Warren Buffett

Warren Buffett's Deals Come at Taxpayers' Expense

How did Warren Buffett get his property so cheap? Simple! You paid for it.

|

The second-richest American, Berkshire Hathaway CEO Warren Buffett, has given the March 17 issue of Fortune magazine an excerpt of his forthcoming annual letter to investors. The tale of two successful Buffett purchases is illuminating, but not quite in the way Buffett intends.

The Fortune editors have run it out under the headline, "Buffett's annual letter: What you can learn from my real estate investments."

Buffett writes that the purchases — a 400-acre farm in Nebraska and a retail property in Manhattan "adjacent to New York University" — "illustrate certain fundamentals of investing."

He goes for several hundred words, naming five points that are supposedly illustrated by his real estate deals. "Keep things simple and don't swing for the fences." "Focus on the future productivity of the asset you are considering."

They're all more or less unobjectionable, but they also both overlook one important point that both real estate investments had in common — Buffett bought them from the American government, i.e., from us taxpayers, at prices that turned out in retrospect to be ridiculously cheap.

Buffett's letter discloses that he bought the Nebraska farm from the Federal Deposit Insurance Corporation in 1986. The Federal Deposit Insurance Corporation (FDIC), part of the federal government, had gotten it from a bank that it took over.

And Buffett and his partners bought the New York City property in 1993 from the Resolution Trust Corp., a government agency created to, as Buffett put it, "dispose of the assets of failed savings institutions."

Buffett goes on and on boasting about what great investments he made by purchasing the two properties. "Now, 28 years later, the farm has tripled its earnings and is worth five times or more what I paid," he writes. As for the New York property, "Annual distributions now exceed 35 percent of our initial equity investment. Moreover, our original mortgage was refinanced in 1996 and again in 1999, moves that allowed several special distributions totaling more than 150 percent of what we had invested."

He writes that "the two investments will be solid and satisfactory holdings for my lifetime and, subsequently, for my children and grandchildren."

It seems to me that among the "certain fundamentals" of Buffett-style investing that these two stories illustrate are "buy things from the government, because you can sometimes get bargains from bureaucrats who have no idea of the value of what they are selling, and who have a mandate just to sell the stuff off quickly."

In other words, while Buffett boasts of his great real estate bargains, the ones paying the bills are the taxpayers. The savings and loan bailout cost taxpayers an estimated $130 billion. The insurance premiums that banks pay to the FDIC to cover failures mean the banks pay less in taxable dividends to shareholders and less in taxable interest to depositors.

Which brings us to a certain fundamental of public policy, perhaps one as fundamental as Buffett's fundamental of investing. The government should avoid the real estate business. It winds up selling assets to people like Buffett when prices are low.

The story also surfaces a second related and also fundamental point, also unmentioned by Buffett: assets are more valuable in private hands than in government hands.

Finally, it's worth noting that these two real estate investments touted by Buffett in his Berkshire Hathaway shareholder letter were apparently made by him personally, rather than by Berkshire Hathaway, the public company in which he is a major shareholder. In another proposed deal with government, Buffett mixed the two. In his October 8, 2008, "Dear Hank," letter to Treasury Secretary

Henry Paulson, Buffett outlined a deal in which, in the words of the letter, "The company I head, Berkshire Hathaway, would be pleased to invest $500 million" and "I would be willing to personally buy $100 million of stock in this public offering. (This constitutes about 20 percent of my net worth outside of my Berkshire holdings, which as you know are promised to charity.)"

I don't begrudge Buffett his success in real estate investing. In fact, I'm happy he's prospering. But that feeling is tempered by some chagrin at the realization that, as an American citizen and taxpayer, I'm one of the people who sold him the property at such a deeply discounted price.

NEXT: "Irish Democracy" is Alive and Well and Living in America!: Instapundit

Editor's Note: We invite comments and request that they be civil and on-topic. We do not moderate or assume any responsibility for comments, which are owned by the readers who post them. Comments do not represent the views of Reason.com or Reason Foundation. We reserve the right to delete any comment for any reason at any time. Report abuses.

