Here I Go, Criticizing Warren Buffett

by: Graham Summers October 20, 2008 | about stocks: BRK.A / BRK.B / GS    

Graham Summers

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I’m about to commit the cardinal sin of finance… criticizing Warren Buffett.

Buffett needs no introduction as an investor. He’s returned average annual gains of 21% since 1965 and is largely considered to be the greatest living investor, if not the greatest investor of all time.

However, in terms of ethics or business principles, Buffett’s been venturing into some somewhat shady territory in the last two months.

First came his $5 billion investment in Goldman Sachs (GS). Buffett bought preferred shares yielding 10% a year. Goldman can buy the shares back at any point at a 10% premium. And Buffett also receives the right to buy $5 billion worth of GS stock at $115 per share at any point in the next five years.

The talking heads went bananas over this, claiming it was a tremendous show of confidence in financial stocks. It wasn’t. It was an unfair deal HIGHLY in favor of Buffett and no one else. The $2.5 billion in additional capital GS raised from ordinary shareholders certainly didn’t come with any of these benefits.

However, what pushed the Goldman deal over the brink from “unfair” to outright improper was that Buffett was consulting with Congress over the then-proposed $700 billion Bailout almost immediately after the ink dried on the deal. Buffett said the plan was “absolutely necessary, in [his] view, to really avoid going over the precipice."

Now, Goldman Sachs and other financial firms were undoubtedly the ones who would benefit most from the $700 Bailout in its original conception: a mega fund that bought junk debt from Wall Street banks’ balance sheets. So for Buffett to be consulting with Congress about the deal is a serious conflict of interest, if not insider trading.

Then came the GE deal.

As was the case with GS, Buffett grabbed $3 billion of GE preferred shares yielding 10%. He was also guaranteed a 10% premium on the price he paid, should GE choose to buy the shares back from him within the next three years. And he was given the right to buy an additional $3 billion of GE stock at any point in the next five years at $22.25 a share.

Again, this long list of perks was made exclusively to Buffett, NOT the poor saps who ponied up $12 BILLION for GE via the ordinary share offering it issued at that time. But then, Buffett goes on CNBC — a GE subsidiary  —to discuss how great an investment GE is!!!

Again, a serious conflict of interest AND seriously bordering on insider trading.

Finally, last Friday, Buffett writes an op-ed piece for the New York Times lauding how attractive US stocks are compared to cash and gold. He even goes so far as to say he’s considering moving ALL of his personal holdings into US stocks.

He is, of course, correct in his assertion that stocks will outperform cash over the next decade and that the moves the government takes to fight the financial crisis will all be inflationary. But does Buffett really need to be on a soapbox telling people to buy stocks right after $2 trillion in retirement and pension funds has been wiped out? Especially when he knows darn well that most people don’t have his ability to ignore the stock market for a year… let alone five to ten years?

Again, I am not criticizing Buffett as an investor. The man’s genius is virtually unequaled in the financial world. But this latest string of deals is inappropriate to say the least. And while investors who heed Buffett’s advice to buy now will certainly make money in the long run, I guarantee Buffett won’t be writing additional pieces assuring them of the value when they’re down another 10%, 20% or even 30% in the next few months.

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This article has 43 comments:

  •  
    Oct 20 11:47 AM
    you are absolutely correct.
    Reply | Link to Comment
  •  
    Oct 20 11:50 AM
    You don't say WHY any of it is inappropriate.....why can't he consult with congress after investing in GS? Why can't he go on cnbc after investing in GE?

    You make points, but leave it up to our imaginations to find the violation in them.

    Certainly ...as you state.... everyone knows Buffet is an investor,,,therefore people in congress and viewers of cnbc should know that he has financial interests.
    Reply | Link to Comment
  •  
    Oct 20 11:51 AM
    An excellent piece; long overdue. Mr. Buffett did not amass his deci-billions by virtue of his "kindly uncle" on-air persona. Mr. Buffett is as ruthless and hard-nosed a businessman ( and now, one could say, "vulture investor" ) as any since the Gilded Age.
    Reply | Link to Comment
  •  
    Oct 20 11:53 AM
    "What profited a man, etc., etc."
    Reply | Link to Comment
  •  
    Oct 20 11:58 AM
    You sound a bit like sour grapes. When you can invest 10 billion here and 5 billion there, I'm sure you'll get the same perks and mouthpiece that Buffett has. But you need to earn those.
    Reply | Link to Comment
  •  
    Oct 20 11:59 AM
    you have got to be joking.

    the man goes on cnbc because they WANT him on.... cnbc.com has a section dedicated to the man, following his every move for cying out loud, and yet you think he enters deal to simply put his offerings?

    any investor worth their pay (which in this day and age is few and far between) knew a package was coming, and for that assumption to be a part of investing in financials is just ignorance.

