Why Would Warren Buffett Stoop So Low?

Shortly after Warren Buffett invested billions in Goldman Sachs (NYSE: GS  ) , he appeared on CNBC in support of the monstrous bailout package winding its way through Congress. Considering how astute and revered an investor as Buffett is, such actions raise tremendous moral and ethical red flags.

Buffett's timing is important. He made the investment first, and then he talked up the bailout. As a significant new investor in Goldman, Buffett now stands to personally benefit from that bailout. Had he advocated the bailout before making the investment, that'd be one thing. By reserving public comment until after he stood to benefit from it, Buffett looks less like an advocate of reason and more like someone out to make a quick buck.

And that's a terrible shame.

Buffett moves markets
When you're an investor in the public eye, your reputation depends a great deal on adhering to an ethical code of conduct regarding your personal transactions. The Fool's disclosure policy, for instance, requires us to not trade a stock for 10 days before or after we write about it, and we're far less influential investors than Buffett is. Even Jim Cramer claims to have restrictions on when he can buy or sell stocks based on when he talks about them on the air.

Why is Buffett exempt from similar restrictions? Why can he make a huge investment one day, and then advocate for a massive government-spending package that will help prop up the company he just invested in the next?

I applaud Buffett on his negotiation skills for getting such a sweetheart deal on his Goldman Sachs stake. I draw the line, however, at his subsequently supporting a governmental order to force me to fork over my own cash to help assure his investment's success.

The market still works!
With all due respect to Buffett, nobody has yet made a compelling case to me that there is, in fact, a crisis that extends much beyond overleveraged banks with bad business practices. There's a simple fact lost among all of this fearmongering and jawboning about how bad things could get if the government doesn't throw $700 billion (or more) at failing financial institutions. The stock and vulture-capital markets are still generally working, in spite of the cries from politicians and failing speculators to the contrary.

Bank of America (NYSE: BAC  ) bought out Countrywide and is in the process of buying out Merrill Lynch (NYSE: MER  ) after both of those companies stumbled. If there's value in a company's assets and operations, a private investor will be happy to pick up the pieces. Even Lehman Brothers is finding suitors, such as Barclays (NYSE: BCS  ) , to pick up the pieces following its bankruptcy. When a deal comes around that's good enough, the money is there to make it happen.

The market also has a really good mechanism to help struggling financial companies get money. It's called "price," and it's still functioning. You can see it in action by looking at the one-year CD rates that various banks are offering to entice people to deposit money with them:

Company

1-Year CD Rate

Corus Bancshares (Nasdaq: CORS  )

4.51%

Nationwide (NYSE: NFS  )

3.97%

Discover Financial Services (NYSE: DFS  )

3.97%

Countrywide (now part of Bank of America)

3.53%

Corus Bancshares, whose heavy bet on the condo markets in big cities left it at risk for this meltdown, has to offer significantly higher CD rates to attract sufficient funding. On the other end, now that Countrywide has been rescued by the financially solid Bank of America, the rates it needs to offer folks to deposit their cash is significantly lower.

A really bad five minutes
The market can show, will show, and repeatedly has shown itself able to recover from stresses. When the people lobbying the hardest for a bailout are those who stand to benefit from it, you have to ask whether their motives are altruistic or self-serving. That even goes for the man who holds the title of "World's Greatest Investor."

Buffett himself has been quoted as saying: "It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you'll do things differently." It's quite a shame that Buffett's own reputation, built over decades of impeccable ethical dealings and investing, could be put on the line over what to him is a rather modest investment.

I hope it was just an accidental oversight on the part of this great investor and not an attempt to secure his own personal profits on the backs of ordinary Americans. It'd be tragic if Buffett's legacy would need to be rewritten as a result of this catastrophe.

More Foolishness:

At the time of publication, Fool contributor Chuck Saletta owned shares of Bank of America and Discover. Bank of America is a Motley Fool Income Investor selection. The Fool's disclosure policy enforces strong ethics.


Read/Post Comments (24) | Recommend This Article (16)

Comments from our Foolish Readers

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  • Report this Comment On September 26, 2008, at 11:57 AM, longdoc wrote:

    Buffett made his investment in GS at fantastic terms because the offer was made to him. GS came crawling to BRK and WEB extracted his pound of flesh from the bank. GS now works for BRK. WEB made his investment independent of the bailout. That he advocates the bailout is independent of the timing of GS buy. He will do well regardless. WEB thinks the bailout will benefit the nation. He has seen this play out before.

