Buffett Feathers Own Nest First

Includes: BRK.A, BRK.B
by: Rolfe Winkler, CFA

The Oracle of Omaha enjoys considerable public trust. But on banks he talks his own book, not Main Street’s. Maybe that’s not surprising given his large stakes in financial firms. In doing so he risks his reputation as the nation’s financial conscience.

Yesterday Buffett came out against Obama’s proposed bank tax, but his comments were inconsistent. On one hand he’s always maintained banks needed to be bailed out, yet he opposes ways to make them pay for it. At this point, financial giants in which Buffett has large stakes — Wells Fargo, Goldman Sachs and General Electric — all benefit from an implicit too-big-to-fail government insurance policy. How can Mr. Buffett, an insurance executive, argue that it’s inappropriate to charge them for it?

This is just the latest example of Buffett talking his book.

Buffett also lobbied for and profited greatly from the bailouts. He spoke publicly that his investments in Goldman and GE were predicated on the passage of the Troubled Asset Relief Program, saying that he trusted Congress would “do the right thing.”

Later he mocked the stress test, which had over-leveraged banks raise needed capital. This was bad for Buffett because it diluted his stakes in banks.

Less well-known is that Buffett was the first to propose a private-public partnership structure in order to rescue troubled banks. In a letter to Hank Paulson in October ‘08, cited in Andrew Ross Sorkin’s recent book, Buffett pitched his idea for a “public-private partnership fund” that would have used public debt to finance private bets on toxic assets. When Tim Geithner rolled out a similar plan a few months later, it was widely panned as a giveaway to banks.

Yet despite lobbying for and profiting from bailouts, Buffett later complained about them in his annual letter to Berkshire investors, saying they put Berkshire at a disadvantage.

Buffett didn’t respond to requests for comment.

The public has always seen in Buffett a different kind of capitalist, an honest observer providing sound financial advice regardless of his personal interests. When it comes to his own holdings, however, Buffett seems to use a carefully cultivated reputation for financial rectitude to feather his own nest.