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.
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