Multibillionaire Warren Buffett may sound cuddly, but he’s talking from both sides of his mouth
August was a typical month for Warren Buffett, America’s second richest man. While the leisure classes lolled, he called for higher tax rates for the rich. If America had a debt problem, he wrote in the New York Times, it was high time the rich paid a greater share of their earnings to the government.
Then, two weeks later, he sank his fangs into the fleshy rump of Bank of America, one of the bailed-out giants still staggering three years since the start of the financial crisis. Buffett had been circling Bank of America for a while, hoping that its problems would force it into his arms. It was simply a question of when not if they would have to take his money.
By the time they succumbed, it was on typically usurious terms. In return for his $5 billion investment in preferred stock, Bank of America agreed to pay Buffet a fixed dividend of 6 per cent on the stock and to pay a 5 per cent premium whenever they needed to buy it back. It also granted Buffett warrants to buy 700 million shares in the company at a low exercise price, which will almost certainly earn him another large return. Buffett can extract these terms for two reasons: he has cash when most of the world does not; and his investment is the single best seal of approval any struggling company could want.
At the depths of the financial crisis, he poured money into Goldman Sachs and General Electric, propping them up at their moments of greatest woe. And not only did he earn a substantial financial return, he was called a patriot for investing in America when the world was running scared — or, as value investors call it, at the bottom of the market.
Buffett has amassed his fortune investing in some of the least appealing corners of the US economy: credit card companies and insurers, fast food and soft drink makers and trailer housing. He seeks out companies with such good businesses that they are all but impervious to bad management. Leading up to the financial crisis, he owned 20 per cent of Moody’s, the credit rating agency which did such a poor job of rating sub-prime mortgage risk. And when the crisis did hit, he invested in financial institutions while badgering the government to bail them out.
Yet he remains to most Americans a patriotic hero, a warm, Dickensian character, the good rich man who understands his own good fortune and shares it. Five years ago, he became all but bulletproof when he announced that he would give most of his fortune to be managed by the Bill & Melinda Gates Foundation. He and the Gateses are old friends. He has the shtick of an old-fashioned travelling salesman, playing his ukulele and opening up his trunkful of slightly risqué jokes. He called the first congressional stimulus plan half Viagra and half candy, but not enough of either to get the economy going. When stock prices are low, he has said he feels like ‘an oversexed man in a harem’.
As ordinary people are called on to make ever more sophisticated financial decisions and financiers unpick the world economy with their mathematical voodoo, Buffett’s homespun attitudes are highly appealing. He likes cash flow, hates debt, prizes thrift and stays away from anything that might keep him awake at night. He resisted the technology bubble in the late 1990s, and did not even invest in Bill Gates’s Microsoft because he did not understand software. He called derivatives ‘financial weapons of mass destruction’ long before they exploded in 2008. When everything was going wrong, his warm chuckle and belief in America were seen by millions as reassurance that all would be well. But he is above all else an investor, an extremely canny one who uses his reputation to extract better deals and who incessantly talks his own book. He calls for higher taxes on the rich while acting as a pawnbroker to bailed-out banks. Where his money is involved, there is nothing warm and fuzzy about Warren Buffett. He cuts deals and dodges blame with the best of them.
Last year, he spoke before the Financial Crisis Inquiry Commission in Washington DC, and laughed his way through questions about Moody’s. Relying on financial models, he told them, was a mug’s game. Moody’s had an excellent business selling its ratings, but despite being a 20 per cent owner he rarely spoke to management about the quality of what they were selling. He was wilfully blind to how one of his own holdings was helping to stoke the financial crisis with bad information.
He also claimed that Goldman Sachs did not need bailing out, rather that the system just needed reassurance. This cannot be right. Goldman did everything short of sending its bankers out into Lower Manhattan to sell hot dogs to ensure it received help from the Federal Reserve. It turned itself into a bank holding company overnight. It was in deep trouble when Buffett and the US government ran to its aid.
But this is classic Warren Buffett, talking the standard bank CEO line out of one side of his mouth while siding with Main Street out of the other. He is as much the friend of the bank CEOs as he is of the widow buying penny stocks with the contents of her cookie jar. He embodies the contradictions of American capitalism, portraying himself as just another Willy Loman who got lucky, while flashing his knife in the back alleys of Wall Street.
His management theory is to hire good managers and then let them be, a tactic of either trust or plausible deniability depending on your point of view. Earlier this year, this theory rebounded on him when one of his favourite executives, David Sokol, had to resign under suspicion of insider trading, buying stock in a company before recommending that Buffett acquire it. For years Sokol had been one of the toughest and least pleasant of Buffett’s executives. Buffett claimed to know nothing. It was the kind of episode to make you wonder.
Buffett is precisely what so many people since the financial crisis claim to hate, a rentier and investor, making money off his money and the sweat of others. He is not an inventor or manufacturer, but a spotter of value and extractor of dividends. As many have pointed out since he called for higher taxes on the rich, he is perfectly free to pay the government far more than he presently does. But as he showed with his generosity to the Gates Foundation, there are institutions he trusts more to use his money wisely.