    and i am so glad you can give buffett validation... "He is, of course, correct in his assertion that stocks will outperform cash over the next decade... " as if the man needs any from anyone.

    i may still be a relatively young pup in the investing game, but a good long-term money man (let alone a great one) does not do things to provide temporary pumps.

    ur confusing 'inappropriate' with his great abiliy to market what ever he speaks about. (like oprah) GS and GE simply paid (or are paying him) for the consequence of his investing.

    face it... his dollar is worth more than anyone elses... no need to hate him for it.
    Reply | Link to Comment
  •  
    Oct 20 12:00 PM
    Oh, well. The system is designed to corrupt everyone from Warren Buffet to your neighbor getting a home equity loan. A nation of "stock jobbers" as Jefferson predicted.
    Reply | Link to Comment
  •  
    Oct 20 12:02 PM
    Who's this Warren Buffett guy? Just Kidding. ;-b

    The author is right, Buffett's true colors shine through upon any sort of rational scrutiny. Apparently there are two sets of rules. One for those who publicly support socialism and one for those who are trying to earn a living.

    Good name Midas. I bet you have solid gold $culptures in your home.
    Reply | Link to Comment
  •  
    Oct 20 12:02 PM
    You're right to criticize Buffett...his recent moves are *exactly* the types of moves that illustrate inequal access to *public* trading of equities. If the companies in question don't want to be publicly listed, they should go private. Otherwise, no sweetheart deals -- you need $3B in capital, you make those same terms available at retail to anyone who wants in. Period. I would assume that the deals as they were, are nonetheless subject to shareholder approval? Boards are dysfunctional...I'm starting to like Icahn's "shareholder rights" movement more and more!
    Reply | Link to Comment
  •  
    Oct 20 12:04 PM
    Smarty,
    Is that a cigar in your mouth?
    Reply | Link to Comment
  •  
    Oct 20 12:05 PM
    No one is locked out of these deals - stop crying foul and go buy some berkshire shares if you think he made such a good transaction...the public can ride with warren anytime......
    Reply | Link to Comment
  •  
    Oct 20 12:06 PM


    There is still a cost to the capital that is raised for a common offering.

    Did anyone force GS or GE to have Buffett as a funding source? I don't think so. Those 2 institutions used his name and the implied continual BRK backing in order to get their lending back up to snuff. If other institutions know BRK is in with GE and GS, they will feel safer to lend. How much is that worth?

    Now, to go on saying he's ruthless is crazy. He is responsible to BRK shareholders, not GS or GE. I guess you should buy BRK.


    Why don't you concern yourself with calculating what the common offering costs the companies vs. what the Buffett offering costs?



    Reply | Link to Comment
  •  
    Oct 20 12:07 PM
    Investors are scared to death.

    Somebody has to start showing the silver linings.

    Who can do that better than Buffett?
    Reply | Link to Comment
  •  
    Oct 20 12:12 PM
    Yea, I suppose fascism has it's silver linings. I wonder what company will build the concentration camps?
    Reply | Link to Comment
  •  
    Oct 20 12:12 PM
    make that "its"
    Reply | Link to Comment
  •  
    Oct 20 12:15 PM
    Ridiculous. By what stretch of the imagination is it "insider trading" to discuss GE AFTER he's bought the stock?
    Reply | Link to Comment
  •  
    Oct 20 12:17 PM
    Ridiculous! By what stretch of the imagination is Buffett engaging in "insider trading" by discussing GE on television AFTER buying the stock?
    Reply | Link to Comment
  •  
    Oct 20 12:17 PM
    From an outsiders perspective it looks a little bit like a China investment. An investment where one can win "big" but can't lose. If Golden Sachs or GE go bankrupt the govt. will just bail them out. I'm glad Buffet shares his investment information--it's the only way to go.
    Reply | Link to Comment
  •  
    Oct 20 12:18 PM
    Somebody is jelous... =P

    Look, giving your opinion is NOT insider trading...

    While you are at it why dont you criticize Kass, the poor idiot that was shorting Berkshire, and at the same time talking about it on TV. If Buffett cannot give his opinion about GS/GE even after disclosing his positions, why should people like Kass and Einhorn be allowed to do so (who by the way because they are shorts are obliged to much less disclosure)?
    Reply | Link to Comment
  •  
    Oct 20 12:25 PM
    No moonbat it's a pacifier, on loan from Mogambo.

    And those concetration camps are already built. Seek them on utube.

    Socialism cannot compete is also correct.

    Did GE or GS shareholders have the opportunity to approve the generous terms to Buffett?

    Did Freddie, Fannie, or AIG shareholders have the opportunity to approve unilateral takeover by the FED?