  1. Good article.

    1. “If I didn’t think the government was going to act, I would not be doing anything this week,” Buffett told CNBC after investing $5 billion in Goldman Sachs. “I am, to some extent, betting on the fact that the government will do the rational thing here and act promptly.”

      What a humanitarian.

  2. Fancy that. The darling rich guy of the left, benefitting from statist stupidity and the robbery of others.

    1. Considering the GOP’s entire purpose for existing is to do the bidding of rightwing rent-seeking billionaires, Buffett by comparison looks to be merely doing good capitalism.

      1. Tony|2.24.14 @ 5:08PM|#
        “Considering the GOP’s entire purpose for existing is to do the bidding of rightwing rent-seeking billionaires,”

        Considering the Dem’s entire purpose is to develop and enforce poverty on those they don’t kill,
        See how easy it is, shitpile?

        1. 1/10. Poor execution, tired retread of a routine, and utterly predictable. It’s like he’s not even trying any more.

      2. HUR HUR DEFLECTION HUR

        1. Has anyone considered the possibility that the new iteration of Tony is just Shreek’s sockpuppet? Notice that the Shreek is absent from the one thread guaranteed to draw him here.

          1. I was enjoying toying with John on the PM links thread.

            So Buffett bought low during a time of distressed real estate prices? So what?

            Notice that Bush 41 funded the Resolution Trust (about $500 billion) and Bush 43 funded TARP. If those aren’t two losers fucking American in the ass then there are no cattle in Texas.

            And Jeb is waiting in the wings. I smell a Bush Debacle #3 coming our way.

            1. Bush 41 & 43? Who here defends these guys? Jeb & the establishment Pubs are the enemy of the libertarian movement. Everyone here knows this, except you, maybe?

            2. Palin’s Buttplug|2.24.14 @ 6:33PM|#
              “I was enjoying toying with John on the PM links thread.”

              Yeah, you dishonest prick, fuck you with a porcupine.

            3. Though I’ve only been reading the comments here for a short while, I cannot help but notice that the majority of your comments hinge on Bush bashing. It’s almost like you’re too stupid to make a point without bringing up a guy that has been out of office for five years. It’s hard to climb out of the intellectual rut you’ve dug for yourself, isn’t it?

              I find that particularly amusing as the majority of libertarians I know are not particularly enamoured of President Bush.

              I wonder if you similarly troll the United Party’s website absolving Putin of his woes with “But Yeltsin…” Probably not, you can’t just copy/paste from whatever intellectually bankrupt leftie rag you use to soothe your progressive angst.

      3. Considering how many people Stalin and Mao killed, Hitler looks pretty good by comparison.

        Godwin!!!

      4. Can Tony’s typing finger burn even a calorie without producing something stupid?

    1. Agreed. Clearly Welch, the Jacket, et. al read the comments and, in their wisdom, decided to give the Shreek an entire article trolling his hero.

      Of course, I approve.

  3. 5x the original investment for 28 years is only a 6% return. Not exactly worth the chest thumping.

    1. You’re not counting all the operating income the properties have generated over the years.

      1. That assumes that there is income.

        1. “Now, 28 years later, the farm has tripled its earnings and is worth five times or more what I paid,” he writes. As for the New York property, “Annual distributions now exceed 35 percent of our initial equity investment. Moreover, our original mortgage was refinanced in 1996 and again in 1999, moves that allowed several special distributions totaling more than 150 percent of what we had invested.”

          1. Looks like you broke the BladdyK reply cycle.

  4. Sound the shriek-alarm!

    (The sound of the shriek-alarm, unsurprisingly, is a shriek.)

  5. I wonder if he is calling for increased property taxes. You know, so that he pays his fair share.

    1. He’s always willing to pay more. As long as others are forced to do the same, and assuming he gets a favor for doing so.

