Buffett warned Congress about derivatives…

May 27, 2010

…in 1982.

Fast forward 28 years and the Oracle dispatched lieutenants to Washington to fight sensible derivatives reforms that would have made it more expensive to maintain his $63 billion portfolio of them. Luckily the White House beat back the “Berkshire provision.”

In the 1982 letter obtained by Forbes,  Buffett waxed philosophic on the dangers of derivatives. His analysis was remarkably prescient. The kind of wisdom one might expect from him today. But as has been clearly demonstrated over the past two years, Buffett is less concerned with sound public policy than with protecting his own interests.

His investment in Goldman was an effort to profit from TARP; he benefited more than anyone from FDIC’s explicit guarantee of bank debt while arguing that such guarantees are unfair; he mocked Treasury’s stress test, which forced banks to raise much needed capital; he opposed Obama’s sensible bank tax, which would charge TBTF banks for the implicit government guarantee they receive; and he was first to propose a public-private partnership to leverage public money to overpay for banks’ toxic assets.

The bottom line is that Buffett is more hard-nosed capitalist than financial straight-shooter. His advocacy of higher taxes for the rich tends to fool media hagiographers into believing he’s willing to sacrifice his interests or those of his investors for the public good. But he’s simply not the unbiased arbiter of sound financial policy that many still believe him to be…

(ht Scott Frew)


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It is worth noting that even WB’s seemingly populist and magnanimous stance on taxing the rich is not entirely what it seems.

All of his jawboning has been on increasing income taxes for high-earners. But his wealth has almost as much to do with tax avoidance (because his income is unrealized) as as with investment returns. The overwhelming majority of WB’s wealth has compounded untaxed for 50 or 60 years. I have no problem with that generally, for why should someone pay taxes on unrealized gains? But lets not think he would be harmed by the taxes he advocates.

Posted by DanHess | Report as abusive

Not to forget his large holdings in Moody’s who was rating the CDO’s and other corporations owned by Buffett. Warren sold out a large part of his holdings in Moody’s when he realized they would be subject to many lawsuits.

Buffett was the main beneficiary of the bailouts, including the Tarp plan and he stated that “derivatives were weapons of mass destruction” but later sought an exemption for Berkshire from these taxes. The government bailed out Buffett and all of his bank stocks. Great article as Buffett has taken advantage of many tax loopholes that are legal but allowed him to compound much of his wealth tax free.

HIs defense of Goldman Sachs is clearly a conflict of interest and his support of Ken Lewis of Bank of America, his close friend who took millions of compensation, was against his own stated principles.

Posted by RFreedl221 | Report as abusive

There are tons of dirty business people out there, but Buffet isn’t one of them. Any money he makes will ultimately go to the Bill and Melinda Gates Foundation, so the self-interest that people deride is quite literally money that will go things like helping people in Africa survive malaria, not some sports franchise or yacht. Regarding the TARP and FDIC guarantees, once they were approved the opportunity to profit was there, and I’d rather have Buffet profit off it than someone else. That said, I agree with the criticisms about Moody; he was awkwardly silent when he should have been actively changing their operations, but other than that, his record is pretty clean … and often counter to his own interests.

For example, Buffet’s advocacy of expensing stock options would work against his net worth, and his complaints about tax rates for the rich are genuine … especially considering he’s directly saying that to people who are repulsed by the idea that they have to pay $0.20 in capital gains taxes on their 100 millionth dollar of income. Buffet doesn’t make the rules, but he plays by them, and more importantly (and uniquely) he plays within them. And he advocates changing them to make them more fair. If people don’t like the rules, then they’re usually agreeing with Buffet’s points. There are plenty of villains on Wall Street; there’s no need to create another one from one of the better business people (again, see the multi-billion dollar donation to the Bill and Melinda Gates Foundation).

Posted by CJS80 | Report as abusive

@CJS80 —

WB is a terrific guy, no question and he has been generous in his teachings and usually remarkably honest over his career. America would be well served to have more people like that.

It is also true that there has been a lot of drifting from the Warren that long-term fans like myself have come to know.

