Is Warren Buffett Wearing Thin?

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 (NYSE: 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 (NYSE: 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 (NYSE: WFC  ) , Bank of America (NYSE: BAC  ) , American Express (NYSE: 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?"

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.


Read/Post Comments (14) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 05, 2012, at 7:01 PM, ilovesumm wrote:

    Buffett has done well and this shows just how the big money gets what they want and the little guy pays.

    You could also include Buffetts defense of Moody's .

    Unfortunatley Buffett opaque world has become more transparent in the last several years.

  • Report this Comment On March 05, 2012, at 7:39 PM, DoctorLewis4 wrote:

    David Lee Smith and the right wing talking points are what is wearing thin. (gotta hand it to all you guys for sticking to the bullet points) And thanks for twisting the facts and trying to turn an American icon and patriot into a twisted sick sinister villain. Well done! Your contribution to society and civil discourse is appreciated. The truth is so bothersome when it doesn't stick to your agenda.

  • Report this Comment On March 05, 2012, at 7:49 PM, sOnTheIsle wrote:

    Wow. I didn't know you were allowed to say these things about Saint Buffett. I guess your IRS audit should be coming soon...

  • Report this Comment On March 05, 2012, at 9:32 PM, InvestWhatWorks wrote:

    Taking this in a different direction:

    I don't know if Warren Buffet himself is wearing thin, but Fool article headlines that constantly mention or reference him are starting to wear thin.

    I know adding Buffet's name to a headline will increase the likely hood of people clicking on the article, but wow... it has really been overdone lately.

    It would be interesting to find out exactly what percentage of Fool article-headlines mention or reference Buffet in some way.

  • Report this Comment On March 06, 2012, at 12:44 AM, BarryWel wrote:

    Since when did FAUX News get a business program?

  • Report this Comment On March 06, 2012, at 6:36 AM, Awebb33 wrote:

    FOX News only rails on Buffett because he supports Obama. Deep down, those talking heads know that Buffett's correct. Hard to take FOX seriously.

  • Report this Comment On March 06, 2012, at 1:27 PM, TMFMorgan wrote:

    <<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 , Bank of America , American Express , and Goldman Sachs, which received not only TARP money but also $130 billion in FDIC backing for their debt.>>

    All those positions combined made up 12% of Berkshire's entire portfolio.

    And shouldn't the same logic apply to everyone else who holds positions in those financial companies? I'd venture to say one-third of American households hold shares directly or indirectly in at least one of those companies. I've never heard anyone say "companies Grandma Sue owns in her 401k received $95 billion in bailout funds."

  • Report this Comment On March 06, 2012, at 1:54 PM, TMFKopp wrote:

    "Buffett needed the TARP bailout more than most."

    I found this quote particular interesting. Who is "most" here? Berkshire never received any TARP money, so it certainly didn't need the bailout more than any of the hundreds of banks and financial institutions that actually received money.

    At the time of the bailout, Berkshire had 25% of its public equity portfolio in three financial companies: Wells Fargo, American Express, and US Bancorp. I'd be interested to hear a case made for these being the most at-risk of the financial institutions. As for Goldman, it was criticized in the wake of the financial crisis for doing *too well* in the aftermath.

    Berkshire did indeed have stakes in more at-risk banks, but its stake in B of A was 0.25% of the equity portfolio and SunTrust was 0.2%.

    For sake of argument, Berkshire's total stakes in Wells Fargo, Amex, and USB amounted to roughly $19B at the time -- the total loss that would have been taken if those three were wiped out *in their entirety*. Berkshire's shareholder equity at the time was $125B and it had $33B in cash on the balance sheet.

    And as far as those who "needed" the bailout, check this out... Among the top 25 most widely-held stocks in Congress were: GE (remember: received TARP money), B of A, JPMorgan, Citigroup, and Wells Fargo.

    So yeah, like I said, I guess I find myself scratching my head a bit at the contention that Berkshire needed the bailout "more than most."

    Matt

  • Report this Comment On March 06, 2012, at 2:10 PM, rodnog wrote:

    "Is Grandma Sue wearing thin?".

    "She should just write a check and shut up," said the governor.

