Buffett's Goldman defense reeks of hypocrisy

Warren Buffett's about-face on derivatives smacks of a rich, spoiled brat, not the sage, sensible investor the market adores.

By TheStreet Staff May 3, 2010 2:18PM

TheStreetWarren Buffett. Credit: (© Paul White/AP)By Lauren Tara LaCapra, TheStreet


Warren Buffett is a hypocrite.


For at least eight years, the Oracle of Omaha had been grousing about the derivatives business: In 2002, he called derivatives "financial weapons of mass destruction." In 2003, he said they were "unattractive" and moaned about related losses. In 2004, he compared the derivatives market to hell. In 2005, he mocked the way contracts are structured and compared the dangers of derivatives trading to Hurricane Katrina.


In 2006 and 2007, Buffett's tone softened a bit as Berkshire Hathaway (BRK.A) wound down a derivatives business it took over when it acquired Gen Re. He breathed a sigh of relief on that front, and assured investors that all remaining derivatives contracts that Berkshire held were personally managed by Buffett himself and contained "no counterparty risk."


He provided perhaps the most stunning rebuke of derivatives and their supporters in 2008. He began by simply stating: "Derivatives are dangerous," but went on to compare them to contracting a venereal disease with a philandering sexual partner.

"It's not just whom you sleep with, but also whom they are sleeping with," Buffett warned.


But this year, Buffett is lobbying hard against any attempt to rein in the "dangerous" and unregulated derivatives market. He would like a pass on any rule that would require broker-dealers to clear such deals in an open market or post higher capital to cover related losses. It's not that Buffett doesn't support the broader measures. He just thinks Berkshire shouldn't be required to pay up for contracts it already brokered.


His argument -- or his campaign donations -- was apparently so convincing that the senator from his home state of Nebraska, Ben Nelson, was the only Democrat to join Republicans to help block debate on financial-reform legislation. Nelson also succeeded in getting the Agriculture Committee to exclude existing contracts from the derivatives bill it approved.


At Berkshire's annual shareholder meeting over the weekend, Buffett also issued a muscular defense of Goldman Sachs (GS) and its CEO Lloyd Blankfein. It's ironic because the Securities and Exchange Commission has accused the firm of fraud, and the Justice Department has reportedly begun a criminal probe into transactions involving the type of derivative contracts that gave a lot of investors metaphorical genital warts.


One wonders whether Buffett would be so supportive of Goldman and its behavior if he didn't hold a $5 billion preferred stake in the company.


To continue the Oracle's own metaphor, it appears that Buffett has been having unprotected sex -- and doesn't want to stop.


No one doubts Buffett's ability to invest wisely. His hand-picked, self-structured and closely monitored derivatives contracts have been "significantly" profitable, according to last year's annual report. He expects them to continue to earn money over the life of the contracts, though he acknowledges the potential for "wild swings" on a short-term basis.


Nonetheless, Buffett's self-serving actions and blatant hypocrisy are disappointing. It tarnishes his reputation as a sagacious philanthropist -- albeit a capitalist one -- who supports sensible measures for ordinary investors. Buffett's annual letters read like guides for the Average Joe investor, but his recent actions smack of a wealthy, spoiled brat: It's OK to hammer everyone else with reforms that will help the system; just don't hammer Berkshire.


"We are delighted that we hold the derivatives contracts that we do," Buffett said in his 2009 letter to Berkshire investors. "To date we have significantly profited from the float they provide. We expect also to earn further investment income over the life of our contracts."


Indeed he does. The rest of the market be damned.


Related Articles


Is Goldman dragging down Warren Buffett?


Buffett breaks his rules again


Warren Buffett as a growth manager





Please help us to maintain a healthy and vibrant community by reporting any illegal or inappropriate behavior. If you believe a message violates theCode of Conductplease use this form to notify the moderators. They will investigate your report and take appropriate action. If necessary, they report all illegal activity to the proper authorities.
100 character limit
Are you sure you want to delete this comment?


Copyright © 2014 Microsoft. All rights reserved.

Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.


StockScouter rates stocks from 1 to 10, with 10 being the best, using a system of advanced mathematics to determine a stock's expected risk and return. Ratings are displayed on a bell curve, meaning there will be fewer ratings of 1 and 10 and far more of 4 through 7.

125 rated 1
264 rated 2
485 rated 3
679 rated 4
640 rated 5
617 rated 6
632 rated 7
493 rated 8
276 rated 9
153 rated 10

Top Picks

TAT&T Inc9



Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.

Contributors include professional investors and journalists affiliated with MSN Money.

Follow us on Twitter @topstocksmsn.