The defense of Goldman at the recent shareholder meeting was full throated and embarrassing, because he went much farther than saying Goldman acted legally. He shockingly argued Goldman acted ethically in assembling financial products designed with failure in mind. This was in sharp contrast to Charlie Munger, who much more reasonably conceded there was a lot of bad behavior all around. Goldman’s own shareholders were stunned speechless because this seemed to Berkshire faithful like a total reversal.

Buffett’s lobbying against sensible derivatives reform (such as reserving) due to costs on Berkshire was an embarrassment after he had railed for so long on the dangers of derivatives.

Buffett’s recently showed rudeness to all of us in rejecting repeated requests to serve America by testifying before the Financial Crisis Inquiry Commission. It took a subpoena to get him to help lend his knowledge to America.
http://money.cnn.com/2010/05/27/news/com panies/buffett_fcic_subpoena.fortune/ind ex.htm

Buffett is a wonderful man, there is no question. But a lot of people are longing for the old Buffett that they grew to love over the years.

Posted by DanHess | Report as abusive

[…] Rolfe Winkler: Buffett warned Congress about derivatives… […]

Posted by Friday’s Caught on The Web – The Source – WSJ | Report as abusive

I’ll add the same comment here that I posted on the Seeking Alpha version of this “article”:

There are so many incorrect “facts” in this article that one might wonder if the author is merely uninformed or (more likely) has an agenda against Buffett and/or Berkshire. Here are the actual facts for anyone interested:


I am amazed that such drivel passes for “journalism” on Reuters.

I guess we can expect nothing different from someone who wrote a totally off base piece entitled “Buffett’s Betrayal” last year, a piece so weak that it was dismantled promptly by many more informed individuals, some linked to in this post:


Posted by rnagarajan | Report as abusive

[…] Buffett warned Congress about derivatives… | Rolfe Winkler […]

Posted by News on the pensions bailout and other links | Credit Writedowns | Report as abusive

@rnagarajan —

It is foolish to hold someone in such high esteem that you shut off your critical thinking.

Buffett, while a great man, is not perfect, and not a man to be blindly idolized. He has faults and it is good to see them.

Posted by DanHess | Report as abusive

@DanHess – No blind idolization happening here, just an objective view of reality, something that Mr. Winkler may find beneficial not only for his journalism but for his investment activities.

Mr. Winkler’s post is a tortured and distorted picture of reality plagued with inaccuracies and half truths. I’ll stand by the posts I previously linked to.

Posted by rnagarajan | Report as abusive

@rnagarajan –

I think Mr. Winkler’s point is that Warren Buffett should not be seen as a moral leader, given the type of bad behavior and multiplication of systemic problems that occurred in companies in which he was *the* most prominent and leading shareholder (Moody’s, Wells Fargo and most recently Goldman Sachs).

The innoculated investor piece actually does a great deal to bolster Winkler’s position.

“Should BRK have sold Wells Fargo (WFC) and Moody’s (MCO) because of questionable practices? Maybe, if investing was solely a moral game. This is where I think Winkler has it all wrong. Investing the right way does not necessarily mean only giving capital to companies that are spotless. We live in a capitalist world and just like every human is imperfect, there are no perfect companies. Buffett likes the moats and underlying earnings potential of both of these companies and thus continues to hold shares. I also think it worth mentioning that he holds such large stakes that it is very difficult for him to unload shares without moving the market price. While this is not a reason to hold stock in a company that turns out to be morally reprehensible, these potential costs have to be considered by any manager who has to answer to his or her shareholders. ”

That is precisely the point. Buffett is a moneymaker first and foremost. Moody’s and WFC were not merely dabbling in questionable things on the side. Their central businesses were ethically dubious. If business ethics were so central to Buffett, that should have been a problem.

If Buffett wants to lead the discussion of business ethics (and he has sought out this role for many years) he should lead by example.

Google’s Sergey Brin pulled out of China because he could not abide by China’s abuses and requests for Google to be complicit. Frankly I think most Google shareholders are proud.