    Violation of property rights (ie. shareholder's rights as existant in corporate bylaws) by deals with government agents and Buffett without shareholder approval used to be illegal.

    I guess the government's role in following the law isn't really an important American tradition any more. All that stuff about 'supporting and defending the Constitution' is just words on paper.

    The $64 question is, how long before they decide your rights aren't important?
    Reply | Link to Comment
  •  
    Oct 20 12:34 PM
    You can't blame a buy for getting the best terms possible for himself, I mean that's what I try to do. Does anybody go out of their way to pay more than they have to for their investments? I think that all the shareholders of GE and GS benefit when WB buys into the company, it's a pretty solid endorsement and it's worth way more in my book than an upgrade from some analyst. Is he a "vulture" investor, I don't know what that means but again, can you blame him for being opportunistic? Warren Buffett isn't doing anything in secret as far as I can tell, he is above board and if there is any conflict of interest the SEC is free to call him on it. Also, both GS and GE were not forced to go along with these deals....they could have said no or bargained for better terms. If you have a problem with anybody it should be with the CEO's at GS an GE because they are charged with the responsibility of doing what's best for the company; not WB.

    As far as Buffett telling people to buy stocks goes; it's probably good advice but buyer beware. If you don't have a 5 year minimum investment time horizon you shouldn't be buying stocks anyway....ever. The people trying to make a quick buck in the market may get burned by Buffett's advice to get into the market but the people with years to stay in won't. Note the Buffett is NOT calling a bottom, he never does that. He is saying that he sees value in US stocks at these levels. All that implies is that he believes these companies will be worth more in 5, 10, 20 years; it does not mean that he is certain they will not go down more before they go up again.
    Reply | Link to Comment
  •  
    Oct 20 12:40 PM
    Smarty,
    Those camps don't look too comfortable. Probably no Internet access either. I think I'll pass if I have the choice of being riddled with bullets instead.

    Reply | Link to Comment
  •  
    Oct 20 12:51 PM
    I don't get this article at all. Is Buffett not allowed to express his own opinions at all?
    Reply | Link to Comment
  •  
    Oct 20 12:54 PM
    moonbat,
    I haven't seen any pictures, but I hear those camps have very nice public showering facilities, but I must admit the bullet option you put forward may be a viable alternative.

    Fortunately Olin Corp. (NYSE: OLN) is trading near a 5 year low so I can take line my pocket from your free choice.

    Disclosure: I don't own Olin Corp. (yet), but I may or may not own some of their products.
    Reply | Link to Comment
  •  
    Oct 20 01:56 PM
    When the ultra rich (like Buffett) are advising the politicians on which investments to make with mega billions of government money, and those ultra rich are making those same investments just prior to the government making those investments it is unfair advantage. The poor common people do not have the same inside info.
    Reply | Link to Comment
  •  
    Oct 20 02:28 PM
    So, buy BRK. Frankly, I consider Buffett one of the honest people out there. I'm glad he is sharing his expertise with the gvt.
    Reply | Link to Comment
  •  
    Oct 20 03:18 PM
    Oh boy. Looks like I get to do another point-by-point.

    "It was an unfair deal HIGHLY in favor of Buffett and no one else."

    You mean, other than the shareholders of the company he heads? Isn't he SUPPOSED to make deals that favor his shareholders?

    "The $2.5 billion in additional capital GS raised from ordinary shareholders certainly didn’t come with any of these benefits."

    GS raised $5B, not $2.5B, and it was a public offering that was OVERSUBSCRIBED. Did you think somebody was twisting those folks arms to force them to buy the shares?

    Quite simply, GS saw the value of the Buffett investment to be not just the cash, but also the cache. Would GS have been able to raise as much money for as high a price per share without Buffett's investment? It's certainly reasonable to think not. Overall, the cost of the capital raise may have been less because of Buffett's investment. In which case, existing GS shareholders benefit.

    "However, what pushed the Goldman deal over the brink from “unfair” to outright improper was that Buffett was consulting with Congress over the then-proposed $700 billion Bailout almost immediately... Buffett said the plan was 'absolutely necessary, in [his] view, to really avoid going over the precipice.'...for Buffett to be consulting with Congress about the deal is a serious conflict of interest, if not insider trading."

    Who, exactly, was Buffett consulting with? A Congressman? A congressional committee? Are you sure? I believe your quote is from his CNBC interview; does that mean that everybody who goes on CNBC is "consulting with Congress"? From an ethics standpoint, as long as everybody was aware of all of the financial positions of those involved, which they were, there is no ethical problem. Would it be improper for anyone in government to speak to ANY CEO about these problems? Then it wouldn't be improper for somebody to ask Buffett for his thoughts.

    By the way, do you know what insider trading means? And does it matter to you that Bailout v1.0 FAILED TO PASS?

