Bad Investment

Warren Buffett’s defense of Goldman will damage his credibility.

At Berkshire Hathaways Inc.’s annual meeting in Nebraska this past weekend, Warren Buffett apparently had this to say: “If Lloyd had a twin brother, I’d go for him.” That’s Lloyd as in Lloyd Blankfein, the CEO of Goldman Sachs. The case of Buffet further suggests that if someone with such a stellar reputation—and, up until now, seemingly sound judgment—can be so profoundly off base in his handling of the recent repercussions of the financial crisis, then greater federal regulation of Wall Street is essential. But this regulation needs to be performed not with an ax, but with a scalpel. With our highly politicized environment and an enraged public, this will be a difficult task.

But Buffett doesn’t seem to care. He laid it on thick. “I haven’t seen anything in Goldman’s behavior that makes it any more subject to criticism than Wall Street generally,” he said. He went on to defend Goldman’s practice of secretly betting against its own investors on mortgages, a practice that is currently the subject of a fraud suit filed by the Securities and Exchanges Commission. Buffett, by contrast, says, “I have no problem with that Abacus transaction. If there were other things that were hugely troublesome, I haven’t seen them.” There are “other things.” For example, the May 11 Los Angeles Times reports that gubernatorial candidate Meg Whitman, the CEO of Ebay, got a sweetheart deal from Goldman. According to the Times,

After Whitman hired Goldman Sachs to handle EBay’s investment banking business — deals that generated $8 million in fees for the bank, court records show — Goldman gave Whitman early access to initial public offerings of stock for her personal portfolio. The head start on the rest of the market allowed her to sell shares for a profit of $1.78 million.
The deals raised suspicions among regulators that Whitman and other executives, including Kenneth Lay of Enron, were trading shareholder assets — in the form of fees paid to investment banks, for example — for personal gain.
“It is effectively a bribe for future services,” said Mercer Bullard, a law professor at the University of Mississippi and former Securities and Exchange Commission attorney who was not involved in the government investigation. “It was exactly the kind of thing crooked politicians engage in.”

Obviously, no one is accusing Buffett, legendary for his personal rectitude, of fiscal hanky-panky. But isn’t there something more than a little offensive about Buffett making that case, taking up the cudgels for Goldman? The fact is that no one has enjoyed a more sanctified reputation than Buffett, who has managed to become one of the country’s richest men while hectoring it to shape up.

For years, Buffett has railed against dangerous financial practices—derivatives, he said, were “financial weapons of mass destruction.” And for years, the folksy Buffett has been preaching about the necessity for self-reliance and abstemiousness. He seems to incarnate it. The hamburgers and diet cokes for lunch. Those rumpled shirts. The speeches berating greed.

Yet even as Congress grills Goldman Sachs and moves towards financial reform, Buffett has executed a U-turn at his shareholder’s meeting. Certainly he is upfront about the motives for his enthusiasm about Goldman. According to the Guardian newspaper,

A long-term customer of Goldman, Buffett has enlisted the bank’s help in buying scores of businesses. At the height of the financial crisis in September 2008, he lent $5bn to Goldman – a loan that yields annual income of $500 million for Berkshire Hathaway, at a rate of $15 a second.

He is turning out to be a crony capitalist. As the Guardian wrote, “‘We love the investment,’ said Buffett, who accepted that the SEC’s charges had damaged Goldman’s reputation. ‘There’s no question the allegation alone causes the company to lose reputation. Obviously, the past few weeks have hurt the company and hurt morale.’”

Where does this leave Buffett? Financial writer Jane Bryant Quinn has it right: “For that premium price it [Goldman] not only bought your backing, it bought your credibility, too.” But the louder he defends his cronies, the more quickly Buffett’s credibility is disappearing. So the question inevitably arises of how much of Buffett’s reputation is genuine—and how much consists of old-fashioned hokum?

Jacob Heilbrunn is a senior editor at The National Interest.