Buffett Bashers Miss the Mark; Saints Seldom Make Billions

Includes: BRK.A, BRK.B, MCO
by: Kurt Brouwer

Warren Buffett, the CEO of Berkshire Hathaway (BRK.A; BRK.B), has taken a fair amount of heat in the media and in the blogosphere over the past week. The backstory is that he was compelled to testify before the Financial Crisis Inquiry Commission [FCIC] which is a government commission with a mandate to examine the causes of financial panic.

Warren Buffett testified before the commission along with Raymond McDaniel, the CEO of Moody’s (NYSE:MCO). Other than the fact that Berkshire owns a 13% stake in Moody’s, I’m not sure why Buffett was forced to appear with the Moody’s CEO, but he was.

Moody’s and the credit rating fiasco

I think it was unfortunate for Buffett to be paired with a guy trying to defend the ratings agency fiasco because, in my view, rating agencies such as Moody’s and Standard & Poor’s bear a lot of blame for enabling the craziness that went on in the mortgage-backed securities business and on Wall Street. Grilling the company’s CEO seems fine to me. Having to appear alongside the Moody’s CEO may have led people to think Buffett was defending the company’s action, even though he was not. How do I know that Buffett did not defend Moody’s?

I actually listened to Buffett’s testimony

As I could not find a transcript of his testimony, I paid the price of actually listening to the testimony from start to finish. It was long. How long you say? Too long. If you want to listen also, here is the link.

As I was listening, my two sons wandered in from time to time to ask what the purpose of this video was and they occasionally offered funny remarks about a particular panel member who was being — no doubt unintentionally — amusing.

FCIC Chairman and former California State Treasurer, Phil Angelides got in a few good quips, but overall the tone was calm and rather boring. I had to laugh when I read some approving accounts of Phil Angelides’ comments, given the role he played over the past decade or so in California’s dismal economic condition.

For those who do not know of him, Phil Angelides is hardly a paragon of financial acumen. He was the Treasurer of the State of California during the years (January 1999 to January 2007) when most of the disastrous decisions were made that plague California today. He was also on the board of California’s woefully underfunded state pension plan during the time period when it embarked on an ill-fated and unfunded increase in pension payouts. California is broke today and Phil Angelides bears at least some responsibility for that.

The Buffett bashers

The Buffett bashers (see here and here and here) seem to have heard different testimony than I did. Or rather, I think they expected him to transform himself miraculously into some sort of social champion, bashing Wall Street right and left. Apparently, they did not know that he is a guy with strong Wall Street connections. D’uh. He is a big investor in Wall Street firms and has been a power player in investment circles for decades.

Here are three examples of the scorn and derision unloaded on the venerable investor. From the generally-sensible Felix Salmon:

Buffett is that rarest of institutional shareholders: someone who actually owns and runs lots of large companies of his own. As such, he can and should act much more like an owner than most shareholders. But he doesn’t, and he has no visible desire to fix the problems at Moody’s or at the ratings agencies more generally. He just says he wishes he’d sold his Moody’s stock earlier, passing on those losses to some other sucker. I don’t think he’s ever going to be able to live this one down.

Note the loaded phrase, ’should act much more like an owner.’ Salmon is entitled to his opinion on what Buffett should or should not do, but that doesn’t mean Buffett has to agree with him.

From Capital Gains and Games blog, comes former New York Timesman, Edmund Andrews, who thunders:

Oh my God. I never thought i would ever say this, but Warren Buffett has turned into an evasive, disingenuous, bumbling buffoon. I’ve just finished watching the beloved Oracle of Omaha being grilled by the Financial Crisis Inquiry Commission about the catastrophic role of credit rating agencies, and it’s pitiful to watch him plead ignorance on the most elemental questions about what Moody’s and Standard & Poors did wrong or how they should be changed…

I find this kind of language — "Buffett has turned into an evasive, disingenuous, bumbling buffoon" — to be really offensive.

As if that was not bad enough, Fox Business News personality, Liz Claman, asked this:

You being the largest shareholder in Moody’s would that make you knowingly or not complicit in the unwinding of the financial system?

Good grief.

Buffett bashed for being himself

I found Buffett’s testimony to be utterly in keeping with his reputation. He spoke as a knowledgeable shareholder in Moody’s, but not someone who pretended to understand the ins and outs of the credit ratings system. I did not hear him defending Moody’s, but rather stating the obvious fact that the firm missed the real estate bubble along with most everyone else. He was clearly not happy with the results, either for his investment or for the country. He did not buy shares in Moody’s because of the quality of the ratings they give, but rather because he felt they were cash machines that had been granted a duopoly by governments. His point-of-view is simply that of a large shareholder — a ‘hands off’ shareholder I might add.

In my view, Buffett is being condemned in crude terms, not for something he did, but rather for something he did not do, which is to try and reform ratings agencies thereby ’saving’ the financial system. However, Buffett is no social crusader, nor has he ever acted like one. Certainly, he has announced that the bulk of his billions will go to charity when he dies and that’s laudable indeed. Maybe that act convinced some folks that he was a social reformer, I don’t know. He’s no saint, nor a social activist, but he is hardly a buffoon.

Apparently, Felix Salmon, Edmund Andrews and Liz Claman had false expectations that Warren Buffett would charge forth and bash ratings agencies. Obviously, he disappointed them and their strident responses reflect their collective disappointment. Boo hoo.

Saints seldom make billions

I would not have thought it was necessary to remind anyone that billionaire saints are rare indeed. Making as much money as he has made — for himself and for his shareholders — is not easy, nor is it simple. Warren Buffett has mastered a very complex system of making investments, managing taxes, working the system in Washington and New York and sticking to his lucrative knitting. He works the system and talks his book (promotes his point of view) whenever he can. That’s why he has been so successful.

But, when it comes to companies whose stock is owned by Berkshire, I see Buffett as an investor, pure and simple. If he thinks a company is screwing up, I suspect his first inclination would simply be to sell the position, not try to reform that business. He’s a portfolio manager and, I think it behooves us to acknowledge, one of the best portfolio managers of the past 50 years.

Quite frankly, as an investor in Berkshire, I don’t want him spending his days opining on ways to improve Moody’s or other rating agencies. Rather, I’d like him to figure out great investments that will make Berkshire lots of money. His job, in my view, is not to try and make the world safe for unwary investors, but rather to make money for his investors, of which I am one.

Disclosure: Kurt Brouwer owns shares in Berkshire Hathaway (NYSE:BRK.B).