Thursday, 25 September 2008

The Sly Sage of Omaha

Sometimes, to know what a man really thinks, you need to watch his feet, not his lips. Words are the units of an often-cheap currency that’s easily manipulated and debased. And so when Warren Buffett, finance’s plain-spoken wise man, voices support of a $700 billion plan to bail out Wall Street, one might reasonably glance down to see what his feet are doing. After all, Mr. Buffett’s company Berkshire Hathaway is pretty well cashed up right now, having patiently waited on the sidelines recently while more reckless rivals dabbled in risky ventures.

Buffett’s latest bit of deft footwork: buying a $5 billion stake in Goldman Sachs. While calling any investment bank “blue chip” during this period of financial turbulence is a bit of a stretch, Goldman merits the stamp of quality if anyone does. Goldman is highly profitable, employs many of Wall Street’s smartest bankers, and – perhaps not coincidentally – was rare among peers for foreseeing troubles developing in bonds backed by U.S. home mortgages. So Buffett walks away with ownership in a well-run, top-tier (arguably the top-tier) investment bank on Wall Street. All for $5 billion. Sweet.

If you think, however, he supports such a smart deal for the U.S. taxpayer, you’d be dead wrong. Treasury Secretary Paulson’s plan seeks a towering pile of money to buy Wall Street investments that have gone sour largely because of the U.S. housing crisis. Even after getting a discount, the government would probably pay well above market value. If the investments turn out to be worth only $600 billion, $500 billion, or even $50, tough luck. For all his troubles, the U.S. taxpayer will own nothing of anything. Not even a third-rate boutique investment house or a paperweight bull.

Buffett has a lot of money under his thumb but little apparent appetite for acquiring, even at a deep discount, any of the risky mortgage-backed investments being offered to the American taxpayer. The same appears true of another high-profile cheerleader of Paulson’s plan. Bill Gross, a Master of the Bond Universe and the chief investment officer of Pimco, argues for the bailout on the pages of the Washington Post, even guesstimating how much the government could profit. So why isn’t he eyeballing any of this toxic waste for his portfolio? (Note: Gross is, however, eyeballing a well-paid role in managing the $700 billion pool of bad assets, should Paulson succeed in buying them.)

So as we seek advice from high-finance sages while trying to resolve the financial crisis, the advice bears repeating: Watch their feet. Not their lips.