Is Warren Buffett Wearing Thin?
Mar 5th 2012 6:30PM
Updated Mar 6th 2012 3:32PM
You've likely noticed that many investors recently celebrated something of a holy week.
Two Saturdays ago, as my Foolish colleague Morgan Housel has told you, Warren Buffett released his eagerly awaited annual letter to Berkshire Hathaway (NYS: BRK.B) shareholders. As usual, this year's version was clearly written, folksy, informative, and worth the time necessary for a thorough reading. Or, if you'd prefer a condensed version, worth taking the few minutes necessary to read Morgan's distillation of what he believes are the 25 must-read quotes from the Oracle of Omaha's latest epistle.
Either way, you'll find little to disagree with in Buffett's comments. After all, their author is clearly one of the most astute and celebrated investors of our time, the envy of all those who exchange their shekels for investment instruments in the hope of recouping even more shekels later.
A spending cut, perhaps?
But given his oft-uttered opinion that the wealthy in the U.S. should pay their "fair share" at tax time, the application of his name to a feature in the president's newly proposed budget, and his repeated contention that his secretary pays a higher effective tax rate than he does, the octogenarian has been meeting with pushback from more and more quarters of late. Beyond that, if you look back just a few years you'll discover that he appears to have gained significant financial benefits from his Washington political ties -- benefits that wouldn't be available to you or me.
Last week New Jersey's outspoken Governor Chris Christie struck at Buffett and the so-called "Buffett Rule" on a CNN interview. The rule is intended to ensure that those with incomes above $1 million a year pay equal or higher tax rates as those in middle-class households. "He should just write a check and shut up," said the governor. Instead of clamming up, however, the Oracle retorted on a subsequent CNBC appearance that "It's sort of a touching response to a $1.2 trillion deficit, isn't it? That somehow the American people will just all send in check and take care of it?"
But the governor clearly isn't the only one who's tiring of Buffett's pronouncements on financial patriotism among the ultra-wealthy. After noting on Fox News Biz Block that the Buffett Rule would be better labeled the "Buffoon Rule," Steve Forbes, the editor-in-chief and publisher of the magazine that bears his name, continued with "There's a difference between capital gains and ordinary income, and if Mr. Buffett can't recognize it, he ought to go back to business minus 101." That assessment was followed by an expression of dissatisfaction with Buffett by Fox Business Network's Elizabeth MacDonald, who opined that, "I'm tired of Buffett's unbearable rightness of being."
In fairness, these comments admittedly represent just one side of the sentiments on the Buffett Rule. As think-tank observer Allen McDuffee of The Washington Post wrote last week, "[The Center for American Progress's Seth] Hanlon argues that implementing the Buffett Rule would help address the long-term budget challenges the United States faces -- by asking the wealthy to contribute rather than by simply relying on budget cuts."
Read it and weep
Then there's Throw Them All Out, a recently-published tome by Peter Schweizer that exposes the plethora of financial shenanigans that are commonplace in Washington, D.C. An entire chapter of the book is devoted to the degree and manner in which Berkshire Hathaway has benefited during the past several years from Buffett's political ties and activism.
Schweizer effectively begins tracking Buffett's role in and gain from the government's 2008 financial bailout package by describing Berkshire Hathaway's $5 billion September investment in Goldman Sachs (NYS: GS) , the then-cash-strapped and overleveraged investment bank. In exchange for its funding, Berkshire received 10% preferred stock, along with an option to exchange another $5 billion for additional Goldman shares at an attractive $115 each. (The shares traded between $123.43 and $159.41 during that month.)
The oracular lobbyist
With that transaction completed, Buffett hardly sat on the sidelines waiting for events to unfold on their own. He now needed the bailout. "[B]eyond Goldman Sachs," as Schweizer tells it, "Buffett was heavily invested in several other banks that were at risk and in need of federal cash. He began immediately to campaign for the $700 billion TARP rescue plan that was being hammered together in Washington." His campaign included -- but hardly was limited to -- "a conference call with House Speaker Nancy Pelosi and House Democrats during which he pushed them to pass the (TARP) bill."
As we all know, the bill did pass after one failed effort, and it proved to be a tremendous benefit to Warren Buffett. According to Schweizer:
Buffett needed the TARP bailout more than most. In all, Berkshire Hathaway firms received $95 billion in bailout cash...Berkshire held stock in Wells Fargo (NYS: WFC) , Bank of America (NYS: BAC) , American Express (NYS: AXP) , and Goldman Sachs, which received not only TARP money but also $130 billion in FDIC backing for their debt.
But Buffett's job, as he saw it, apparently wasn't completed with the passage of what was labeled the Emergency Economic Stabilization Act. He soon crafted a letter to then Treasury Secretary Henry Paulson suggesting the formation of a quasi-private, U.S. government-backed fund that would relieve financial institutions of their toxic loans. As he proposed it, for every $1 of private money used to establish the fund, the government would contribute $4. Paulson's reaction, according to his memoir was that he "knew, of course that as an investor in financial institutions, including Wells Fargo and Goldman Sachs, Warren had a vested interest in the idea."
Time used profitably
With the changing of administrations from Bush to Obama, it was March 2009 before the Public-Private Investment Program -- which had been altered somewhat by Treasury -- was announced by Paulson's replacement, Timothy Geithner. However, in the period between the birth of the proposal and Geithner's announcement of the program's formation, Berkshire Hathaway apparently had substantially increased its holding in the banking sector, including buying 12.4 million additional Wells Fargo shares. Not surprisingly, those shares appreciated approximately 50% between early 2009 and the weeks following Geithner's announcement.
I could go on discussing, for instance, the members of Congress who were actively buying Berkshire stock as they were deciding the nation's economic fate. I'll conclude, however, with a meaningful -- if rhetorical -- query by Schweizer: "The term 'social compact' sounds benign. But when did American voters make a compact to turn one of the richest men in America into one of the biggest recipients of taxpayer subsidies?"
At the time this article was published Fool contributor David Lee Smith doesn't have financial interests in any of the companies named in this article. The Motley Fool has a disclosure policy.The Motley Fool owns shares of Berkshire Hathaway, Bank of America, and Wells Fargo. The Fool has created a covered strangle position in Wells Fargo, and Motley Fool newsletter services have recommended creating a write covered strangle position in American Express and buying shares of Berkshire Hathaway and The Goldman Sachs Group. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
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