A Conspiracy Theory or: Buffett Miscalculates or: Am I now a Populist?
I must admit that I do not share the same amount of deference and admiration for Warren Buffett as, well, everyone else on the planet. He seems to me to be a Solari, fabulously rich but relying on the Mozarts of the companies he invests in for his fortune. At other times he circles above dying prey, waiting to negotiate / extort a deal that no one else would even dare ask for, much less get. But maybe I am being too hard on him.
When Buffett came out in support of Barack Obama on May 19th of 2008 (“He’s my choice.”), this was heralded far and wide as the definitive answer to charges that Obama was a socialist – of course he is not! If he were, would Warren Buffett support him? I admit this took my opinion of him down a few more notches, his current strong opposition to Card Check notwithstanding.
But during his turkey vulture phase of late 2008, some pieces of a puzzle seemed to align, and the publishing of a partial AIG counterparty list put them together, at least for me. I’ll sum these up in bullet points:
- September 15 – AIG bailout meeting called in New York by none other than Mr. Tim Giethner. The only Wall Street CEO attending was Lloyd Blankfein, CEO of Goldman Sachs. He succeeded then treasury secretary Henry Paulson.
- September 22 – It is reported that Goldman Sachs will become a bank holding company.
- September 24 – Coincidentally, Warren Buffett gets the bright idea to make a $5 billion investment in Goldman Sachs. He gets perpetual preference shares that pay a 10% dividend, and warrants to buy $5 billion more shares at $115 at any time over the next five years.
- October 1 – Warren Buffett circles GE and invests $3 billion dollars in GE preferred shares paying 10% interest, with the option of buying another $3 billion at $22.25 at any time over the next five years. As we know, GE is the parent company of NBC, and are partners with Buffett’s pal Bill Gates in the MSNBC venture.
- GE Capital, which has been responsible for a significant portion of GE’s profits over the last few years, had $510 billion in debt at the end of 2008. It recently sold bonds, which are guaranteed by the FDIC under the Temporary Liquidity Guarantee Program, in order to shore up its balance sheet. It was also recently revealed that GE Capital is eligible for funds under the TARP bailout plan.
- March 16 – Finally, a counterparty list is published by AIG showing where most of the taxpayers’ bailout money went. Third on the list? You guessed it – Goldman Sachs, at $2.1 billion. Nice work, Mr. Buffett!
Now the twist to the story. Warren Buffett seems to have made a major miscalculation. The London Times said that his investment in Sachs “might come to be seen as the turning point in the finanancial crisis.” Not by a long shot, I am afraid. Check the closing prices of Sachs ($93.90) and GE ($9.66). I don’t know what Warren Buffett knew after the meeting on September 15, but it certainly seems that the information was not known by the markets at that time. Everything between Buffett, Wall Street and Washington, D.C. for the past several months is a little too cozy for my taste, and that is as far as I can go. The miscalculation Buffett seems to have made is to rely on the government to be a partner in making his investments profitable and to shore up the economy at large.
Buffett has now come to realize that his “choice” is not quite living up to expectations, the tax cheat that bailed out AIG and Sachs is still trying to figure out if you need to dial “9” to get a line out on the phones in Treasury, and that all the happy talk and optimism in the world doesn’t do a bit of good if the party in power has made American business the enemy. Now these deals will probably work out in the long run – I just hope The One makes him squirm a little longer so he can more carefully consider his endorsements in the future.