This is my third post on a topic of my choice for the Prospect‘s writing test (and the favorite of my sister, who graciously helped to copy edit my submissions). I give a Minnesotan take on the Oracle of Omaha in this piece. The first TAP test post had a green angle, the second talked up tax policy.
Warren Buffett is perhaps the only financer in history who is as revered on Main Street as he is on Wall Street. Buffett’s appeal in the Midwest—the part of the country that most closely resembles the mythical Main Street of American political lore—can be explained by his plainspoken criticism of financial excess, his long-standing commitment to philanthropy, and the fact that the Oracle of Omaha actually lives in Nebraska. Even the annual shareholder meetings of his $100 billion conglomerate Berkshire Hathaway are as American as apple pie.
So many were surprised by Buffett’s unabashed support for Goldman Sachs at what has been called “the informal summit of Main Street American capitalism.” No one should be shocked by Buffett’s satisfaction with the $5 billion preferred stock investment he made in Goldman or his support for the bank’s embattled CEO Lloyd Blankfein. Buffett’s statements are part of a broader pattern of advocating for one thing while profiting by contradicting his supposed beliefs.
At the 2010 shareholder meeting last weekend and again yesterday on CNBC, Buffett candidly addressed the charges against Goldman brought by the SEC. Talking with Berkshire’s shareholders about the controversial Abacus deal Goldman set up for Paulson & Co., Buffett dismissed allegations that the German bank on the other end of the wager, which lost millions when the subprime loan portfolio soured, was uninformed. “It’s very strange to say, at the end of the transaction, that if the other guy is smarter than you, that you have been defrauded.” he said. “It seems to me that that’s what they are saying.”
In the past, however, Buffett has been less sanguine about the lack of disclosure in derivatives contracts. As John Gapper pointed out, Buffett called these shady dealings “a sham” in his 2002 letter to Berkshire investors and warned that, “almost invariably, they have favored either the trader who was eyeing a multi-million dollar bonus or the CEO who wanted to report impressive ‘earnings’ (or both).” Now that the vote of confidence Buffett gave Goldman during the nadir of the financial crisis is making Berkshire $500 million a year in dividends, he is loath to see the bank or Blankfein punished for engaging in the profitable practices he once deplored. “‘Tick, tick, tick, tick,’ that’s $15 every second,” Buffett bragged.
On the issue of derivatives regulation, Buffett’s past words are also at odds with his recent actions. In the same 2002 letter, Buffett famously described derivatives as “financial weapons of mass destruction.” Why then is Buffett now opposing their strict regulation? With the help of his Senator Ben Nelson, debate of the financial reform bill was held up three days last week because Buffett wanted a provision inserted into the legislation to exempt Berkshire’s existing contracts from collateral requirements. The Wall Street Journal notes, Berkshire “often isn’t required to post collateral on derivatives because of its strong financial position.” Nelson’s provision would grandfather in the friendly terms Buffett has secured for Berkshire’s estimated $63 billion derivatives portfolio.
But not all companies with existing derivatives contracts have such a strong balance sheet. Remember, selling CDS insurance without setting capital aside for if the policies paid out was exactly what allowed a small unit of AIG to take down what was in 2008 the world’s 18th largest company. In January, CFTC chairman Gary Gensler estimated that there was $300 trillion of over-the-counter derivatives already in existence. With financial weapons of mass destruction now worth nearly 20 times the American economy, grandfathering in the current contracts would leave a lot of unregulated nuclear material floating around.
Even on non-financial issues, where Buffett is less likely to take a public position, his business investments seem at odds with his highly praised philanthropic work. The Gates Foundation, the primary beneficiaries of Buffett’s largess, has program areas devoted to both global health and development. Yet Buffett’s recent purchase of the Burlington Northern railroad company undermines both objectives. While Buffett described the $44 million acquisition as a “bet on the US economy,” that wager is contingent on coal: Transporting trainloads of the dirty fuel accounts for about a quarter of Burlington’s revenues. Coal mining and burning is linked to a host of health problems and the climate change its combustion helps to exacerbate will disrupt development across the globe. A couple years earlier, Omaha’s Oracle also pleaded ignorance when faced with calls to divest from PetroChina, which activists accused of indirectly funding the genocide in Darfur. Buffett claimed PetroChina was merely a domestic company, but other institutional investors found strong links between its management and that of a Sudanese-Chinese joint venture.
What common thread unites this apparent disconnect between Buffett’s rhetoric and action? Hypocrisy, according to Lauren LaCapra. It’s not that simple, though. Every seemingly contradictory action Buffett takes is motivated by the belief that it will make Berkshire shareholders money, one of the largest of which is—by his own design—the Gates Foundation. Although some of Buffett’s profitable investments may make the foundation’s project goals more difficult to attain, he is doing his best to ensure Bill and Melinda Gates have plenty of money to fund their initiatives.
Does that excuse Buffett’s uncritical support for Goldman and Blankfein, his derivatives loophole, or his lax stance on climate change and genocide? Of course not. But it does go some way toward explaining how the world’s fattest fat cat banker can remain popular in the heart of heartland America. The rest of the goodwill is probably because he also happens to live there.
Photo credit: Aaron Friedman (via Flickr)