    "Then came the GE deal. As was the case with GS... this long list of perks was made exclusively to Buffett, NOT the poor saps who ponied up $12 BILLION for GE via the ordinary share offering it issued at that time."

    And again, would GE have been able to raise as much in the secondary at as high a price without the BRK stamp of approval? If not, then GE did right by the deal.

    "But then, Buffett goes on CNBC — a GE subsidiary —to discuss how great an investment GE is!!! Again, a serious conflict of interest AND seriously bordering on insider trading."

    First, have you never seen anybody on CNBC talking about a stock they already own in a positive way? Why are you so aghast that Buffett was doing the same thing done by the vast majority of guests on that network?

    And again, you don't seem to know what insider trading is.

    "Finally, last Friday, Buffett writes an op-ed...does Buffett really need to be on a soapbox telling people to buy stocks right after $2 trillion in retirement and pension funds has been wiped out?"

    Need? Who cares? You're offended that the man speaks his mind at the time he thinks is most opportune? Why are you complaining?

    "Especially when he knows darn well that most people don’t have his ability to ignore the stock market for a year… let alone five to ten years?"

    Do you expect every op-ed to be pertinent to the majority of people? When somebody writes about something happening in some foreign country that most Americans couldn't pick out on a map, does that offend you? The fact is that a very large number of people who have money invested can and do ignore the stock market for years at a time.

    "this latest string of deals is inappropriate to say the least. And while investors who heed Buffett’s advice to buy now will certainly make money in the long run, I guarantee Buffett won’t be writing additional pieces assuring them of the value when they’re down another 10%, 20% or even 30% in the next few months."

    My goodness but you can whine, can't you?

    Buffett made good deals for his shareholders (who, by the way, he has a fiduciary responsibility to), and you complain. He goes on CNBC to share the reasoning behind these investments, as dozens of money managers do every day, and you complain. He writes an op-ed explaining his decision to invest his non-BRK money in stocks for the first time, specifically and repeatedly stating that he doesn't know if the market will go up or down in the short run, and you complain.

    Don't you have anything better to do?
    Reply | Link to Comment
  •  
    Oct 20 03:34 PM
    Warren Buffett is a man of great wisdom and tremendous investment acumen. However, the timing of his statements about the bail out did raise a few eye brows to say the least. I wouldn't accuse him of 'pumping' the stocks he bought. But I felt that there was a conflict of interest and Buffett shouldn't have made his statements at that time.
    I don't have any issue with his statement about GE. It isn't uncommon for fund managers, analysts etc to talk up stocks they have already bought.
    Reply | Link to Comment
  •  
    Oct 20 03:46 PM
    I think there should be a cabinet post "secretary of investing" and, in that capacity Warren Buffett could handle all of the Government's investments.
    Reply | Link to Comment
  •  
    Oct 20 03:57 PM
    Why be too pessimistic?

    Look, during the 1930s, the industrialized world suffered the great depresion. Stock markets was still young then as far as the western world is concerned. Then the stock market made a 68 years sustained rally from 1932 to year 2000 interrupted only by minor corrections. Minor corrections in context with 1932. Now the stock market is not so young nor it is too old. Dow maybe old but being replenished all the time. SnP is middle age while Nasdaq is definitely young.

    Now, the whole world is becomming aware of the stock market. Look at China and India as prime examples. Do you think more than 5% of their population has exposure to their stock markets?
    The industrialized world has now more than 50% of population with direct exposure and almost everybody indirectly affected. In the developing countries, stock market is now suffering the same fate as the US during the 1932 crash. Great! Are they going to have the same 68 years of sustained rally? More yes than no. Asians look at crisis as opportunity in disguise much more so than the West. Give them as much as a little chance and they will go for it with gusto.

    Likewise, this is only the second time the West have suffered so much stock market upheaval almost nobody of us have seen in a lifetime. Buffett must have seen 1932-1942 depression that is why he remained cash and now is starting to deploy that cash into the equity markets. Another 68 years of sustained rally starting this year or next? Well, he will not live to see it but surely he deserves his last hurray.

    Best time to enter is when everybody have already lost hope. Seems like not everybody is desperate yet like me. But are you willing to wait and wait until Dow reaches 5000 or lower; or wait until you have to chase Dow at 12000 or 14000 levels.

    In the context of the potential next wave of 68 years rally; this current downturn may be the bottom or next year will be it. It is no wonder Buffett has to act now since he is not known to be good at chasing rallies.
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  •  
    Oct 20 05:26 PM
    @righttoweb: sorry...warren bought those for his *private* portfolio, not for berkshire! at least, that is my understanding. besides, who wants the dilution of berkshire? the point is that those particular deals were really sweetened.
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