Buffet, yet another pig feasting on TARP
sacbee.com
Billionaire Buffett benefits from bailout he promoted
cpiller@sacbee.com
Published Sunday, Apr. 05, 2009
Financier Warren Buffett has been lauded for his plain-spoken denunciation of the greed and foolishness behind the economic crisis. He has pushed the massive federal bailout of imploding banks as the essential response to an "economic Pearl Harbor."
When Buffett speaks, people in high places listen. The famous investor is so highly regarded that in a debate last fall, both presidential candidates said they were considering him for treasury secretary.
A Bee examination of regulatory records shows that Buffett, the world's second-wealthiest person, also quietly has become a top beneficiary of the banking bailout he so vigorously advocated.
Just 28 companies received more than 90 percent of the funds so far disbursed to financial firms by the $700 billion Troubled Asset Relief Program, or TARP.
Buffett's holding company, Berkshire Hathaway Inc., did not directly receive any of that aid. But Berkshire is the largest shareholder of San Francisco-based Wells Fargo & Co., which got $25 billion – 91 percent of TARP funds invested in institutions headquartered in California.
Overall, Berkshire owns more than $13 billion of stock in the top recipients of TARP funds – including Goldman Sachs Group Inc., US Bancorp, American Express Co. and Bank of America Corp., all considered by analysts to be in deep trouble before the federal infusion. The more the bailout props up these financial companies, the more secure Berkshire's investments.
That total, The Bee found, ranks Berkshire fifth among all investors in TARP-assisted companies. Berkshire's TARP holdings constitute 30 percent of its publicly disclosed stock portfolio. That proportion reflects at least twice as much dependence on bailed-out banks as any other large investor.
Buffett increased his bank holdings in September, while openly pressing Congress to pass the bailout.
"If I didn't think the government was going to act, I would not be doing anything this week," Buffett told CNBC, after investing $5 billion in Goldman Sachs. "I am, to some extent, betting on the fact that the government will do the rational thing here and act promptly."
In October, TARP was approved. Still, Buffett's credibility is such that experts tend to withhold judgment about his motives.
"People can draw their own conclusions" about Buffett's huge stake in the bailout, said Richard Coppes, an expert in business ethics at the international law firm Jones Day, and former general counsel of the California Public Employees' Retirement System. "But it shows one reason Buffett is so intensely interested in TARP."
Buffett, whose company also is the largest investor in Goldman Sachs and American Express, declined to be interviewed. In a February letter to Berkshire shareholders, he said that without government intervention, the consequences would have been "cataclysmic."
"Like it or not," he wrote, "the inhabitants of Wall Street, Main Street and the various Side Streets of America were all in the same boat."
Experts agreed with Buffett that preserving a functional banking system, TARP's stated goal, benefits everyone. In dispute is whether the bailout was the fairest and best approach.
Some say large shareholders such as Buffett actually have been the primary, and perhaps only significant, beneficiaries of TARP. Bank stocks have recovered significantly in recent weeks – Goldman's share price has more than doubled since November – and no TARP bank has failed.
Berkshire Hathaway shares are down nearly 40 percent since September, but have risen sharply in recent weeks with the financial sector stock rally.
Critics of TARP, however, worry that it propped up Wall Street against bankruptcy at the expense of Main Street and Side Street taxpayers. The Treasury Department expected TARP to get loans flowing again, but the market has barely thawed and unemployment has surged.
Thomas M. Hoenig, president of the Federal Reserve Bank of Kansas City, recently advocated a government takeover of moribund banks until their balance sheets can be cleaned up.
"Shareholders would be forced to bear the full risk of the positions they have taken," Hoenig said, "and suffer the resulting losses."
TARP's quiet winners
Buffett's TARP assets appear to have traveled under the radar of federal oversight groups. The holdings of foreign firms that gained much from the U.S. bailout also have escaped public notice.
The Bee's examination of federal data showed that foreign investment firms hold more than $31 billion in TARP-assisted financial companies. That lends credence to U.S. concerns that some European countries should more forcefully stimulate their own economies.
The Europeans agreed to loans and trade guarantees at the G-20 economic summit last week in London, but not the stimulus package sought by President Barack Obama.
"It shouldn't just be the obligation of the U.S. to bail out the global system," said Richard C. Ferlauto, governance and pension director for the American Federation of State, County and Municipal Employees, AFL-CIO, whose members' pension assets total more than $1 trillion. "Each country has to step to the plate proportionately."
The Bee also found that many of the leading TARP recipient companies cross-owned large shares of other TARP banks.
Northern Trust Corp. received about $1.5 billion in government investments, yet its holdings in other TARP-assisted banks are about four times that amount. State Street Corp. got $2 billion, but holds nearly $24 billion in shares of other TARP recipients.
Each company has a stake in at least a dozen California banks, large and small, that received TARP funds.
Those commingled interests are partly responsible for the financial meltdown, Ferlauto said. "Ownership interlocks among these large financial institutions meant that no one was willing to rock the boat," he said, in the period leading up to the financial meltdown.
"There needs to be a lot more transparency on the part of large financial institutions as to how they act as fiduciaries of other financial companies," he added. "It's collusion of ownership."
To be sure, most of the investments by banks in other banks actually are investments of private clients managed by the banks. But those clients are not disclosed to regulators – another way beneficiaries of the bailout are shielded from public scrutiny.
When told of The Bee's findings, Robert Kuttner, author of a recent best-seller on the economic crisis, said they reveal a bailout program designed out of public view, and one that "reeks of favoritism and special treatment."
"TARP was designed that way," Kuttner said, "to concentrate power with almost no effective oversight. That, to me, is the scandal."
The lack of clear criteria for awarding TARP funds continued after the recent change in government, according to Kuttner and other experts.
"The Obama administration said it would offer transparency and openness. But the single most important thing they are doing is being done largely behind closed doors, and the design is by, for and in the interest of large banks, hedge funds and private equity companies," he said. "Because there are no explicit criteria, it's very hard to know if a Citigroup or a Goldman got special treatment."
Influence on policy faulted
The Bee's findings follow recent controversy over Buffett holdings thought to have contributed to the economic crisis.
Berkshire owns more than 20 percent of Moody's Corp., a top financial rating agency, making it by far the largest shareholder. Moody's has been faulted by many as enabling the global crisis by overvaluing toxic mortgage assets.
Although Buffett has been outspoken about the need for government intervention in the crisis caused by the mortgage meltdown, he has said nothing publicly about Moody's role.
Buffett also has decried derivatives such as "credit default swaps" – similar to an insurance policy, in which mortgage bonds and other financial instruments are insured against default – as "financial weapons of mass destruction." He criticized the profligate use of these unregulated financial tools, widely blamed as a root of the credit collapse.
Yet Berkshire has issued tens of billions of dollars in derivatives. In a letter to his shareholders, Buffett justified his derivatives as relatively safe and likely to yield vast profits.
Leading economists, however, said Berkshire's credit default swaps are much the same as those that sank American International Group Inc., the large insurer at the epicenter of the derivative fiasco.
"I assume that (Buffett) is being more responsible than they were," said Dean Baker, co-director of the Center for Economic and Policy Research, a Washington, D.C.-based think tank. "But this is a difference in quantity, not quality."
Simon Johnson, an MIT professor and former chief economist for the International Monetary Fund, said that despite the banking collapse, financial leaders such as Buffett have retained surprising control over the government.
"There's this general presumption that Wall Street knows best. But they may not know best for the taxpayer," Johnson said. "We've gotten into the habit of deferring to them a little too much – including Warren Buffet." |
