Warren Buffett offered a strong defence of Goldman Sachs at his annual shareholders meeting arguing that clients lost money on the sale of mortgage-related investments brokered by the investment bank because they made “dumb deals” not because they were misled.
In Early April, US authorities accused Goldman Sachs of securities fraud that caused investor losses of more than $1bn leading to a hail of questions about the attitude of Mr Buffet, an investment guru known for his principles and his large stakes in the bank.
Mr Buffett said he did not “hold it against Goldman Sachs that they are subject of [Securities and Exchange Commission] allegations,” and noted that Berkshire Hathaway “had a lot of very satisfactory transactions with Goldman” in the four decades it has been dealing with the bank.
“There is no question that the allegation alone causes the company to lose reputation … the last few weeks hurt the company and morale …it is not remotely mortal but it hurts,” Mr Buffett said.
The comments will bolster the bank and its beleaguered management, which has been roiled by the accusations. Since April 16 when US authorities announced the investigation, Goldman’s shares have slumped 21 per cent amid repeated calls for the resignation of Lloyd Blankfein, the chief executive.
Characterising much of the reporting on the subject as misleading, Mr Buffett instead turned his focus on the investors who bought into the products that Goldman traded.
“It is pretty hard for me to get sympathetic because they made a dumb credit deal,” Mr Buffett said of the Dutch bank ABN Amro Group, one of the major losers from the Abacus transaction at the centre of the controversy.
He said that his own company, Berkshire Hathaway, regularly participates in similar deals – insuring the credit of other companies – but always relies on its own research and judgment rather than on any expectation about the intent of their counterparties.
“It doesn’t make any difference whether it was Paulson [a hedge fund manager who made billions betting against the mortgage market] on the other side of the deal or whether Goldman was on the other side of the deal or whether Berkshire was on the other side of the deal,” he said
Still, Charlie Munger, Mr Buffett’s long time business partner took a more critical line. “Every business ought to decline a lot of business that is perfectly legal and proper to accept. I think the standard in business should not be what is legal but what is proper.
“I don’t think investment banks should take on too many skuzzy securities and deal with skuzzy people … I think [this deal] was a closer case than usual,” he added, although he admitted that had he been on the Securities and Exchange Commission he would have voted against pursuing the case.
In a three-hour question and answer session that is the centre piece of Berkshire’s bonanza annual shareholders meeting, often called the “Woodstock of Capitalism” Mr Buffett offered another upbeat assessment of the global economy.
“What was sort of a sputtering recovery months ago seemed to pick up steam in March and April,” Mr. Buffett said as he introduced Berkshire’s first quarter results. “We’re seeing a pretty good uptick.”
Berkshire, a textiles to financial services conglomerate, made operating profits of $2.2bn, up from $1.7bn in 2009.
Net profits jumped to $3.6bn, after a net loss of $1.5bn in the first quarter of 2009, although Mr Buffet noted that the accounting treatment of certain derivatives contracts rendered those numbers meaningless.
The company’s performance has improved markedly since 2008, when the financial crisis took a bite out of its earnings, the value of its stock holdings and the firm’s reputation for producing an uninterrupted run of stellar returns. In 2009, the company’s per share book value, Mr Buffet’s preferred measure of intrinsic value, rose 19.8 per cent.
But the credit crunch also created opportunities for the cash-rich investor as quality companies looked around for assistance. During the crisis he bought into then-ailing corporate icons like Goldman Sachs and also General Electric, picked up under-priced securities and bet heavily on a recovery in the US stock market.
The upbeat feel was evident at the meeting. In Berkshire’s traditional spoof movie, Mr Buffett starred in a schmaltzy skit about baseball, riding to the rescue of the Boston Red Sox and striking out Alex Rodriguez, the star batter, to beat the Yankees and send the team to the World Series.
On the floor of the convention centre in Omaha, Nebraska, Burlington Northern Santa Fe, the US railroad operator that Mr Buffett bought for $26.6bn in cash and shares in November 2009, was also visible.
A mocked up train with Mr Buffet and Mr Munger depicted as drivers decked out in the distinctive orange and black livery took prime place in the central hall while outside a real train and numerous carriages ringed the parking lot.
Inside the meeting room Mr Buffett dealt firmly with questions about the potential impact of pending Congressional legislation on derivatives. The bills would have no impact on Berkshire he said because the company’s 250 contracts posed no danger to the system.
If Congress chose to adopt a broad stance, Berkshire might be forced to hold capital against its exposure but would likely be entitled to claim additional premiums from its counterparties to offset some of that.
In a surprising turn however, Mr Buffett, also explained that the travails at Goldman had been specific net positive for Berkshire, which bought $5bn of preferred shares paying a 10 per cent coupon at the heart of the credit crisis when Goldman was in need of additional funds.
Despite the roller coaster share price ride, Mr Buffett said that the headline challenges facing Goldman made it less likely that the bank would call its preferred shares. Those earn Berkshire almost $500m a year. If it the shares were called Berkshire would get $5.5bn back, but could only deposit that in low interest accounts earnings less than $20m a year.
“Every day that Goldman does not call our preferred is money in the bank,” Mr Buffett said. “Our preferred is paying $15 per second … so as we sit here… tick tick tick … its $15 in the bank. I don’t want those ticks to go away.”
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