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One financial observer, Graham Summers of Phoenix Capital Research, claimed on the finance blog site Seeking Alpha in October 2008 that Buffett’s conduct during the financial crisis involved a “a serious conflict of interest…seriously bordering on insider trading.” But what Buffett did was entirely legal. It may have been an exercise in crony capitalism and manipulation, but he broke no law. He simply used his political connections to secure huge profits with taxpayer money.
There are two main questions to ask about Buffett’s behavior. First, why do so many people continue to heed his policy advice without considering his enormous self-interest? Second, and more important, how did our politics get so warped by deep-pocketed, heavily invested advisers?
After the bailout bill passed, Warren Buffett sat down and wrote Treasury Secretary Paulson a four-page letter proposing a larger solution to the financial crisis: a quasi-private fund backed by the U.S. government that would buy bad loans and other rapidly sinking investments. He proposed that for every $10 billion put up by the private sector, the federal government would kick in $40 billion. As Paulson put it in his memoir, “I knew, of course, that as an investor in financial institutions, including Wells Fargo and Goldman Sachs, Warren had a vested interest in the idea.”
The bootlegger’s interest does not necessarily mean the Baptist’s ideas are wrong. The Treasury Department considered Buffett’s proposal, but with Paulson leaving at the end of President George W. Bush’s term, it would fall to the incoming secretary, Tim Geithner, to act on it. Geithner tweaked the plan and announced the Public-Private Investment Program in March 2009. It was largely seen as a boon to banks, especially large banks with a lot of bad debt.
What did Buffett do in the six months between writing the letter and watching the adapted policy get approved? He bought more bank stock. According to Berkshire’s quarterly reports, Buffett’s firm bought 12.4 million shares of Wells Fargo during this period and another 1.5 million shares in U.S. Bancorp. When Geithner announced the Public-Private Investment Program, bank stocks rallied and Buffett’s holdings did very well. We don’t know the exact price that Buffett paid for these millions of shares because he is not legally required to list the dates he bought them. But we do know those bank stocks all jumped after Geithner unveiled his program. Wells Fargo, which was trading around $20 per share early in 2009, jumped to $30 a share in the weeks following Geithner’s announcement. U.S. Bancorp did even better: It had hit a low of $8 a share in February 2009 but vaulted to more than $20 a share by May. And of course Buffett already owned tens of millions of shares in a host of financial companies, such as American Express and M&T Bank, which also benefited.
Buffett did very well with Goldman Sachs and GE too after they received their bailout money. His net gain from General Electric as of April 2011 was $1.2 billion. His profits from the Goldman deal by then had exceeded the gains of July 2009, reaching as high as $3.7 billion. He had bet on his ability to help secure the bailout, and the bet paid off.
In the fall of 2010, Buffet wrote a “Thank You, Uncle Sam” op-ed piece in The New York Times, praising the role that the government played in stabilizing markets throughout the crisis. There was no disclaimer or disclosure of how much he personally gained from TARP or the Public-Private Investment Program. He simply endorsed both as good public policy. At the bottom of the article he was identified this way: “Warren E. Buffett is the chief executive of Berkshire Hathaway, a diversified holding company.”
With tongue in cheek, journalist Ira Stoll, the former managing editor of the New York Sun (and current columnist for reason.com), suggested the bio might have been more accurate with a bit of rewriting: “Warren Buffett, the largest crony capitalist in the world, shareholder of GE, Goldman Sachs, Wells Fargo, U.S. Bancorp, M&T Bank, and American Express, as well as competitor of private equity and hedge fund firms that have been threatened with new taxes and regulations, and behind the scenes, insider adviser to most of the government officials mentioned above.”
Again, to be clear, even though Buffett was the one who proposed the public-private partnership, there is absolutely nothing illegal about lobbying for a policy while investing in the companies that stand to gain most if that policy is adopted. But consider this: Had Buffett instead pushed a private investment house to make an acquisition that would benefit certain stocks while quietly buying shares in those same stocks, he would have been vulnerable to charges of insider trading.
Indeed, this is what his lieutenant David Sokol was accused of doing in 2010, landing him in legal hot water. Sokol, who resigned amidst insider trading accusations, apparently bought shares in Lubrizol, a chemical company, and then encouraged his employer, Berkshire Hathaway, to buy a large stake in the company, thereby driving up the price of the stock. All Buffett did differently was use the federal government instead of a private company to boost the fortunes of certain stocks. This is why crony capitalism is so perennially attractive to financiers: It’s legal, and it’s often more remunerative than the illegal private-sector version might be. Because government officials are dealing with other people’s money, they are less likely than a private firm to drive a hard bargain.
Buffett has long believed that corporate-government partnerships provide excellent investment opportunities. While he’s famous for owning Dairy Queen and other all-American private companies, two of his largest holdings are in railroads and regulated utilities. He regularly lobbies on their behalf and counts on significant public money to make them more profitable.
After the 2008 financial crisis appeared to be easing, Buffett turned his attention to championing the Obama administration’s stimulus program. When he went on television to hawk the stimulus, he was never asked what he might personally be getting out of the deal. A candid answer would have taken up many valuable minutes of airtime.
In late 2009, Buffett made his largest investment ever when he decided to buy Burlington Northern Santa Fe Railway (BNSF). It was not just an endorsement of the railroad industry’s financials; it was also a huge bet on the budget priorities of his friend Barack Obama. As The Wall Street Journal reported, “Berkshire Hathaway Inc.’s planned purchase of Burlington Northern Santa Fe Corp. represents a bet that upcoming Washington policies to improve infrastructure and combat climate change will be a boon to the freight-railroad industry. President Barack Obama has said railroad investment will be a cornerstone of his transportation policies, given the environmental benefits and improved mobility that come with taking cars and trucks off roads.”
Others in the railroad industry saw Buffett’s involvement as very helpful, precisely because he was so politically connected. “It’s a positive for the rail industry because of Buffett’s influence in Washington,” Henry Lampe, president of the short-haul railroad Chicago South Shore & South Bend, told the Journal.