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Warren Buffett: Financial Statesman or Just Another Hack?

Posted by Larry Doyle on May 3, 2010 8:54 AM |

Warren Buffett

The Oracle of Omaha Warren Buffett is widely regarded as a true financial statesman. From his understated lifestyle to his self-deprecating manner to his simple wisdom in his books, Buffett has always appeared to be a world apart from most, if not all, other financial titans. While Buffett deserves plenty of the respect accorded him, let’s not totally sanctify him just yet. Why?

Buffett’s widely publicized opinions on the regulations of financial derivatives and the treatment of Goldman Sachs also show him to be just another financial hack (albeit it a VERY BIG one) “talking his positions.” Let’s navigate.

In regard to derivatives, let’s not forget that none other than Buffett defined these financial instruments as ‘weapons of mass destruction.’ As the BBC reported back in 2003, Buffett Warns on ‘Investment Time Bomb’:

The world’s second-richest man made the comments in his famous and plain-spoken “annual letter to shareholders”, excerpts of which have been published by Fortune magazine.

The derivatives market has exploded in recent years, with investment banks selling billions of dollars worth of these investments to clients as a way to off-load or manage market risk.

But Mr Buffett argues that such highly complex financial instruments are time bombs and “financial weapons of mass destruction” that could harm not only their buyers and sellers, but the whole economic system.

Additionally, the BBC offered these pearls of wisdom from Mr. Buffett in 2003:

“Derivatives generate reported earnings that are often wildly overstated and based on estimates whose inaccuracy may not be exposed for many years.”

“Large amounts of risk have become concentrated in the hands of relatively few derivatives dealers … which can trigger serious systemic problems.”

Well, now as the rubber meets the road in terms of regulating these “WMD,” let’s shift to the other side of the Oracle’s mouthpiece.  Over the last week, Buffett has been “talking his po” (that is, “talking his position”) as he has amassed significant derivatives positions and exposures over the last few years. Increased regulation within this sector would clearly impact Berkshire’s bottom line, any and all reports to the contrary. To this end, we witness Warren and team aggressively going after Congress. Oh, how statesmanlike.

The Financial Times reports this morning, Buffett Warns on Derivatives Legislation:

Warren Buffett has stepped up his warnings over the impact of any move by the US Congress to bring in retroactive rules on the use of derivatives contracts.

Congress is debating legislation on derivatives as part of efforts to reform the financial system and the products that helped bring it to the brink of collapse. Berkshire has lobbied heavily against the most sweeping proposals which would force companies to hold collateral against all outstanding derivatives contracts.

Oh, I get it. Now that Warren and team have utilized these financial WMD as a means of implementing leverage within Berkshire Hathaway, his role as responsible social financial statesman moves to the back burner.

Additionally the FT reports:

In comments to reporters on Sunday, Charlie Munger, Mr Buffet’s long time business partner, said that the regulators, not the bankers, were to blame for the financial crisis for because they did not control the banks properly.

So we are not supposed to call out the dealers because the cops were asleep, on the take, or some variation of both. Against this backdrop, Warren again ‘talks his po” in providing blanket coverage for his friends at Goldman Sachs. Buffett provided this support over the weekend at his annual meeting of Berkshire shareholders in Omaha. The Wall Street Journal sheds insights on Buffett’s loyalty to Goldman in writing, Mr. Buffett Goes to Bat for Goldman, Moody’s:

At Berkshire Hathaway Inc.’s annual meeting here this weekend, the legendary investor mounted a vigorous defense of Goldman Sachs Group Inc., sued for civil fraud by regulators and under assault by Congress for its business dealings.

As Buffett supported Goldman (and his large financial stake in the company in the process), his henchman Mr. Munger tried to redirect America’s venom toward Wall Street onto Lehman’s CEO, Dick Fuld. I do not dispute that Fuld deserves a healthy dose of criticism, if not worse, for his management of Lehman. But let’s be honest. Warren Buffett had an opportunity to stand up for America this weekend and he struck out. Many might say that Buffett’s responsibility is primarily and solely to his shareholders. I would respond that Berkshire’s interests and those of America go far beyond Berkshire’s immediate financial stakes.

Buffett had the bully pulpit. He could have totally exposed the Wall Street-Washington incest.

He whiffed.

LD

  • David Thetford

    Yer a riot, Alice! Good article. I’ve been watching Buffet for years, with deep respect, and I’ve never seen him be anything but a class act. I think he didn’t do justice here.

  • Pat J

    There is a huge laundry list of people to blame and the regulators should be on top of the list.

    • LD

      Fair point but if America allows regulators in general to be blamed while not pointing out specific individuals and actions, then confidence will not return, the incest will have won, and America will have lost.

      Buffett had the chance to truly stand up for America. He sat down.

  • JPC

    I’m shocked. The next thing you’ll tell us is that Bill Gross only talks his position too.

    • LD

      Everybody knows Bill Gross has always primarily talked his position in the midst of providing financial insights.

      Buffett has always been much more held out as a true financial statesman. ….until NOW.

  • Vin

    I have had mixed feelings about Warren Buffet for years after reading some earlier books about some of his personal and professional choices years ago. That aside, on the record, he makes $500mm a year from his GS investment, not counting the convert side. Personally, I expected better from him. For the richest, or second richest guy in the world, maybe he could have spoken out for all the small firms that get ripped off in these derivative transactions. Can you partly blame these firms when they walk into the lions den? Yes, certainly. But some of them do act as fiduciary for pension funds and smaller investors as well. Thats why they are mandated to not buy anything less than AAA paper. Its just sad all around. Deceptive for sure. And now you have Warren talking his own book and to hell with everyone else. I can only size it up by one word: hypocrite.






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