johnnymk

http://seekingalpha.com/article/1540...l?source=email

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 (BRK.A), 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.



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 (WFC) 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.

Thesifer

"For his own gain" except that he gave his entire fortune away (minus a relatively small amount) To charity, last I heard.

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Showtime

I don't care if he is curing cancer with his money. He shouldn't be able to mulnipulate where government funds are going. He should suffer like those retirees who lost big on enron and people loosing their homes. He of all people could afford it.

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MrGreg

Unless we're also getting rid of all lobbyists...

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zippyjuan

He was far from being the only person urging bailouts. He just happened to be one of the larger share holders. He is also one of the largest share holders in numerous other companies which have lost money and not been bailed out.

The Top Ten (OK- make that Top Twelve) holdings by Berkshire Hathaway based on dollar value:
Cocoa Cola
Wells Fargo
Burlington Northern Santa Fe
Proctor and Gamble
American Express
Craft Foods
Conoco Phillips
Johnson and Johnson
Wesco Financial Corp
US Bank Corp
Moody's Corporation
WalMart
http://www.cnbc.com/id/22130601/

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Thesifer

Also, All he can do is "urge" the government to give the companies he has interest in - bailouts. I don't see how that's any different then the CEO of a major bank saying they need a bailout. If he were a government official, or actually set policy, or anything related to that, I might see a problem.

MrGreg

Yeah, it's not like he had strong ties to a corporation *cough* Halliburton *cough*, started a sham war, and then allowed profiteering and no-bid contracts.

VTGreg

You do realize that he is an advisor on Obama's Economic Recovery Advisory Board. He has a lot more sway than any single bank CEO.

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Thesifer

Members:

1. William H. Donaldson, former Chairman, SEC
2. Roger W. Ferguson, Jr., President & CEO, TIAA-CREF
3. Robert Wolf, Chairman & CEO, UBS Group Americas
4. David F. Swensen, CIO, Yale University
5. Mark T. Gallogly, Founder & Managing Partner, Centerbridge Partners L.P.
6. Penny Pritzker, Chairman & Founder, Pritzker Realty Group
7. John Doerr, Partner, Kleiner, Perkins, Caufield & Byers
8. Jim Owens, Chairman and CEO, Caterpillar Inc.
9. Monica C. Lozano, Publisher & Chief Executive Officer, La Opinion
10. Charles E. Phillips, Jr., President, Oracle Corporation
11. Anna Burger, Secretary-Treasurer, SEIU
12. Richard L. Trumka, Secretary-Treasurer, AFL-CIO
13. Laura D'Andrea Tyson, Dean, Haas School of Business at the University of California at Berkeley
14. Martin Feldstein, George F. Baker Professor of Economics, Harvard University
15. Jeffrey R. Immelt, CEO, GE


Maybe you meant.. he WAS an advisor? As in.. During the transition?

http://uspolitics.about.com/od/presi...c_advisors.htm

Which includes the CEO of JP Morgan, and many others who had a lot to lose. Well actually just about everyone dealing with financial markets or with large stock portfolios had a lot to lose, so that's humm.. All of them.

ray

Buffett served as an economic advisor to Schwarzenegger and to Obama during their campaigns for office, but I don't think he remained on once they were elected.

Daedalus

I remember that. First the announcement was made that Buffet was an advisor. Soon after, Buffet got a lot of press for saying he thought CA property taxes were too low. Then we never heard a peep from or about him with regard to CA economics.

Not sure if he did any good here as an advisor, as this state ranks in the bottom 2% of all states on an economic/solvency basis.

MrGreg

Um, last I checked there were 50 states, so "bottom 2%" means last, right? So why not just say last?

Daedalus

I can't get anything past you. You're like a modern-day Sherlock Holmes. What's your secret?

You said "last I checked there were 50 states"; have you ever really had to check? Why not just say there are 50 states?

Thesifer

That's because the inmates basically run the asylum in California.

irwin

I'm dying over here, guys. Keep it up.

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Maarchk

Yup prop 13 and some other stuff basically said we'll never raise taxes or do anything to correct our problem.

And with the line drawing, we will always have heavy republicans vs heavy democrats, and we'll never meet in the middle.

If the lines weren't redrawn, over time, people would have to be moderates to get into office because their districts would be more evenly divided between both parties. Than we could actually get some bipartisan something!

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Thesifer

That would be interesting, but California problems run deeper then that. Allowing the public to vote on every little thing in the state if they get enough signatures on a petition (Which is relatively small, and might look up the numbers again later) Isn't the best way to set law.

If you want to see what happens when special interests run amok, it's California. (---- I don't like this law.. *gather petition signatures* 30,000 sheep show up to vote my way.. Law repelled ----)

zippyjuan

That is definately a true point. There are so many "safe" districts that a polititian has not incentive to compromise on anything. If they do, the biggest threat of losing their job comes not from somebody in the other party but someone from their own party who can accuse them of selling out. This is true both nationally and locally.

US politics looks more like the UK these days. There you have the ruling party and the opposition party. The ruling party is expected to come up with everything and the opposition party only has to oppose it- they do not need any ideas of their own. This has been extremely obvious in the debate (if you can call it that) on health care. Throw out some scary information on what may or may not be in it to get people to be against it- not offer constructive alternatives to it.