Warren Buffett on Taxes and TARP

by: Ira Stoll

CNBC had a half-hour this morning with Warren Buffett that made for some interesting viewing. Mr. Buffett complained that the government had diluted his stake in Wells Fargo (NYSE:WFC). "I didn't like it. The government forced him to issue shares," Mr. Buffett said. "The government's done a lot of good things for the economy, and net I'm a beneficiary and Berkshire Hathaway is a beneficiary of the things overall that they've done. But they cost us real money at Wells Fargo."

Mr. Buffett, who supports increases in the estate tax (which incentivizes people to sell their businesses to him) and in income taxes (which he mostly avoids paying), criticized President Obama's proposal of a tax on banks (which would hurt Mr. Buffett's bank holdings in Wells Fargo and Goldman Sachs (NYSE:GS) among others). "I don't understand that. It's some kind of a guilt tax," he said. Instead of taxing bankers, he said, why not a special tax on autoworkers who benefited from the auto bailout or on members of Congress who "ran Fannie and Freddie." "It just doesn't make any sense to me," Mr. Buffett said.

As for the federal bailout of AIG and, via AIG, counterparty Goldman Sachs, Mr. Buffett said of Goldman, "They were paid what they were owed, but so were millions of policyholders." Mr. Buffett said he saw the bank tax as a kind of "vengeance." He also said he didn't buy the White House rhetoric about bank profits being "obscene." Bank of America and Citigroup's profits may be "obscene," he said with a chuckle, but maybe "a different kind of obscene," meaning, obscenely small or nonexistent.

Mr. Buffett said that he doesn't think the government should backstop investment banks such as Morgan Stanley (NYSE:MS) or Goldman Sachs that don't have commercial or consumer banks attached. Goldman, he said, was part of TARP, "but they were given no choice."

How to prevent such future bailouts? Mr. Buffett proposed that shareholders impose conditions that if a bank has to go to the federal government, the chief executive and his wife and the chief executive and wife going back two years "get wiped out," while directors are penalized with five times their compensation. "If you can't keep this place from needing the federal government for help, you're going to be broke," was the principle he outlined.

Despite his complaints about TARP and the treatment of Wells Fargo, Mr. Buffett said he thought the chairman of the Federal Reserve, Ben Bernanke, had done a "magnificent job."

The "sage of Omaha" was asked whether he was "embarassed" by the deal that Senator Nelson of Nebraska got for Nebraska's Medicaid costs in exchange for supporting ObamaCare. "I don't think that was all that popular out here," Mr. Buffett said, criticizing the "Christmas tree approach" to legislation and observing that "bad behavior begets bad behavior." "What you've seen in the last year has not been encouraging." as far as Congress's behavior, Mr. Buffett said.

The interview concluded with another example of how Mr. Buffett, while publicly supporting some tax increases, prefers to organize his own affairs to minimize taxes. He's a big Kraft (KFT) shareholder through Berkshire Hathaway and criticized Kraft for selling a pizza business for $3.7 billion. Because the pizza business had a low tax basis, he explained, the net gain to Kraft was really only $2.5 billion. The business had pretax earnings of about $280 billion, so Kraft sold it at about 9 times pretax earnings. Yet it is paying 16 or 17 times earnings to acquire Cadbury (CBY), along with "$390 million in deal expenses" (not bad work for the lawyers and investment bankers who can get it). "It's hard to get rich doing this," Mr. Buffett explained.

As readers of my past coverage of Mr. Buffett may appreciate by now, I find Mr. Buffett oddly fascinating. On one level, he's a consumate capitalist -- one of the richest men in America. On another level, as he himself acknowledges, he's a beneficiary of government actions.

He maintains a folksy image while operating in quite a sophisticated fashion, calling for higher taxes while paying as little in tax as he can. I think the best way to explain him is that he's basically self-interested (though his interests are pretty well aligned with those of Berkshire shareholders), and that the error a lot of people who listen to him make comes in interpreting his pronouncements as somehow related to the overall national interest.

There's nothing wrong with a businessman operating in his business's interest or in his own interest, so long as they are aligned. In fact, it's basic to capitalism. But if you start trying to separate out what Mr. Buffett thinks or says about taxes or some other questions, such as energy policy, from his personal or business interests, it starts getting complicated pretty fast.

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