Warren Buffett, widely regarded as an investment genius, is little noted for his polished PR skills, yet he's a Teflon investment guru that attracts little whiff of scandal. He's widely thought of as a man of sterling ethics, and yet he dove into Wall Street twice -- first with Salomon Brothers and now with Goldman Sachs (GS) -- and he's managed to escape ever richer and with his reputation intact.
When he called derivatives "financial weapons of mass destruction" in Berkshire Hathaway's 2003 annual report, nobody cared that he not only traded them but lost money for Berkshire (BRK.A) in so doing. In the first quarter of 2008, Berkshire lost $1.7 billion thanks to his trading in WMDs. Some would call this hypocritical, or just plain dumb.
And Buffett has emerged unscathed from his 19.6% stake in Moody's (MCO), which bears a significant share of the responsibility for the AAA ratings of sub-prime mortgage backed securities (MBS) whose collapse contributed so heavily to the financial crisis.
Buying Salomon Brothers, Deriding Casino-Type Markets
In 1987, Buffett bought 12% of Salomon Brothers, a storied bond trading house, to block it from a hostile takeover. But then Salomon got itself in a heap of trouble: In August 1991 it nearly collapsed after a scandal related to rigging the trading for U.S. Treasury bonds.
Buffett's annual reports in the mid-1980s decried the waste of leveraged buyouts, junk bonds, and "casino-type markets" -- all of which were at the core of Salomon's business, according to Michael Lewis writing in The New Republic. (Those annual reports are another sign of Buffett's PR genius. Since 1977 Berkshire Hathaway's annual reports have been edited by Carol Loomis of Fortune, who in addition to being a highly respected journalist, has managed to strengthen that respect by helping a subject of her reporting produce his most important written document.)
But all that verbal railing against Wall Street casinos didn't stop Buffett from buying a 12% stake in Salomon for $700 million when it was willing to pay him a 9% interest rate. Nor did it stop him from defending the integrity of John Gutfreund, then Salomon CEO, in the 1987 Berkshire annual report. Why has Buffett escaped the kind of journalistic probing that might naturally follow the hypocrisy of publicly complaining about Wall Street being wasteful and then buying 12% of one of its chief sources of such waste?
Cultivating Reporters, Working the Media
In addition to having Fortune's blessing (as evidenced in part by Loomis's editing his annual report), Buffett spent time conducting off-the-record interviews with reporters. Lewis reported that this led to a media kerfuffle after Nov. 8, 1991, when The Wall Street Journal had the audacity to burst the St. Warren myth by printing some of that off-the-record commentary, noting that he "keeps a mistress, hobnobs with celebrities, and enjoys his luxuries (fancy threads, limos, suites in the Plaza) as much as any billionaire."
After a fascinating series of climactic media events, the Journal ended up retracting this bit from its story, after it wasn't able to admit that it may have gotten these anecdotes from then-PR hero, James Burke, who famously handled the 1982 Tylenol poisoning scandal so well, rather than confirming them directly with Buffett.
Buffett's skill at working with the media may have also helped him to retract his earlier public support for Gutfreund, after it came to light that Gutfreund hid for four months an investigation into Salomon's violation of U.S. Treasury bidding rules. Buffett installed Deryck Maughan, a former British Treasury official, as CEO, and they buffed up Salomon before selling it to Travelers Group at a profit.
The Sage of Omaha was seen as the White Knight rather than an inattentive shareholder who should have, but didn't, know or care what kind of shenanigans were going on at Salomon. Perhaps it was his ability to bend the media to his will that let him enjoy both a reputation as the world's shrewdest investor (who I think must have known how Salomon made money) and that of an ethical Midwesterner who was duped by Salomon's gang of banksters.
$5 Billion Vote of Confidence in Goldman Sachs
Most recently, Buffett waded back into investing in a Wall Street firm a mere 17 years after escaping from his Salomon Brothers debacle. According to The Wall Street Journal, his September 2008 investment in $5 billion of Goldman Sachs preferred stock generates $500 million in cash a year.
