Buffett’s Betrayal

Aug 4, 2009 17:54 UTC

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)


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?


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

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Sheila Bair not cowed by Geithner tantrum, criticizes Obama

Aug 4, 2009 16:30 UTC

Last week Tim Geithner dropped multiple F-bombs in a meeting with regulators unenthusiastic about his plan to concentrate oversight of the financial system at the Fed.  Sheila Bair was one of his targets, but today she held her ground.  In testimony before the Senate Banking Committee this morning, she had this to say about concentrating regulatory power at the Fed:

we do not see merit or wisdom in consolidating federal supervision of national and state banking charters into a single regulator for the simple reason that the ability to choose between federal and state regulatory regimes played no significant role in the current crisis.

One of the important causes of the current financial difficulties was the exploitation of the regulatory gaps that existed between banks and the non-bank shadow financial system, and the virtual non-existence of regulation of over-the-counter (OTC) derivative contracts. These gaps permitted lightly regulated or, in some cases, unregulated financial firms to engage in highly risky practices and offer toxic derivatives and other products that eventually infected the financial system…

She hits back at the administration pretty hard:

In light of these significant [regulatory] failings, it is difficult to see why so much effort should be expended to create a single regulator when political capital could be better spent on more important and fundamental issues which brought about the current crisis and the economic harm it has done.

She makes great points throughout.

But we can’t let Sheila and FDIC off too easy, though.  They’ve been undercharging for deposit insurance for years, which meant they didn’t have the resources necessary to resolve too-big-to-fail financials when they collapsed last fall.  Instead FDIC was forced to delay the reckoning, offering big banks a federal guarantee for their debts.

But at least Bair recognizes the terrible precedent that has been set, and wants to move decisively to reverse it.

John Dugan over at OCC also questions the wisdom of concentrating too much power at the Fed, though he and Sheila clearly have their disagreements when it comes to the proposed Consumer Financial Protection Agency.  She’s a big fan of existing proposals.  He’s got qualms with it.

Incidentally, I agree with my colleague Matt Goldstein that it’s good to see Tim Geithner get mad for a change.  A little anger is certainly appropriate.  I also agree with him that Geithner’s anger seems misdirected.


Bottom-up, baby. Micro-intelligence. That’s where regulators needs to spring from.

Pending Home Sales continue upward

Aug 4, 2009 14:07 UTC

A little bit of good news from NAR for a Tuesday.

The Pending Home Sales Index, a forward-looking indicator based on contracts signed in June, rose 3.6 percent to 94.6 from an upwardly revised reading of 91.3 in May, and is 6.7 percent above June 2008 when it was 88.7.  The last time there were five consecutive monthly gains was in July 2003.

But read this with a grain of salt.  The private credit system is still broken; home sales are dependent on government financing.


More than a pinch of salt I’d say. NAR are nothing more than an industry lobby group. Their stats have been rubbished consistently as pure cheerleading nonsense.

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Evening Links 8-3

Aug 3, 2009 22:58 UTC

(send links, pics, vids to optionarmageddon at gmail)

U.S. raids Colonial bank office in Florida, serving “TARP-related” warrants (Reuters)  Cheers for kicking butt and taking names.  As the special inspector general for TARP, Neil Barofsky has broad authority, including subpoena power and the right to carry a handgun.  This profile in the WSJ quotes critics that say he’s got too much Eliot in him, Ness or Spitzer, “over-stepping” his bounds or other such nonsense.  With the vast legal apparatus that rich banksters are able to hide behind, we need a guy who’s not afraid to offend delicate sensibilities.

Hot Waitress Economic Index (NY Mag)

Wall Street profits from trades with Fed (FT)  Makes a great point.  Too bad there aren’t any numbers here. But then the Fed won’t make that possible; it won’t let anyone audit its books.

Boom and Bust will be with us for some time (FT, via Kedrosky)  The former SocGen strategy duo (Montier recently left) take on the adaptive markets hypothesis.  Keeping economists honest!

