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?
Thanks for the article. I have been saying that since september last year when Buffett was making calls to Congress to bail out banks. It is quite pathetic to see Buffett stoop to this level. He looks just like any other operator playing the system, with billions, nothing more.
Rolfe, you are correct in pointing out that many of Buffett’s investments have received bailouts, but I think you do not give enough credit to him for the things he has advocated that are beneficial to the public. His early call on regulating derivatives, staying away from leverage in investments, championing against the abolition of the estate tax, let along the valuable and safe tenants he has applied to make money, all fall on the other side of the scale. The bailouts his investments have received were not his fought or doing. The fact none of his investments went bankrupt inspite of a government bailout (such as AIG or Bear Stearns) is testament to his investing acumen. Your blame is akin to saying Tiger Woods has lost his golf ability because he might have shot 5 over par on a cold, rainy, windy day, which is outside anyone’s control. What you fail to mention is that everyone else shot at least 15 over par given the same climate.
TRAITOR!!! Benedict Buffett
Well said.
Howard, thanks for your comment. It gives me an opportunity to expand my argument.
I do give him credit for advocacy. That’s my problem. This just goes to show that even the most pious among us will sacrifice their principles when their own money is at stake.
Yeah, Buffett TALKS a lot about derivatives, about leverage, but what does he DO? He trades derivatives and, if I recall correctly, has said he doesn’t want to see more substantial margin requirements.
And on leverage, Wells Fargo is one of the most highly levered banks there is. If he’s against leverage, he wouldn’t have spoken against stress tests that were designed to reduce it. He offered some smug line about knowing Wells business better than some bank examiner, but that’s patently false. Has he seen Wells’ term sheets circa 2005? Is he familiar with the kind of toxic loans they were underwriting even before they bought option ARM king Wachovia? I doubt it.
And the reason none of his investments went the way of Lehman and Bear has nothing to do with superior fundamentals. Wells, GE, Goldman, Bank of America were all goners if it weren’t for bailouts. People conveniently forget this, now that government rescue facilities have provided the support necessary to boost stocks. But credit markets were closed to them.
And I didn’t even mention the accounting shenanigans these guys are playing. Buffett SAYS a lot about accounting integrity, but his businesses are engaged in some very shady number fudgery.
And what about the General Re case? Everyone forgets that now too.
People give Buffett a free pass because they think, deep down, he really cares about their interests. I think he does too. Just not when they conflict with his own.
It’s one thing to be a hard-nosed, self-interested capitalist which Buffett certainly is. It’s quite another to use a carefully cultivated reputation for moral rectitude to feather your own nest.
Though Buffett has done many positive things, it’s about time someone exposed the unquestioning worship of St. Warren for what it is. Well done.
What, exactly, is the meaning of “collateralization” of asset values, in terms of creating tradeable liquidity?
Actually Buffet investing in companies such as GE and Goldman was a vote of confidence for the financial sector if you remember. Buffet probably just negotiated much better financial terms than the US taxpayers got. Who’s fault is that? But yes I’m sure he benefited from the Federal money. And the Federal officials are not protecting the taxpayers sufficiently. They sure be hard-line but everything is all for the banks and the government continues to just give away taxpayer money and not even negotiating in favor of the taxpayers. The banks get all the benefits. Its scandalous in the worst sense.
Besides Goldman and GE Buffet already held positions in most of those companies. Actually Buffet helped Goldman and I almost wish he hadn’t. They don’t deserve it. Actually none of the banks deserve anything they got the Feds just thought it was necessary and after the Fed missed all the warning signals or didn’t care. Did any of them care as long as the ball was rolling? And taxpayers don’t deserve that they have to pay for it. That’s why it still burns me when the execs get millions in pay and bonuses.
Powerful stuff Rolfe. Powerful.
I agree with plenty of this article but not all of it. I agree with your overall point that not enough people talk about some of the toxic loans that Wells Fargo made, or that Goldman got a sweet deal from the bailouts and that Buffett just piggybacked on that. However, two of his huge financial holdings came about after the carnage. His Goldman and G.E. holdings came as a result of his having cash on hand at a good time. Everyone knew they’d get bailed out, Buffett happened to have kept his powder dry and then invested in a high probability event. The back-scratching between i-banks and the Fed churns my stomach as well. Buffett’s right-hand guy Charlie Munger aptly calls it a “daisy-chain of reciprocity.” However, I don’t fault Buffett for investing where he did. On the derivative issue, it does appear, on the surface very silly on Buffett’s part. These derivatives though were so custom-tailored though that they don’t even resemble the type Buffett has railed against in the past. I’d liken them more to an insurance play than an options play. He received a massive premium up front(”float”), and as I understand they are european style exercise not American. They also have a renegotiation feature that resets(at Buffett’s discretion) the exercise price at more favorable terms in exchange for a shorter maturity. Seen in its totality, it was one of the most shrewd, well thought out deals ever crafted. I have no dog in this fight. I myself was pretty shocked at the derivative position, and I’m still surprised at his push for the stimulus bill. I’m more with Jim Rogers who says just let the failures fail. Rogers is the only one i’ve heard even make the connection between this time around and the LTCM disaster a while back. Your man on the street-including Wall Street for that matter-probably doesn’t know the full extent of the rot in AIG. The AIG hubris and the mathematics of a small group there are kind of similar to the LTCM deal. Overall, I don’t side with those who think Buffett is a saint among all humanity, but by Wall Street standards I think he and Munger are in the upper echelons ethics-wise.
While I admire Buffett for the wisdom he has imparted an innumerable number of us throughout the years, I have to agree with Rolfe that Buffett certainly has his hands on more than a few taxpayer dollars. But is that Buffett’s fault, or our governments?
bingo! maybe munger is the man behind the curtain
If Buffett’s a greedy parasite, then all the rich and powerful are greedy parasites. Please bring on the regulators, but make sure there’s somebody or thing there to watch over the regulators. And while we’re at it, let’s “socialize” health care system. The reason the founding fathers created checks and balances in government was because they were smart enough to know that everyone is quite capable of acting selfishly and against the good of society (and quite likely to do so). We seem to have forgotten that and have become a nation of the rich and the dumb Joe-the-plumbers who worship the rich, with the middle class stuck in the well - middle, only knowing what they see on TV.
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