      1. Well yeah, He could pick up some properties on the cheap at some sheriff’s sales.

  6. The conspiracy theorist in me says that Keystone is not getting approved because Obama BFF Warren Buffet own CNX, the railroad company that is currently hauling all the oil that would move through the pipe.

    But that is just crazy talk.

    1. You mean the BNSF.

    2. CNX is CONSOL Energy. CNI is Canadian National Railway, which Gates is or was involved in. I think the SEC of FTC made Buffett sell all his non-BNSF railroad shares.

  7. Good points, but time to extend to take the next logical step. Land is not the fruit of anyone’s labor, and our system of land tenure is based not on labor, but on decrees of privilege issued from the state, called titles. In fact, the term “real estate” is Middle English (originally French) for “royal state.” The “title” to land is the essence of the title of nobility, and the root of noble privilege.

    When the state granted land titles to a fraction of the population, it gave that fraction devices with which to levy, and pocket, tolls on the fruits of the labor of others. Those without land privileges must either buy or rent those privileges from the people who received the grants or from their assignees. Thus the state titles enable large landowners to collect a transfer payment, or “free lunch” from the actual land users.
    http://geolib.com/essays/sulli…..allib.html

    1. “Those without land privileges must either buy or rent those privileges from the people who received the grants or from their assignees.”

      Tell it to the Brits.

    2. You’re full of shit. Owning land is not a magic, arbitrary passkey to riches; if you don’t produce anything with it, you get eaten alive on taxes and lose it.

    3. “Land is not the fruit of anyone’s labor, and our system of land tenure is based not on labor”

      Shut the fuck up, already. The proprietism shit is so goddamn boring.

    4. The value of land does not come from the land itself. You can buy all kinds of good, productive land cheaply. The high value of certain land comes from its proximity to the labor that other people are conducting on their own land.

    5. Are you channeling Marx?

      1. Ahhh…ha ha ha!

    6. “Good points, but time to extend to take the next logical step. Land is not the fruit of anyone’s labor”

      The only type of widespread wealth taxes are property taxes and inheritance taxes. And they specifically address the issue of accumulating larger amounts of wealth based upon someone else’s labor.

      So, this is not a problem.

  8. “5x the original investment for 28 years is only a 6% return.” No the 5x increase in property value is in addition to “the farm has tripled its earnings”.

    1. You’re right. The real estate appreciation of 6% is awesome compared to the 4% annual increase in earnings.

  9. As we all know, Buffett does his own taxes, on form 1040EZ. And he pays less than his secretary.

    1. If that’s the case, then he does all his itemized deductions on his business’ taxes.

      1. And his rides on Net Jet are NOT income!

  10. By the way, this pales in comparison to the enormous money Buffett made on two more USA/Bush distressed deals – Bank of America and Goldman Sachs.

    If another Bush is elected short everything and get ready to buy some other poor sucker’s losses at the bottom.

    1. Seriously, man, the guy has been out of office half a decade. Nobody here liked him when he was around. Do you ever get tired of screaming “but Bush did it too!” every time anyone brings up the obvious corruption and incompetence ongoing currently? At what point has it been long enough since Bush left office that we start evaluating officeholders on their own merits, rather than in comparison to him, in your world?

      1. It’s the inherent weakness in their “BOOOOOSSSHH!!” argument that drives me crazy.

        1. X is bad.
        2. “You can’t say X is bad when my guy does it, because ‘your’ guy did it more!”

        So, if X isn’t bad when Team Blue does it, then it can’t have been bad when Team Red did it more. OR, X is always bad, but it’s redeemed when your Team does it. Thus, Palin’s Buttplug et al must either condone Bush’s policies that are continued under Obama, or they don’t really care about the policies so much as the people involved.

        It’s like saying that one rapist shouldn’t be charged because other people have raped in the past and gone free.