  • Report this Comment On September 26, 2008, at 12:04 PM, nicknick99 wrote:

    Actually, Buffet stated in his interview with CNBC that BRK called GS, not the other way around. Unless senility is setting in and he misspoke.

    Well written article about Buffet's ethics.

    One always sees the worst and the best come out in people when times are really bad and this time is no exception.

  • Report this Comment On September 26, 2008, at 12:10 PM, AudioLaw wrote:

    Buffet has been straight with the world for decades. He has said, over and over, that he is an investor, trying to make money with dispassionate choices.

    It isn't about ethics, or duties of disclosure. It is about maximizing profits. He did what he did to maximize his profits. And that's consistent with his history.

    This should be a reminder that "Wall St." is not a public service but a private, money making (or losing) opportunity. Every successful society has some measure of public regulation of private activity. We don't allow people to speed on the roads or run red lights simply because they feel rushed.

    So Buffet's actions, purely in pursuit of personal gain, should remind us of the need for meaningful public controls on private financial activity which affects the public.

  • Report this Comment On September 26, 2008, at 12:11 PM, pondee619 wrote:

    oxymoron=business ethics

    unless a law is clearly broken, all is fair

  • Report this Comment On September 26, 2008, at 12:26 PM, getrichordietryi wrote:

    I honestly think that if after the deal Warren had actually said that Congress should NOT pass the bailout, BRK and GS stocks would still have gone up because of the terms of this negotiation and you would still have written this article saying that Buffet said this in order to make a quick buck...

  • Report this Comment On September 26, 2008, at 12:32 PM, shegde wrote:

    Even though I still see Buffett as above the frey, I AGREE in part to this article.

    Yes - BRK is in Business and needs to make Money.

    Yes - Buffett has to be dispassionate about the business dealings.

    Yes - As long as no law is broken, all is fair.

    BUT

    You do not need to ride on someone (poor people's money) to make this kind of money - Period. There ARE ALWAYS still better ways to make money - you don't have to backstab someone to get it. I believe there are a lot of such things in Warren that makes him above the frey. I would be extra proud if BRK stays on the headlines and not weigh in on what our elected MORONS are doing in DC.

  • Report this Comment On September 26, 2008, at 1:33 PM, toddum wrote:

    Is it just me or doesn't Buffett stand to benefit from the bailout with or without the GS deal because of his positions in WFC & USB? That being said, who cares if he/BRK benefit even more because of the GS deal? (rhetorical)

    Anyone who owns financials right now will benefit from the bailout--including me or you. And no, I don't own any financials.

  • Report this Comment On September 26, 2008, at 5:54 PM, abbeymoney wrote:

    Buffet's duty is to his shareholders, not the general public. He also predict this banking mess a few years ago, but nobody was listening then. The world knew about his investment in Goldman Sacs, so there was discloser of his possition at the time of his statement.

  • Report this Comment On September 26, 2008, at 6:47 PM, tramagli wrote:

    I strongly disagree with your contention that WEB is engaging in front running or some other nefarious scheme. As far as him standing to benefit from the bailout, the proposed bailout is about much more than GS. And just because a man is willing to put his money where his mouth is, even if his money gets there first, doesn't signal some kind of underhanded tactic. I think too many people are just always looking for something bad in everything rather than solutions to problems.

  • Report this Comment On September 26, 2008, at 7:58 PM, damastr wrote:

    It's gutsy to even think let alone write that Buffett might have had some ulterior motive in all this. Let's not forget that these are exceptional circumstances requiring exceptional steps from exceptional people to save ordinary people (shareholders or taxpayers for the most part, even if some big guns responsible for this mess end up benefiting as well). I am sure Buffett must have followed all rules. Remember, he did not buy common stock in open market -- who knows what the exact rules are. Can anyone provide any other example of Buffett buying in open market and pumping up the stock? In fact, he keeps on repeating that Berkshire's own stock is not cheap. Moreover, we don't know GS needs a bailout. As such, even if the $700B plan doesn't get thru, GS and Buffett may still do well.