Posted by DanHess | Report as abusive

@DanHess, yes of course Buffett is a capitalist and making money is his objective. I would also say that he’s done so with higher ethical standards than nearly any of his contemporaries. Is he perfect? No, he is not. Are there some things I would prefer Berkshire stay out of? Yes, in fact I wish that the company’s stake in Moody’s had been liquidated more rapidly. Has Buffett made mistakes? Yes, with Conoco Philips the latest example.

Sensationalist headlines are Mr. Winkler’s goal, not insightful analysis or discussion. This is why he makes it seem as if Buffett wants special treatment for the collateral requirement issue when in fact Buffett simply is against abrogation of existing contracts in general. I’m not sure if Mr. Winkler understands the issue and chooses to distort or has no understanding of the issue. In either case, his credibility is pretty much shot.

Posted by rnagarajan | Report as abusive

@rnagarajan –

How well do you fully understand the issue? I am no expert myself but the issue is not a matter of simply abrogating existing contracts.

Suppose, for instance that a party which has written credit default swaps on a bunch of debt has no ability to make good in the event that the default actually occurs. Sound familiar? The government comes in and requires that you reserve for the event that the default occurs, just like insurance.

If you don’t have reserves to actually pay in the event of default, well then your “insurance” product was insurance fraud. Contracts built on fraud aren’t worth the paper they are printed on anyway.

How dare anybody abrogate my fraudulent contract! (I’m not talking about Buffett’s contracts, but a great many *existing* contracts.)

That is not to put Buffett in a league with AIG; he does have the ability to pay and he won’t have to cancel anything.

Should a reserve requirement be retroactive? Certainly. Existing credit default insurance contracts not backed by an ability to pay are fraudulent and need to be made not fraudulent by proper reserving or else canceled.

Posted by DanHess | Report as abusive

@DanHess – I posted in detail on my views regarding the issue so I won’t repeat it here (links were in my original comment). The bottom line here is that Mr. Winkler did not seek to bring up some of the points you have brought up; he was too busy talking about “Buffett’s Betrayal” and the “Berkshire Provision” in a feeble attempt to distort the issue into one where Buffett went out to seek preferential treatment in an unethical or unseemly manner.

The Constitution is pretty clear on the sanctity of contracts in the law – start messing with that and you undermine the basis for economic activity in ways that policymakers will come to regret. Buffett’s action was intended to influence the debate in terms of the general provisions under discussion, not to seek special treatment for Berkshire as Mr. Winkler claims.

Posted by rnagarajan | Report as abusive

We learn from Buffett’s testimony today that Moody’s is as pure as the freshly fallen snow.

Absolutely disgraceful. Moody’s slapped a triple-A on anything that moved for several years running. But this was not a once-off event. The gross incompetence of Moody’s continues as it bestows AAA on every issue of sovereign debt that has past the point of no return.

These days, Buffett is about as believable as Baghdad Bob. It is getting embarrassing to watch!
http://politicalhumor.about.com/library/ jokes/bljoke-iraqinfominister.htm

Pay attention to what Warren does and not what he says. He has been selling Moody’s even as he sang their praise today.

Posted by DanHess | Report as abusive

“Buffett’s PR Disaster” (Felix)
http://blogs.reuters.com/felix-salmon/20 10/06/03/buffetts-pr-disaster/

Posted by DanHess | Report as abusive

“We learn from Buffett’s testimony today that Moody’s is as pure as the freshly fallen snow.”

Ummm… Buffett did not say anything of the sort.

Look, I actually *disagree* with Buffett on the rating agency issue (I wrote about it today: http://www.rationalwalk.com/?p=7328) but there is a difference between an honest difference of opinion and sensationalizing what he actually said.

Posted by rnagarajan | Report as abusive

Buffet knew perfectly well that the reason Moody’s was getting so much business was because it was way too generous with the aaa ratings.
He should have understood that those ratings were inflated, and the company might get damaged as the result.
In this sense, investing in Moody’s was akin to investing in Madoff.
If one has a feeling that the company’s business or earnings may be based on fraud, he or she should not invest as we all have learned from Enron and so on.
In this sense, Buffet was wrong when he did not get out of Moody’s investment sooner – and he gets yelled at for that now.

Posted by ForeverSPb | Report as abusive