Cops: Wife, three other women torture husband (Chicago Breaking News)  “Torture” is probably too strong a word.  Then again…

10 years ago, an omen no one saw (NYT)

Trump cuts price on Park Ave. penthouse by 40% (NY Post)  WSJ also had a good page 1 story this morning on the problems at the high end of the housing market.  So much for the top of the market being the last to decline and the first to recover…

Japanese couple turns down free trip to Rome, says would be waste of Italian taxpayers’ money (abc.net.au)

Barney’s illegitimate child? (imgur)  I can’t believe I never noticed the resemblance.

Cosmoplitan (incredimazing)


I guess I don’t understand the TARP angle, since CNB didn’t receive TARP funds (at least not the capital boosting preferred part). They were approved conditionally, pending getting private capital first.

On the wharehouse lines: It’s not like CNB is the only bank in the western galaxy that provides this service to mortgages lenders. We’re talking about a bank that is 1/100 the size of BAC, and 1/10 the size of USB and PNC. The loss of CNB’s wharehousing is hardly a systemic threat to the mortgage industry. It might inconvenience some, but it’s not a mortal threat.

I also like how people who are invested in failing banks lash out and place blame for their bank failing on “greedy big banks” and their “crony regulators” conspiring to enrich themselves.

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Daily Show: Home Crisis Investigation

Aug 3, 2009 19:30 UTC

Tim Geithner can’t sell his house. Wait, he raised the price? WTF!?!

The Daily Show With Jon Stewart Mon – Thurs 11p / 10c
Home Crisis Investigation
Daily Show
Full Episodes
Political Humor Joke of the Day

If you have trouble playing the video, try it here.


I actually like his bathroom

George Magnus’ Opus

Aug 3, 2009 18:58 UTC

For those convinced the economy is getting back on track (the S&P got back above 1,000 today!), I offer a cold shower courtesy of George Magnus, Senior Economic Adviser at UBS.  He pens a good op-ed in today’s London Times that warns folks to be wary of the emerging “recovery.”

…we should not be seduced into thinking that [the latest green shoots] comprise the gateway to a new expansion, because this “recovery” is not yet a match for the four horsemen of: financial instability; loss of leverage; retiring baby boomers and financial exit strategies.

Whatever financial stability we’ve achieved of late is thanks only to government support.  Remove it and the system would be exposed as totally unstable.  As for de-leveraging, it will take many years for the household and banking sectors to repair their balance sheet.  This means increased saving and less consumption for some time.  Both are good things of course, but with them comes less economic activity as measured by GDP.

The other big problem for economic activity going forward is demography.  As baby boomers retire, and the working population shrinks, the drag on growth will be substantial.

As the baby boomers — roughly 20-25 per cent of the population in most advanced nations — retire and swell the over-65 segment of the population, the labour supply will fall, or rise only modestly, because of low or declining birth rates. The working age population will grow slowly in the US and the UK, but in most of Europe it is starting to decline now. In Japan, this has been happening for almost a decade already.

In the absence of policy changes, growth will be reduced, and the rise in old age dependency will generate significant financial stress. The main policy shift should be to strengthen labour input and output through employment-creating infrastructure programmes, raising the participation of over 55s and women in the labour force, the pursuit of phased retirement and flexible working practices, and the provision of lifelong learning programmes.

Getting older workers to stay in the workforce will be crucial for our economic future.  Among other issues, the only way to put Social Security and Medicare on sound footing is to boost the retirement age well into the 70s.

There’s much more in the piece.


Why is no one diagnosing this Wall Street re-inflation accurately. Isn’t it just the latest bubble? Is our economy perpetually dependent on boom-bust cycling? How many more cycles before feudalism resumes?

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Lunchtime Links 8-2

Aug 2, 2009 21:06 UTC

Billions in Lehman claims could bury an elusive insurer (NYT) A fascinating story. My colleague Felix correctly compares the situation to AIG, the massive insurer that underpriced tail risk when it sold CDS on toxic paper. Here we have an interesting problem where this insurer appears to have been regulated, just not very well. If it can’t be successfully regulated, and it poses huge systemic risks, should we outlaw insurance on tail risks that are potentially very fat?

Schumer tops House, wants $4 billion for C4C (CBS2) And President Obama will likely jump on board. Reader JL comments: “What better way to waste capital than pay it to people to buy crappy cars they don’t need, that get barely better mileage than their current crappy car? Nice way to disguise a giveaway to Detroit and its unions as ‘green.’ BO is looking more Soviet all the time.” One better way to waste capital has been to finance home purchases with taxpayer cash. We’re hundreds of billions in the hole there!