But when Goldman CEO Lloyd Blankfein asked Buffett for advice dealing with the Securities and Exchange Commission, the Journal reports that he told Blankfein that "he would let him know if he came up with any good ideas." Despite losing $21 billion in market value since the SEC filed suit against Goldman, Buffett still "supports Blankfein 100%," according to Bloomberg News.
If enough evidence is uncovered against Goldman, don't be surprised if Blankfein goes the way of Gutfreund. As I wrote on April 17, it wouldn't shock me if such evidence emerged from the investigation of allegations that a Goldman director, Rajat Gupta, who formerly ran McKinsey & Co., tipped off hedge fund Galleon Holdings to Buffett's investment in Goldman.
Some would say that Buffett shouldn't have been surprised with Goldman's (and Salomon's) conduct and that he really didn't care, because he was convinced that those preferred shares were the deals of a lifetime. And as long as Goldman keeps paying the $500 million each year and its stock doesn't fall too much, it's not Buffett's problem. (Although the $1.7 billion drop in the value of the Goldman warrants Buffett received at $115 a share -- now worth a mere $1.3 billion after the SEC charged Goldman with fraud -- has got to hurt a little.)
PR Master Stroke: Great Media Coverage
Finally, one of Buffett's greatest PR master strokes is that he gets the media to fight so hard to give him great coverage.
With few exceptions, the media has been silent on Buffett's involvement with Moody's. For example, a May 2 New York Times editorial excoriating ratings agencies for the financial crisis pointed out that 91% of AAA-rated sub-prime mortgage-backed securities issued in 2007 are now junk-rated -- as are 93% of 2006-vintage securities. But the Times makes no mention of Buffett's investment in Moody's. Yet a relatively minor pundit, Edward Jay Epstein, pointed out in January 2008 Buffett's involvement with this catastrophe.
Interestingly, Buffett may just be using the same techniques with the media that investment banks used to get AAA ratings on mortgage-backed securities from Moody's and its peers. Just as the banks got ratings agencies to compete for fees to see who would be willing to give the highest ratings to a batch of dodgy securities, so Buffett gets the media to compete to put their AAA rating on him.
For the latest proof point of this, it's not hard to imagine how hard those in the business media fought to be one of the three journalists, along with The New York Times's Andrew Ross Sorkin, to have the privilege of asking Buffett fawning questions at this weekend's Buffettpalooza 2010.
Many books have been written about how Buffett makes investment decisions. Since he's known as the second-richest person in America, it wouldn't be a shock if many poorer ones felt some envy of his success. Yet Buffett seems to have a populist appeal that no other member of the rich list can come close to. And that appeal probably makes him feel safer as he roams around the world.
Why is Buffett so appealing? He's from Nebraska, which is culturally as far from the unpopular coastal urban centers as you can get. He claims to still live in the same house he purchased in 1958 for $31,000 (yet he owns a corporate jet which he dubbed Indefensible). He holds many populist political views -- such as opposing the abolition of estate taxes.
Just A Regular Guy From Nebraska
And perhaps the most important thing of all is that he comes off as a regular guy who just happens to have lucked out in the skill lottery -- allowing him to pick investments that make him many multiples richer than any of the New York sharpies whom he rescues once every few years.
And that's why Buffett's PR genius is so important to his investment success. It's hard to imagine a more powerful signal to investors of its long-term viability in the darkest days of the financial crisis than Buffett's willingness to sink $5 billion into Goldman Sachs. Without Buffett's buff reputation, he wouldn't have been able to negotiate that 10% interest payment and the $115 a share warrant either.
Perhaps Buffett gives hope to all the regular people who think that someday they can achieve a nice fraction of what he has. Or if not, they can buy shares of his company. And it looks like, no matter what he does, he will keep smelling like a rose.
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