Buffett reassures the faithful

Goldman Sachs, a target for Wall Street bashing from Capitol Hill to Main Street, received a comprehensive endorsement from Warren Buffett and sustained applause Saturday from a record 37,000 shareholders at the Qwest Center Omaha.

Buffett spent an unprecedented 30 minutes at this year's annual meeting of Berkshire Hathaway Inc. shareholders explaining the role of Goldman Sachs, where he has bet $5 billion of Berkshire's money.

The top executives of Goldman Sachs received a tongue-lashing before a Senate committee last week, with Democrats and Republicans attacking the firm for allegedly marketing securities they knew were likely to fail and adding to the 2008 global financial near-collapse.

But Buffett, in his first public defense of the New York investment firm, said Goldman's business practices are solid and the U.S. Securities and Exchange Commission's civil suit against Goldman is unwarranted.

That doesn't mean Buffett wants the government to let financial markets run free. He said he is basically indifferent to most of the financial regulations being hammered out in Congress.

As for the deal that led to the SEC lawsuit, Buffett said investors that lost money primarily large European investment banks should bear the consequences of the risks they took. “It's a little hard for me to get sympathetic with a bank that made a dumb bond deal,” Buffett said.

The overflow Qwest Center crowd heard Buffett devote an unprecedented half-hour to a single topic, the Goldman controversy. He said the SEC's allegations don't mean Goldman Sachs has violated the high ethical standards that govern his business dealings.

Rather, he said, Goldman remains a trusted business partner that over the years has made Berkshire a better company. For example, Goldman helps Berkshire carry out its acquisitions and raise money.

“We knew that Goldman Sachs would be a hot subject,” said Ralph Witkin, a Berkshire shareholder from Greenwich, Conn. He said Buffett's defense of Goldman is “a total plus.”

“The general public doesn't understand, and they're out for blood,” Witkin said. “They think this company cheated ordinary Americans, but it really hasn't cheated anybody.”

The SEC alleged in the lawsuit that Goldman and one of its employees signed up investment banks in a contract based on what turned out to be bad home mortgage loans but didn't disclose the names of the other parties in the contract.

Those other parties, one of whom helped pick the home mortgages in the contract, were betting that the mortgages would collapse which they did, causing the losses.

The SEC said that if the investment banks had known the other parties' names, they would not have joined the contract, and that the contract was designed to fail.

But Buffett said companies that sign such deals including Berkshire don't expect to know the names of the other parties, nor would knowing the names make a difference.

“I don't care,” he said, because it's his job to decide whether to sign such a contract, no matter who else is involved.

Berkshire Vice Chairman Charlie Munger said the SEC's decision to sue Goldman came on a 3-2 vote by its governing board. He said he would have voted against the lawsuit.

Yet Buffett and Munger also said a lack of regulation on such contracts, known as derivatives, allows more “casinolike” investing on Wall Street that has little to do with the proper role of the financial industry: to allocate money toward businesses with the potential to create economic value.

“I think the usefulness of derivatives is overrated,” said Munger, who also criticized what he said were “scuzzy deals” by some investment companies.

If he were a “benevolent despot” put in charge of the nation's financial system, Munger said, “I would make Paul Volcker look like a sissy,” referring to the former Federal Reserve chairman known for his tough economic policies.

Buffett said Burlington Northern Santa Fe Corp., the railroad company Berkshire acquired this year, routinely uses derivatives contracts to protect against unexpectedly high diesel fuel costs.

Munger said during the question-and-answer session that he had no problems with derivatives on commodities, such as fuel or grain. Buffett's view is that over a long period, diesel fuel costs would be about the same without the contracts, and the contracts involve extra fees.

But the railroad's managers are in charge and can manage costs as they see fit, Buffett said.

Federal regulations proposed in Congress would restrict derivatives. Buffett doesn't object to restricting derivatives, but he said part of the proposal would unfairly require some companies to put up large amounts of added capital to back up existing derivative contracts.

That portion of the proposal likely would not directly affect Berkshire, he said, but only companies that the government deems “dangerous” to the economy.

It would be unfair and probably unconstitutional for the government to require substantial changes in contracts that were signed under previous laws, Buffett said.

If the government requires more capital to back up derivatives in the future, businesses will pay more in premiums to insurance companies such as Berkshire rather than use the money for expansion or other purposes, he said.

Ironically, the government's lawsuit against Goldman Sachs actually makes money for Berkshire, Buffett said.

Adverse publicity has hurt the stock price of the Wall Street firm, which probably will delay Goldman from paying back the money that Berkshire invested, he explained.

Berkshire earns $15 a second from its investment in Goldman, Buffett said. The longer Goldman has to wait, the more seconds go by: “Tick, tick, tick, tick …”

Contact the writer:

444-1080, steve.jordon@owh.com

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