  • Report this Comment On September 26, 2008, at 8:44 PM, JoeChase wrote:

    There is no problem with that, had he said something FIRST to move the price, and then made a position on it, that would be unethical. If he had said something to drive the price lower, for example, and then bought it low, that would not be ok. Any one of us could write to our senator to try and influence the decision on the bail out package, Buffett is just lucky to be listened to.

  • Report this Comment On September 26, 2008, at 9:53 PM, raghuveern wrote:

    Before this author goes around lambasting someone with a spotless reputation, he clearly hasn't done his research.

    On CNBC Sunday morning (Sep 21) Becky Quick had already reported that Buffett agrees with the plan (he said it is exactly what I'd do).. Check the CNBC video site. That means he had already conveyed his opinion on Friday/Sat.

    He announced the Goldman Deal on Sep 23rd evening.

    He came on CNBC and Fox Business the next day(24th) and said he made a spontaneous decision to invest in Goldman on Tuesday afternoon(23rd) and said he agrees with the plan and that it was absolute neccessity to prevent a meltdown.

    And secondly, he is the last person who needs the money.. 5bn is not much in Berkshire's 210bn universe. Plus Goldman is going to make it regardless of the bailout.

    I wish if the author had done his research and issue an apology to the readers for misleading them.

  • Report this Comment On September 26, 2008, at 11:07 PM, haystrust wrote:

    I think that we need to shift our own frame a bit before we jump in here. We are not only investors in the stocks we buy, we are investors in the government we elect, even if our contributions are not volutary. We need to approach any action by our government as investors in that government.

    WEB made an investment in GS, but he also suggested an important modification of the bailout - take an equity stake in what the goverment pays for. This is a wise comment from a big investor in the government.

    We have had a lot of examples of this sort of bailout being done right, as in Sweden, and wrong, as in Japan. I think that WEB wants the American people to make the right decision and to potentially make money on this.

    Not a conflict on interest in my book.

  • Report this Comment On September 27, 2008, at 8:57 AM, enneas wrote:

    Your logic is flawed. Buffett's influence is what you believe it to be and, for that reason, the very fact of his investment in GS *was* his public comment -- as evidenced by the subsequent media reaction and analysis. Buffett's reputation doesn't need any defense from me but his reputation for integrity and transparent, honorable dealings doesn't merit this kind of aspersion. His wealth doesn't abrogate his right as a citizen to speak out on this issue and, quite frankly, it's well-established that he sees farther and more clearly than most. The Hill could do worse than listen to him. In fact, he ought to have been listened to five years ago when he predicted this mess, likening mortgage-backed derivatives to "financial weapons of mass destruction" and steering BRK clear of the business. Your calumny should be heaped on our feckless Administration, instead. There's your target.

  • Report this Comment On September 27, 2008, at 2:53 PM, Konstanu wrote:

    What a crock of s--t. Goldman Sachs does not have bad mortgages or CDOs on their books to unload to the government. The success of Buffet's investment hinges on the economy not collapsing, you are right about that, except that's not the point you made. You said he stands to benefit...blah blah blah

    The deals are getting made by companies such as JPM with strong CASH positions. As you may know, cash is a substitute for obtaining credit, and someone's use of cash does not mean that credit is being made available.

    Motkey Fool rarely fails to disappoint in disappoiting. How do you guys get your bs in the news area of yahoo finance? Of course now you have "seeking alpha" as well, a bunch of jackasses

  • Report this Comment On September 27, 2008, at 2:54 PM, Konstanu wrote:

    the typo of motley fool was unintentional

  • Report this Comment On September 28, 2008, at 3:37 AM, sumbawa wrote:

    Chuck: you say "nobody has yet made a compelling case to me that there is, in fact, a crisis that extends much beyond overleveraged banks with bad business practices". That may be true, but it seems that markets for mortgage securities have frozen and as a result they can be neither valued nor traded. So they sit on balance sheets. As a result, interbank lending also seems to have frozen. Who wants to lend to another bank with an unknown capital situation? And this can easily percolate down: no liquidity for interbank lending, therefore no liquidity for bank-to-business/consumer lending.

    So I'm somewhat in support of the "bailout". However I think it hasn't been presented well. This should not be a case of taking the illiquid mortgage securities off the banks for some fair price. They should be taken at a low price with equity stakes and attendant writedowns for the institutions involved. The government should aim to profit in the medium term from their "investment" in these securities. While defaults and foreclosures will no doubt rise, this part has been overstated. Most mortgages, even subprime, will be repaid. But confidence and faith between counterparties needs to be restored. The government is unfortunately the only one with the money and the time horizon to quarantine these securities for now and then hopefully lending can resume, albeit at a slower but perhaps healthier pace.

