OMAHA, Neb. (
) -- When
The markets seemed to answer this question with a "yes" on Monday.
Warren Buffett voiced unequivocal support for Goldman Sachs during and after the
annual meeting, and Goldman Sachs shares ended Monday up 3%. On Tuesday morning, as the markets went into a tailspin, Goldman Sachs shares were down to a much lesser extent than financial stocks.
If it were left up to Warren Buffett or his right hand man Charlie Munger, there would be no case against Goldman. Yet there's a big caveat emptor for investors: the $5 billion Goldman Sachs investment made by Berkshire Hathaway at the height of the financial crisis makes an obvious case for why straight shooter Warren Buffett might not shoot so straight on the subject of Goldman Sachs.
It complicates the issue of Buffett speaking out on Goldman Sachs that Buffett has such a stellar reputation for being frank. Would Buffett risk his reputation on support for Goldman Sachs if he really didn't believe what he was saying?
It is fitting, in at least one respect, that Buffett's decision to invest $5 billion in Goldman Sachs at the height of the financial crisis restored confidence in the markets, as it shows the power of the Buffett brand -- and that power has now come full circle by way of Buffett's support for Goldman Sachs at another time of crisis.
Analysts are not convinced that the government is the one with the losing legal strategy, though. On Monday, Rochdale Securities analyst Richard Bove said Goldman Sachs should replace its top executives.
Bove didn't advocate selling Goldman Sachs shares, but he wrote in a note to investors, "Goldman is going to have to pay a high price for its ineptitude." Bove wrote that Goldman's response was politically naïve, weak and ineffectual.
Bove's words were in stark contrast to the Berkshire Hathaway support for Goldman Sachs, and in particular, Buffett's support for Goldman CEO Lloyd Blankfein, though the analyst did ultimately suggest that the case against Goldman was part of a political witch hunt.
Was there anything in the Berkshire Hathaway comments of a substantial nature in supporting the legal case of Goldman Sachs?
Most of what Buffett and Munger said has been said before, and the only difference was that the comments hadn't been made specifically by them.
On the one legal point -- that investors who lost on the Abacus deal should not even care in the first place who was on the other side of the transaction -- it's a point that has been made countless times before Buffett made it. It might be a good idea to drag these investors before Congress, too, as a cautionary example. Still the mistakes made by these investors are a separate cautionary tale from the questionable methods used by Wall Street during the mortgage bubble. Sophisticated institutions should base their investment decisions on their own research, but does that rule out the potential for an investment to be marketed in a misleading way?
The themes expressed by Buffett and Munger in their comments were a) there are much worse villains on Wall Street than Goldman; b) the investors who lost a billion on the Abacus deal did not do their homework; c) Goldman is the best firm on Wall Street; d) the markets were just crazy and everyone was at fault for triggering the housing crisis, from Wall Street to home owners; and e) Blankfein is doing a great job.
And that about sums it up. It is safe to say that if Buffett and Munger were hired as Goldman's lawyers and went into the court with those arguments, Goldman would probably struggle.
Let's take the comments point by point as a legal issue.
Editor's note: the following are paraphrased comments from what Buffett and Munger told
Buffet on Goldman Sachs and Blankfein: "I've been doing business with Goldman for 44 years and they raised a lot of capital for us. Berkshire Hathaway is a much larger company because of Goldman Sachs.... I think Blankfein has done a great job of leading Goldman, and Goldman Sachs has a history of picking first-class people. I'd rather have Blankfein running Goldman than anyone else."
Not much of a legal argument there.
Buffett on his investment in Goldman Sachs: "Some people say I'm defending Goldman Sachs because I have a major investment.... We do have a major investment, and if put $5 billion into a company I better feel good about it when I do it, and I feel good about it now."
Not much of a legal case there either.
Buffett on the housing crisis and the Goldman Abacus investment: "Big banks made bad bets, America made bad bets on housing, housing kept going up and up and up. Banks lose money on loans, that's part of business.... This transaction was not unique in any way. There were a lot of people betting on the bullish side of housing.... I don't worry about doing business with John Paulson. If he presented me with a deal today, I would look at it."
Safe to say that going into court and saying banks losing money is part of capitalism, and that
is a good man with whom to do business, is not going to be a failsafe for Goldman Sachs.
Buffet on who is to blame for the housing crisis and whether the Goldman case is political in nature: "The whole country was involved in a fantasy. The belief that housing would go up became a self-fulfilling mania.... No one likes to say it is my fault when it all comes crashing down."
Is the SEC arguing that the entire housing crisis is Goldman Sachs' fault, or that Goldman Sachs committed fraud related to one particular series of investments?
Buffett had more to say on this question: "When there is mass delusion, everyone is to blame." Buffett also brandished his legendary wit in talking about the mass delusion that triggered the housing crisis, comparing the U.S. to Cinderella at the ball convincing herself that the clock won't strike midnight. "It's hard to blame the band or the guy you are dancing with; there is no villain at the ball when you are thinking you have until 5 minutes to midnight, and then you look up and there are no clocks on the wall.... You can't prevent bubbles. People get delusions."
Blaming everyone seems like a court strategy that would quickly turn into a pumpkin for Goldman Sachs.
Speaking about the mass hysteria, Buffett said that the Fed should have spotted it, mortgage brokers should have spotted it, and Wall Street should have spotted it, too. Let's at least add Berkshire Hathaway to that list of those who could have warned us. Berkshire Hathaway owns companies in the home building, home furnishing and home mortgage business -- companies that exacted a big toll on Berkshire's earnings in 2009. Buffett could have at least blamed his own operating subsidiaries for not providing sufficient warning, too.
Finally, let's consider the words of Charlie Munger, who has been a thorn in the side of Wall Street from well before the Goldman Sachs case surfaced. In responding to the charges against Goldman Sachs, Munger decided to riff on former Lehman Brothers head honcho Dick Fuld. "Of all the investment banks of size, Lehman Brothers was the one where the behavior was the worst and it came right from the top."
Munger described Fuld as a megalomaniac, driven by envy, defined by "poor cognition" and isolation, and Lehman Brothers as an example of corporate governance at its worst. "You didn't have to be wise to see that place had the wrong leaders and the board did nothing to fix it," Munger said.
At the risk of making a really bad analogy, would Adolf Eichmann have beat the case by showing that Hitler was an even bigger monster than he was?
Finally, Munger said of Blankfein and Goldman, "I don't know Lloyd the way Warren does, but I'm favorably impressed with him -- not to say that Goldman didn't participate with its industry in urging permissive rules for investment banking that were socially undesirable. It's human nature to do that."
Goldman Sachs defenders should hope that its legal team's closing argument is not, "It's human nature." That seems pitifully weak as a court summation.
Of course, Buffett and Munger aren't white collar crime lawyers, and don't claim to be, or even to play them on TV. Still, investors are left wondering how to weigh general words of support for Goldman in light of a specific legal challenge. Does the manner in which Buffett and Munger played their support for Goldman Sachs on TV -- more or less showing that they too believe a political witch hunt is at work -- give investors reason to believe a material change for the positive has occurred in the legal outlook for Goldman Sachs?
Indeed, it all begs the question,
Do you think Warren Buffett and Charlie Munger's words are a reason to bullish on Goldman Sachs stock?
Take the poll below to see what rest of
has to say -- and don't forget to leave a comment.
-- Reported by Eric Rosenbaum in New York.
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