Saturday, August 27, 2011

The Daily Ticker - Taken to Task: The Cult of Warren Buffett

By Aaron Task

Bank of America stock jumped over 9% Thursday on news that Warren Buffett is making a $5 billion investment in the bank. But, at $7.65, the stock closed more than a $1 below its high of the session and BofA shares were falling anew Friday morning, trading as low as $7.45 before stabilizing.

When the news broke that Buffett was investing in BofA, the chattering class rejoiced….Buffet has "saved" Bank of America"…Buffett Deal Is "Seal of Approval" … "Time to Buy Bank of America"…and my personal favorite: Buffett's vote of confidence in B of A, US economy.

Warren Buffett is a great investor but the idea his deal with Bank of America is good for anyone but Warren Buffet is baloney.

Warren Buffett is investing in Bank of America for one simple reason — to make money. A lot money.

Follow the Money

Bank of America will pay Buffett a 6% dividend for the privilege of getting access to his money — and his brand. Shareholders will have to pay for that and live with the threat of a massive dilution as Buffett also got the right to buy up to 700 million shares of Bank of America stock at $7.14 per share. (See: Buffett: The One-Man Blue-Chip Bailout Machine Strikes Again)

From Salomon Brothers in 1987 to Goldman Sachs and GE in 2008 to Bank of America today, Buffett has always been willing to help a fellow corporate citizen who's down on their luck — for the right price.

Not that there's anything wrong with that... but don't confuse Buffett's profit game for altruism, patriotism or any other "ism" other than capitalism.

Buffett has carefully cultivated an image of America's kindly grandfather. Just a simple, humble guy from Omaha who just happens to be one of the world's richest men. Many journalists and pundits eagerly peddle this glorified version of the man they call "The Oracle of Omaha" because it's a good story and appeals to the huddle masses yearning to be free -- and looking for a hero.

In recent years, Buffett has opined about why we should 'Buy American' -- stocks that is -- to tax policy, and his prognostications have been greeted as gospel by everyone from the thousands of individual investors who flock to Berkshire's annual "Woodstock of Capitalism" up to and including President Obama, who cited Buffett's recent complaint that he and other 'super-rich' super-friends aren't taxed enough. (See: Buffett Blasts Low Taxes On Billionaires, Says Congress Must Stop Coddling Them)

But I'd like to take these Buffett brown nosers to Task for failing to see that Buffett is nothing more than an investor, and like any other good investor, his only goal is to make money.

Buffett: Myth vs. Reality

By putting his "stamp of approval" on Bank of America, Buffett no doubt hoped to profit not just on the BofA deal, but also on his massive holdings in other blue-chip stocks — including financials like USBancorp and Wells Fargo, which would be at risk if a "systemically important" bank like Bank of America were to get into 'real' trouble, as appeared to be the case earlier this week.

The idea Buffett is doing the rest of us a favor is naïve, at best. He's not saving our economy, nor is he giving us a road map on how we can make money. He's just trying to make money for himself and his shareholders.

Again, not that there's anything wrong with that…but it says something about our society that we deify this billionaire rather than celebrate researchers seeking the cure for cancer, scientists trying to solve the world's energy crisis or our children's school teachers, not to mention our soldiers in uniform.

And while Buffett has never been accused of breaking the law, he's not without sin either. Consider:

  • Buffett is the largest shareholder in Moody's, one of the rating agencies that placed AAA ratings on subprime mortgages that later proved toxic — arguably one of the biggest causes of the crisis of 2008 and its aftermath, including up to present day. And Buffett started selling Moody's once the rating agencies' role in creating the crisis became evident.
  • More recently, Buffett came under scrutiny for defending former executive David Sokol, who bought shares of Lubrizol last winter just ahead of the company's purchase by Buffett's Berkshire Hathaway. But once public opinion turned against him, Buffett threw Sokol to the curb faster than you can cook a minute steak. (See: The Sokol Saga: Buffett Can't Remove "Black Mark," Tuck's Paul Argenti Says)
  • Berkshire subsidiary General Reinsurance paid a $92 million fine to the SEC last year after being found guilty of helping insurance clients like AIG mislead investors about their financial health.
  • Buffett has had other run-ins with the SEC, including over Berkshire's recent purchase of Burlington Northern and as far back as 1974 over a transaction to buy Wesco Financial, The NY Post reports.

Moreover, investors who've followed Buffett into investments like Goldman Sachs and GE got burned, assuming they adhered to Buffett's dictum about "forever" being the best holding period. The rest of us didn't get the big dividends Buffett earned and both stocks are currently trading below the levels when Buffett made his "confidence-boosting" investments in 2008, Goldman by 12% and GE by 37%.

Finally, shares of Buffett's own company, Berkshire Hathaway, have underperformed the S&P 500 in the past year and the company recently split its B-shares, violating yet another of Buffett's not-so-sacred tenants.

Nobody's perfect but you wouldn't know it listening to most of the coverage surrounding Buffett where there's way too much fawning and not enough 'fair and balanced' analysis.

Aaron Task is the host of The Daily Ticker. You can follow him on Twitter at @atask or email him

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