  • Report this Comment On March 06, 2012, at 2:24 PM, TMFKopp wrote:

    Sorry, one more bit to add b/c I thought this was interesting...

    23% of the Legg Mason Value Trust was in the following as of TARP time: Citigroup, GE, JPMorgan, Merrill Lynch, Capital One, and B of A.

    Davis' Financial Fund had 28% of its fund in: Amex, JPMorgan, Bank of New York, Merrill Lynch, and Goldman Sachs.

    CGM Focus had 22% of its fund in: Wells Fargo, Citigroup, and B of A.

    I'm not sure that I'd have a tough time finding a lot of other examples...

    Matt

  • Report this Comment On March 06, 2012, at 2:51 PM, TheDumbMoney wrote:

    Kopp nails it. Amex faced no trouble at all. And of all major banks, Wells and U.S.Bankcorp were the least likely not to have needed any bailout at all -- with JPMorgan just trailing them. Recall the government forced all banks to take the money, so as not to paint a target on the heads of the weakest banks.... As stated by Kopp, Berkshire received no TARP money directly. And in fact was so strong that it had the billions to invest at the time, in addition to making other non-public investments (I think it did the Wrigley deal roughly contemporaneously).

    The article is, in other words, absurd. And I concur with another commenter that fool.com Buffett headlines are wearing seriously thin. The people who most needed the bailout where the millions of people who would have been laid off if a huge percentage of businesses in Spring 2009 were unable to get their yearly bridge loans to pay employees or build inventory in ancitipation of better times in an actual financial collapse. They would have closed. Buffett would have taken a big temporary loss on his bank equity positions (since neither Wells nor U.S.Bancorp would likely have failed), and gleefully bought EVEN MORE THINGS in the aftermath, with the billions in cash he still had, while also supporting the companies in Berkshire's private portfolio that needed cash and could not get bank loans.

    Finally, substantively, as far as I'm concerned the main problem with the Buffett rule is that it would not raise taxes on enough people. I'm still waiting for the economic miracle that was supposed to follow Bush's 2001 and 2003 tax cuts. The idea that raising the top marginal rate only back up to 39% or raising the capital gains rate would be the end of the world is absurd. And note that Steve Forbes in his excerpted quote above does not actually explain what the substantive distinction is between capital gains and earned income, he just uses an ad hominem, a sure sign of intellectual vapidity from one of the greatest living archetypes of a man who was born on third base and who consistently demands to know why everyone else can't hit home runs.

    All best,

    DTAF

  • Report this Comment On March 06, 2012, at 2:54 PM, DJDynamicNC wrote:

    It is worth holding people accountable and following the money trail, so I rec'd this article, but as the comments show, I think there's not much of a scandal here.

  • Report this Comment On March 06, 2012, at 2:55 PM, DJDynamicNC wrote:

    @DTAF: +1 to every word of that comment.

  • Report this Comment On March 06, 2012, at 3:08 PM, TMFKopp wrote:

    "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."

    Sorry, just a quick clarification for readers. Berkshire's stake in Wells Fargo stretches back decades. At the end of 2008, the company held slightly more than 290 million shares of WFC. So the "substantial" purchase of 12.4 million shares amounted to a 4% increase in its position.

    To put that in perspective, if I have a $5,000 position in my personal portfolio, this would be like adding $200 to that position.

    Also:

    "Not surprisingly, those shares appreciated approximately 50% between early 2009 and the weeks following Geithner's announcement."

    That 50% figure is only achievable if you carefully pick your dates ("cherry pick" might be the phrase). If one assumes that "early 2009" means the beginning of the year however, then between 1/1/09 and 4/30/09 you're looking at a *loss* of around 35% or so for WFC shares.

    Of course if we stick with dates more favorable to the Buffett-as-corrupt-and-despicable thesis (let's say 3/1/09 to 4/30/09), then we could actually pin a gain of closer to 90% on the shares. Of course, B of A and Citigroup shares were both up around 150% and AIG was up well over 200% over the same time period. So if we're going to thump Buffett here, why not go all the way? He wasn't just corrupt, but he was also really stupid because he could have done much better for his evil empire by buying up BAC, C, and AIG (Berkshire's smallish stake in BAC hadn't changed and it owned no C or AIG).

    Matt

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