he is presented as being somehow altruistic or wise or whatever Obama and people who are for “sharing the wealth” want the sheeple to believe.

Posted by Diane | Report as abusive
 

Sounds like “The Rich get Richer and the Poor get Poorer”

Posted by appayne1 | Report as abusive
 

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