Chart of the Day: Durable Goods shipments since 2000, military vs. non (NYT) Wow.

PIMCO’s McCulley: Fed won’t raise rates till 2011 (Bloomberg) I think I agree with him. Our trajectory will likely track ’90s Japan. Though if Congress successfully destroys confidence in the dollar, the downturn will be more violent. And if it doesn’t? Well, Japan is now headed into its third consecutive “lost decade” and demographics suggest this one won’t be an improvement over the last two. It’s a depressing thought, that we’re headed in that direction.

Why the FCC wants to break open the iPhone (TechCrunch) …because it thinks “the the same rules of open access that rule the wired Internet should apply to the wireless Internet.”

UBS not to pay fine in tax settlement with U.S. (Reuters) UBS’ will avoid a big fine for enabling tax cheats by giving up many of their names to the IRS.

Prolonged aid to unemployed is running out (NYT) 79 weeks of unemployment insurance isn’t enough for many workers. So there have been calls to extend it, again. (I certainly have more sympathy for this kind of deficit spending than I do for C4C)

Schadenfreude alert: Billionaire Ponzi-schemer Allen Stanford can’t afford his own lawyers (CNBC) The fraudster lost his big budget legal team because he can’t pay them; his assets are frozen.

Someone at Fox News didn’t pass high school geography (FunnyZee)

Video: Building rolls over onto its roof in demolition gone wrong (BBC)

Chinese mistress contest takes tragic turn (CNN)

Bank Death Watch: Five failures + new addition

Jul 31, 2009 23:05 UTC

There were five bank failures tonight.  Two of meaningful size, but none in Georgia!

We’re still waiting on two big fish, however, Guaranty and Corus.  In an SEC filing today, Corus said it was “critically undercapitalized” with Tier 1 Capital of $157 million.  They also admitted is was “highly unlikely” they’d be able to raise capital, so FDIC seizure is a matter of when, not if.  Next Friday may be the day. (ht CR)

And we have a new addition to the Bank Death Watch list: Colonial BancGroup, which late today expressed doubt it can continue as a going concern.  With $26.4 billion of assets and $24.6 billion of deposits as of March 31st, it’s larger than Corus and Guaranty put together.


  • Failed Bank:  First State Bank of Altus, Altus OK
  • Acquiring Bank: Herring Bank, Amarillo TX
  • Vitals: At 6/19/09, assets of $103.4m, deposits of $98.2m
  • DIF Damage: $25.2m


  • Failed Bank:  Integrity Bank, Jupiter FL
  • Acquiring Bank: Stonegate Bank, Ft. Lauderdale FL
  • Vitals: At 6/5/09, assets of $119m, deposits of $102m
  • DIF Damage: $46m


  • Failed Bank:  People’s Community Bank, West Chester OH
  • Acquiring Bank: First Financial Bank NA, Hamilton OH
  • Vitals: At 3/31/09, assets of $705.8m, deposits of $598.2m
  • DIF Damage: $129.5m


  • Failed Bank:  First Bankamericano, Elizabeth NJ
  • Acquiring Bank: Crown Bank, Brick NJ
  • Vitals: At 7/16/09, assets of $166m, deposits of $157m
  • DIF Damage: $15m


  • Failed Bank:  Mutual Bank, Harvey IL
  • Acquiring Bank: United Central Bank, Garland TX
  • Vitals: At 7/16/09, assets of $1.6b, deposits of $1.6b
  • DIF Damage: $696m

Rank the danger banks by order of dangerousity:

1) Corus
2) Guaranty

First two are easy. Negative equity is as negative equity does.

3) First Fed. 4.8% Tier 1 and falling fast. Almost no business activity, total exposure to CA residential mortgage market.

4) Colonial Bank. Ouch. Millstone exposure to RE (residential and commercial) in SE USA, and equity infusion yank out from underneath.

5) Flagstar? Not a lot of conviction around this one. Still generating margin writing new loans, non performing assets seem to have leveled off, and just got equity infusion but big time exposure to mortgages in all the wrong places (CA, FL, GA, NV, MI) and only good but not great T1 now (7.2%) makes you wonder what happens next Q when no new capital flows in.

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