        1. Also, it’s an obvious attempt to change the subject and derail the conversation.

    2. If another Bush is elected

      Didn’t that happen in 2008?

      1. And again in 2012, but shreek claims his dick tastes different.

    3. It’s like you have Bush OCD.

  11. Not only did he take advantage of the US government, he cut his investors out of the deal? Does that mean he saves the best investments for his personal money, and his investors only get second choice?

    Nice.

  12. Buffett knows no bounds on hypocrisy. He asks the government to raise his taxes, but doesn’t voluntarily send in any extra payments to the treasury’s national debt relief fund.

    1. He wants everyone’s taxes raised, not just his own, that way, he can still says he’s paying more while disregarding the masses also affected.

    2. You can voluntarily pay more in taxes if you want, not that a wealthy economic leftist would ever say so.

  13. Maybe he could “re-invest” some of his earnings by way of a donation to the IRS toward the national debt, since he’s a good buddy of Obama.

    1. Anvil|2.24.14 @ 8:19PM|#
      “Maybe he could “re-invest” some of his earnings by way of a donation to the IRS toward the national debt, since he’s a good buddy of Obama.”

      Instead, for all his whining about how taxes are too low, he handed all his dough over to the Gates Foundation. The Gates run that operation as a tight ship; you get results or you get no money.
      You’ll notice that hypocrite Buffett wasn’t about to hand it over to Obo to be pissed away on some brain-dead scheme.

  14. Buffett reminds me of when a local radio show interviewed some guy from Dragon’s Den (Canada’s Shark Tank) and asked him advice on what people should do to get capital and start a business. All he did was shoot out various government departments giving out grants. He basically told people to troll the government for money. Which wasn’t helpful at all.

    Look, these guys know how to game the system. If the government allows for this sort of stuff then why not play along and take advantage?

    If you can’t beat ’em, join ’em. And that’s what they do.

  15. In the USA trolling the government for money is for the little guy. All the big shots know cronyism is where the real riches are produced.

    1. No different up here.

  16. The secret of a great success for which you are at a loss to account is a crime that has never been found out, because it was well executed. see Buffett, soros, elon musk

  17. A) Buffett says the government should raise taxes on the rich.
    B) Buffet gives his wealth away to the Gates Foundation, which will make it tax exempt.

    It seems if you were genuinely worried about the governments tax collections, you wouldn’t avoid paying them. His actions are a little hypocritical.

    Granted, I think it’s good to give the money to the Gates foundation, but if he really thinks low taxation is an issue, then he should at the very least, instruct his accountant to not take every possible means to lower his and his companies tax bill.

    It’s particularly egregious that Berkshire Hathaway has been in multiple disputes with the IRS, with the IRS claiming that BH owes at least a billion dollars in additional taxes. It’s clear that only the very richest people and companies could manage to pay a billion dollars less than the IRS thinks you should. Anyone else would either end up in jail or capitulate and pay the money plus fines and penalties.

  18. “If I didn’t think the government was going to act, I would not be doing anything this week,” Buffett told CNBC after investing $5 billion in Goldman Sachs. “I am, to some extent, betting on the fact that the government will do the rational thing here and act promptly.”

    Enough said? He’s a criminal.

  19. “To buy things from the government, because you can sometimes get bargains from bureaucrats who have no idea of the value of what they are selling, and who have a mandate just to sell the stuff off quickly.” can really be a great advantage to the proficient investors who know the approaches to bureacrats and the main aspects of investing, I still try to deal with my debt from Personal Money Service company online and the investments will follow several years later, I think.

  20. To buy things from the government, because you can sometimes get bargains from bureaucrats who have no idea of the value of what they are selling, and who have a mandate just to sell the stuff off quickly.” can really be a great advantage to the proficient investors who know the approaches to bureacrats and the main aspects of investing, I still try to deal with my debt from http://www.personalloanform.com and the investments will follow several years later, I think.

Please to post comments

Comments are closed.