OMAHA, Neb. (
) -- Warren Buffett and
have walked a fine line when it comes to
. That line got considerably finer when the Securities and Exchange Commission accused Goldman Sachs of fraud last Friday.
There are many institutional investors holding Goldman shares who may continue to make big profits off investments in Goldman if the storm passes without further deterioration in Goldman's value, and Buffett is among them. Most institutional investors won't be asked to chime in specifically on Goldman in light of the fraud charges, either.
That might not be the case for Buffett, though. For one, Buffett has spoken out in support of Goldman Sachs, previously, and specifically about Goldman's reputation. Buffett always talks about the importance of believing in the management teams of those companies in which Berkshire Hathaway invests, too. Can Buffett believe in a firm accused of fraud by the SEC?
Buffett has always walked a fine line between his criticism of Wall Street practices and his investment in some of those same practices, so maybe the latest news event just magnifies the contradictions that already exist.
Buffett rails against Wall Street and high-priced investment bankers as regular course of his rhetorical business. Yet, Buffett and Berkshire Hathaway shareholders have reaped a bundle from the Goldman Sachs' investment that Buffett made during the worst days of the financial crisis.
Buffett quipped in his most recent annual letter to shareholders that Berkshire would never be bailed out by the U.S. government. Of course, Berkshire was a net infuser of capital to the markets during the credit meltdown while the banks like Goldman needed to be bailed out. Everyone knows a big chunk of that Berkshire infusion went into Goldman Sachs preferred shares and warrants on Goldman stock at a strike price of $115.
Bloomberg calculated on Monday that the loss of value in the Berkshire investment in Goldman options is just over $1 billion, after
the decline in Goldman shares after the Securities and Exchange Commission announced its fraud case against Goldman on Friday.
One billion dollars is significant, even to the world's second-richest man, yet the bigger issue for Buffett may be towing the line on Goldman now that it has been accused of fraud.
In fact, last week, when Goldman Sachs made the list of U.S. companies with the worst business reputation,
Goldman might have to call on Buffett a few more times to raise its reputation.
What do you know? Buffett, or at least Berkshire Hathaway, did exactly that a few days later, with a Berkshire director giving a video interview to
last week reiterating Berkshire's view of Goldman as a company with great "integrity," and citing that integrity as one of the reasons for Buffett's willingness to invest in the company.
We all now know how poorly timed the Berkshire Hathaway endorsement of Goldman Sachs turned out to be.
It's a bit of business irony that fits nicely alongside this business irony: in the same list on which Goldman Sachs showed up as having one of the worst reputations in the business world,
Berkshire Hathaway topped all companies as being the most trusted brand in the U.S.
The unfortunate timing of the Berkshire Hathaway-Goldman Sachs links also followed on the first bad press in some time for Buffett, when
a former Berkshire Hathaway employee sued the firm, alleging he was fired for whistle-blowing on fraud at Berkshire subsidiary Forest River.
Of course, the case against Berkshire Hathaway by a former employee could be sour grapes from someone passed over for a promotion -- the suit claims that the former manager was promised the CEO post at Forest River. And the Goldman Sachs case could turn out to be a politically motivated attack on Wall Street that works well with voters but does not result in a conviction.
Buffett's investment in Goldman is as likely to rise in value yet again even after the short-term dip stemming from Friday's sell off in Goldman shares, as the shares are likely to dip down to an even greater extent.
Lawsuits -- whether brought by a former Berkshire Hathaway employee or the SEC against Goldman Sachs -- will play out in the courtroom. Berkshire's endorsement of Goldman Sachs, however, will play out in public. Buffett has received a pass up until now on his investment in Goldman; in fact, he has received kudos for the brilliance of the investment.
The Berkshire Hathaway annual meeting is coming up on May 1. Of course, we already know that Buffett is all tough love when it comes to Wall Street ... and tough love is a nice way of putting it. The question now is whether people begin asking more questions about the "hypocritical nature" of Buffett's harsh words for Wall Street practices, while he continued to clean up on his investment in Goldman.
columnist Alice Schroeder, author of a famous book on Buffett, has an interesting column on Monday about the reputational threat to Berkshire Hathaway from its support of Goldman.
Buffett righthand man Charlie Munger wrote a much-read piece on
earlier this year blaming derivatives for bringing down the U.S economy and getting the country away from its roots in actual brick-and-mortar capitalism, and making the economy too reliant on financial instruments like the synthetic CDOs that are now at the center of the Goldman fraud case.
Would Buffett and Berkshire Hathaway now prefer to have back the words of the Berkshire director to Bloomberg last week about Goldman's integrity?
That's history anyway, and a better question might be if Buffett will continue to allow the Berkshire brand to be aligned with Goldman Sachs given the fraud suit.
There are many companies that Buffett has sold because he no longer thought they were a good investment --
Moody's Investor Service
is a recent example.
How does Buffett value reputation when it comes to buying and selling?
Berkshire Hathaway was No. 1 in the business reputation poll for a reason. And after all, Goldman Sachs has been a target for public ire throughout the financial crisis and recession, and the public attacks on Goldman have never really filtered through to Buffett.
At some point, though, one has to wonder if Berkshire's investment with Goldman Sachs could even begin to taint the seemingly impenetrable armor of the Oracle of Omaha.
In the least, the days of Berkshire Hathaway directors giving interviews to help bolster Goldman Sach's public image could be over. Omaha has always been a long way from Wall Street. How far removed will Buffett and Berkshire Hathaway be from Goldman Sachs in the days to come?
-- Reported by Eric Rosenbaum in New York.
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