Let’s Hold Benedict Arnold Billionaire Warren Buffett Accountable
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The derivatives genie is now well out of the bottle, and these instruments will almost certainly multiply in variety and number until some event makes their toxicity clear. Central banks and governments have so far found no effective way to control, or even monitor, the risks posed by these contracts. In my view, derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal. ( Berkshire Hathaway annual report, 2002)
Those were some wise words from Warren Buffett, the Will Rogers of the financial world. He used to say such things at his stockholder meetings, where tens of thousands come to savor his homilies and celebrate their own good fortune--a kind of Woodstock for people who dig money more than sex, drugs and rock n roll. His fans love to party with the iconic multi-billionaire from Omaha with the sparkle in his eyes. The guy makes people feel proud to be Americans and capitalists, big and small.
Buffett's reputation is as a straight shooter. For years he had only contempt for fantasy finance securities that contain nothing but air and risk. He was among the first to see that if we let toxic securities like synthetic collateralized debt obligations run wild, we'd soon be engulfed in a financial crisis. (For an easy to read account of these "financial weapons of mass destruction" please see The Looting of America.)
But times have changed. Today, Buffett is all about the bottom line. He's taken to defending the biggest shysters in the country--and argues that his own questionable derivatives should be shielded from government regulators.
If this were just about Warren Buffett, it wouldn't be worth giving him more ink. But his betrayal comes at a time when Congress is finally realizing that most of us are truly upset with Wall Street's looting of America. While big bank profits and bonuses are reaching record highs, April's unemployment statistics show that there are over 29 million of us without work or forced into part-time jobs. The BLS U6 jobless rate is at 17.1 percent.
There's a genuine populist upsurge that might force the Senate to pass legislation that would bust up the largest banks, reintroduce Glass-Steagall, control dangerous derivatives and provide consumer financial protection. Buffett has decided instead to lend his credibility to defend Wall Street against Main Street. (Hey Warren, how about that high speed trading that tore the stock market apart yesterday. Are you for that too?)
Apparently something happened on the way to the bank--or actually, on the way to the bank bailout. Good old Mr. Buffett is no dummy. When he saw the Goldman Sachs alumni and groupies in government (like Henry Paulson at Treasury and Tim Geithner at the Fed) shoveling billions (not millions) of taxpayer dollars into Goldman, one of the richest financial institutions in history, he knew where next to put his own money. (Bob Kuttner's Presidency in Peril provides a virtual yearbook of Goldman Sachs graduates now in top government posts.)
The government, led by Paulson, the former Goldman Sachs CEO, pumped $10 billion of TARP money into Goldman Sachs at 5 percent interest. But the oracle of Omaha, put in $5 billion and got 10 percent interest plus extra goodies if the stock price rose. Now that's a smart businessman.
Mr. Buffett also knew that Goldman Sachs would probably snag lots more ($12.9 billion, in fact) in bailout funds via AIG, which had insured billions of Goldman's toxic assets--including a bristling arsenal of financial weapons of mass destruction. Goldman Sachs was going to get a free ride on two colossal bad bets. One bet was on complex derivatives that turned bad and festered on its balance sheet. It had been a big gamble for Goldman to hold those assets, but the returns (while they lasted) and the upfront fees were just too juicy to resist. Goldman's second big bet was that AIG was sound enough to insure those risky derivatives against default. Wrong again. Had AIG gone into bankruptcy, Goldman Sachs would have received pennies on the dollar for their bad bets. Hey, that's capitalism, isn't it? Well, maybe once upon a time.