Warren Buffett’s share of the federal bailout

Rolfe Winkler so admired Warren Buffett’s old-fashioned market fundamentalism that, when he was a lad of fourteen, he wrote his idol a fan letter.

Winkler is not so admiring of the whited sepulchre of Omaha today.

Were it not for government bailouts, for which Buffett lobbied hard, many of his company’s stock holdings would have been wiped out.

Berkshire Hathaway, in which Buffett owns 27 percent, according to a recent proxy filing, has more than $26 billion invested in eight financial companies that have received bailout money. The TARP at one point had nearly $100 billion invested in these companies and, according to new data released by Thomson Reuters, FDIC backs more than $130 billion of their debt.

To put that in perspective, 75 percent of the debt these companies have issued since late November has come with a federal guarantee. …

With $7 billion at stake, Buffett is one of the biggest of these shareholders.

He even traded the bailout, seeking morally hazardous profits in preferred stock and warrants of Goldman and GE because he had “confidence in Congress to do the right thing” — to rescue shareholders in too-big-to-fail financials from the losses that were rightfully theirs to absorb.

Keeping this in mind, I was struck by Buffett’s letter to Berkshire shareholders this year:

“Funders that have access to any sort of government guarantee — banks with FDIC-insured deposits, large entities with commercial paper now backed by the Federal Reserve, and others who are using imaginative methods (or lobbying skills) to come under the government’s umbrella — have money costs that are minimal,” he wrote.

“Conversely, highly-rated companies, such as Berkshire, are experiencing borrowing costs that … are at record levels. Moreover, funds are abundant for the government-guaranteed borrower but often scarce for others, no matter how creditworthy they may be.”

It takes remarkable chutzpah to lobby for bailouts, make trades seeking to profit from them, and then complain that those doing so put you at a disadvantage.

Elsewhere in his letter he laments “atrocious sales practices” in the financial industry, holding up Berkshire subsidiary Clayton Homes as a model of lending rectitude.

Conveniently, he neglects to mention Wells Fargo’s toxic book of home equity loans, American Express’ exploding charge-offs, GE Capital’s awful balance sheet, Bank of America’s disastrous acquisitions of Countrywide and Merrill Lynch, and Goldman Sachs’ reckless trading practices.

And what of Moody’s, the credit-rating agency that enabled lending excesses Buffett criticizes, and in which he’s held a major stake for years? Recently Berkshire cut its stake to 16 percent from 20 percent. Publicly, however, the Oracle of Omaha has been silent.

This is remarkably incongruous for the world’s most famous financial straight-shooter. Few have called him on it, though one notable exception was a good article by Charles Piller in the Sacramento Bee earlier this year.

Buffett didn’t respond to my email seeking a comment.

What saddens me is that Buffett is uniquely positioned to lobby for better public policy, but he’s chosen to spend his considerable political capital protecting his own holdings. …

To me this feels like a betrayal. There’s a reason he’s Warren Buffett and not, say, Carl Icahn.

As Roger Lowenstein wrote in his 1995 biography of Buffett, “Wall Street’s modern financiers got rich by exploiting their control of the public’s money … Buffett shunned this game … In effect, he rediscovered the art of pure capitalism — a cold-blooded sport, but a fair one.”

But there’s nothing fair about Buffett getting a bailout, about exploiting the taxpaying public for his own gain. The naïve 14-year-olds among us thought he was better than this.

What would Ben Graham say?

I bought a share of Berkshire Hathaway’s B stock back in 2000, and allowed it to sit around in my portfolio as a mascot until very recently. It did increase in value almost 70% over more than five years, but Nucor (one of Karen’s picks) has done about as well in one year, and Nucor pays a dividend. True, Berkshire treated me better than JDSU, Pacific Century Cyberworks, or Global Crossing did back in the tech wreck. But my investing philosophy has developed since then, and Berkshire Hathaway neither performed well, nor met my investment criteria. After five years, I had also gotten tired of Warren Buffett’s hype. So I sold that share.

John Markham, in his column in MSN Money today, IMHO, hit the Buffet nail right on the head.

Oh, lords of the market, let this be the last straw. The last paean from the pious. The last time we must see simpering reporters, Rotarians and retirees blow kisses to a man once celebrated as the Oracle of Omaha but now best described as the Natterer of Nebraska.Surely there was a time when Warren Buffett was a chief executive worth studying, and even investing alongside. But it sure seems like that time is long past, particularly in contrast to a couple of similar, but much better, conglomerateurs that I’ll introduce you to in a moment…

..Buffett released the fiscal 2005 earnings report of his holding company, Berkshire Hathaway (BRK.A), on Saturday, as well as an annual report and 22-page chairman’s letter.

And when you get past all the juvenile humor, unseemly criticism of rivals, self-promotion and homilies, you are left with one impression: This is one heck of a way to disguise the fact that — outside of an accounting gain — earnings were down 29% in 2005. And that shares turned in a fifth-straight year of underwhelming performance in the only metric that investors truly care about: the advance of the price.

Did I say the stock price is all that matters? Gosh, that seems so craven. I am so sorry to bring it up. But that is what investors are paying him for, isn’t it? To boost earnings in a way that encourages new buyers to be more aggressive than sellers, making the price go up?

That is why we buy most stocks. But Berkshire Hathaway is more a cult than a security.

Just read the 2005 report, and you will see that it is largely filled with boasts that the chairman has goosed book value by slapping together an insurance, retail, media and construction conglomerate that looks more like something the cat dragged in than a streamlined earnings machine.

Needless to say, I strongly agree. Buffett has declined to pay dividends, arguing for years that he can do a better job of investing Berkshire stockholders’ profits than they can. The record of the last five years proves that he can’t.