a new perspective on Warren Buffett

Up until recently I had an image of Warren Buffett that I think is the mainstream one: simple man from Omaha who is single-minded about his investments such that he is very successful.

However, that image has changed for me. Rolfe Winkler from Reuters has compiled some amazing information about the fact that Buffett would have been wiped out if not for the Federal Reserve’s TARP program.

A good chunk of [Warren Buffet’s] 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.

What’s crazy is that so many people have been turning to Buffett for guidance on the most recent financial collapse and while he makes the rounds of Charlie Rose and whatnot he’s doing his best to profit from the US Government’s bailout of the companies that he’s invested in.

Then there’s the fact that many of the companies he invested in were significantly to blame for the global financial collapse.

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.

I was too naive in my impression of Buffett.  That ends today.

4 Comments on “a new perspective on Warren Buffett

  1. Will do. There are a few others who were ‘crying wolf’ early with respect to the housing bubble, most famously Robert Schiller (of the famous Case-Schiller Index.)

  2. Not wiped out. $26B is a little under 10% of the total assets held by Berkshire Hathaway. Of that figure, $8B were post-crisis buys into Goldman Sachs and GE.
    It’s also a fine point, but a lot of the “troubled” banks were and are presumed to be long-term stable. Their trouble amounted to running into short-term FDIC-mandated deposit minimums and such for reasons a little too boring to go into here.
    Suffice it to say that had the bailout not happened, some of these banks might have been declared insolvent, liquidated in some way or another, and end up never having been worthless in the first place (it’s akin to a cash flow failure in a on-the-books-solvent business, if you allow that a bank’s liquid deposits are in some way like cash on hand in a regular business).
    It’s wacky stuff, but had the bailout not happened, Buffett would have lost some money, but nowhere near $26B. And he pretty much put money into Goldman and GE after the bailout was sure to happen.

  3. Seems like somewhere along the line, Buffet forgot (or chose to ignore) his own tried-and-true investing philosophy of only buying shares in businesses he completely understood. He famously stayed out of tech and Internet companies for a long, long time because he felt they were too complex for him to grasp.
    I doubt Buffet really understood all the derivative- and CDO-related shenanigans going on at the banks he invested in, since the bank executives themselves didn’t seem to have a firm grasp of the risk they were taking on.