    As for Buffett, I think the benefit of the doubt is in order here. The timing of him voicing support for the bailout and him investing in Goldman is a bit unclear. I consider his investment a signal that financial markets are perhaps not in as bad a shape as some pundits would have us believe.

    Nice article, Chuck. Part of why I subscribe to Motley Fool: thought-provoking pieces. With all that's going on these days I'd like to see the Fool devote even more space to discussing the financial crisis. If the Fool has more insights into the hows, whats and whys of these balance sheets, I'd love to hear more.

  • Report this Comment On September 28, 2008, at 3:42 PM, Sceptimus wrote:

    I don't follow the author's logic. He seems to believe it is unethical to make public statements pertaining to an industry or the economy when one recently invested, but rather should do the opposite.

    Taking this further, would Mr. Buffett only be allowed to invest in a company *after* making public comments pertaining to its industry or the economy ?

    I disagree.

    Or perhaps he's not allowed to make any public statements at all ? Let's face it, there's a lot of industries BRK *has* invested in. Does this mean Mr. Buffett should not make *any* comments pertaining to those industries or the economy as a whole ?

  • Report this Comment On September 28, 2008, at 6:50 PM, Frogtree71 wrote:

    I have to admit this was the stupidest article I have ever read. Has Buffet turned around and sold into the pop? I don't think so. He is a long term investor isn't he? I don't think he would mind if the stock price of GS went down 50%, he is only concerned with underlying value and could buy more. Remember Buffet has cash.

    Shame on the author for putting Buffet down. If anything he did the public a service by giving the market some sense of hope and allowed a less fearful week for the $700B agreement to be fine-tuned with better tax-payer protection.

    There has only been one person greater than Buffet. And that is Jesus himself. Long Live Buffet!

  • Report this Comment On September 29, 2008, at 12:08 AM, bengarrison wrote:

    But Warrent Buffet didn't invest $5 Billion in the publically traded stocks - he bought $5 billion in preferred shares, which have a completely different payout structure and fluxuate in price much less. Plus, as others have pointed out, GS doesn't have nearly as much bad debt as other banks, so it doesn't stand to win very much by this. BerkHath is such an enormous holding company that by your standards, he pretty much couldn't talk about anything.

    this was a terrible article.

  • Report this Comment On September 29, 2008, at 12:14 AM, jamesatlga wrote:

    First of all Warren Buffett is already one of the wealthiest men on the face of the earth. He is not some crook trying to scratch out a living so he can pay for his new Porsche. Secondly, he has announced that he is GIVING AWAY 85% all of his billions to charitable organizations. This article borders on slandering a man who has an extremely honorable reputation. Given the low price that was paid, the GS deal will make money for Buffett regardless of whether the bailout plan passes. Warren Buffett has PROVEN time and again that he loves people and this country much more than money. There is no evidence that his comments were intended to do anything other than provide comfort to the markets and help this country weather the crises. You should be ashamed of yourself!

  • Report this Comment On September 29, 2008, at 1:54 PM, kurrent wrote:

    I know the circumstances have changed, but I find it interesting that Buffett is a huge proponent of the $700B bailout, yet just over 6 months ago he was quoted saying:

    (speaking on government bailouts in the financial sector)

    "They can handle it and they're paying a price for it," he said. "Somebody has to bear those losses. Is it better that the XYZ bank bears it or is it better to socialize it for the American public. I'd rather have the XYZ bank pay for it."

    source: http://www.financialpost.com/story.html?id=290358

  • Report this Comment On September 29, 2008, at 5:41 PM, cherrycokezero wrote:

    I agree---you should be ashamed of yourself! Congress asked Buffett for his advice, so he certainly didn't orchestrate this as you suggest. Perhaps you skipped out on your ethics class in journalism school---try backing up your opinions with some fact!

  • Report this Comment On September 30, 2008, at 12:01 PM, bradw2k wrote:

    Regardless of the details of the Goldman deal, it is totally unethical to encourage a spike in the government's coercion of individual investors and taxpayers. Shame on Buffett!

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