Warren Buffet: Financial Savior or Angel of Doom?

The dire financial condition of the US has not been altered by Warren Buffet's recently announced investment in Bank of America (BAC).  His participation should not be read as a sign that either Bank of America or the economy is improving.

Warren Buffet, according to Forbes, is the world's third-richest person.  Other than Bill Gates, he is the wealthiest American.

Mr. Buffet is an American icon, generally well-respected and liked.  He is a legendary investor, noted for an unusual ability to discover undervalued companies.  His investment in BAC provides assurance that all is well with BAC and the financial industry.

That is the idea the ruling class would have you believe.  Buffet is part of this oligarchy.  Despite the Hollywood imagery of the great "white knight" riding to the rescue, the reality is that Buffet cannot save BAC.  Nor can anyone save the financial system.

The reported $3- to $5-billion investment is a fraction of what the company needs.  Without true asset valuations, no one knows what capital infusion is required to ensure solvency.

Mr. Buffett's legendary investment powers, if indeed they ever existed, appear overrated.  Berkshire Hathaway Class B shares closed at 99.00 on December 7, 2007.  Last week they closed at 62.38, a loss of 37% over almost four years.  The Dow Jones Industrial Average declined by 16% over the same period.

The Concept of Self-Interest

Why has Mr. Buffett come to the aid of BAC?  The obvious answer is that he negotiated a great deal and expects to make a lot of money.  That may ultimately be true, but I doubt it.  The situation is complex, rife with political as well as economic considerations.

Adam Smith's "invisible hand" concept explained the benefits of self-interest:

It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest.

By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it.

Smith also warned about the dangers of businessmen colluding to commit a "conspiracy against the public or in some other contrivance to raise prices."  He routinely criticized the concentration of power and wealth.

Smith's concept works in free markets.  Today the "invisible hand" of markets has been displaced by the "heavy hand" of government.  A powerful central government and corporate interests, most notably the financial sector, now direct the economy.  This oligarchy controls the country and its markets.  "Self-interest" in this world is not constrained by market forces, nor is it anything that Adam Smith would recognize or condone.

Mr. Buffett did not become successful by reading ancient economists.  He is a pragmatist, not a theorist.  Whatever rules of the game are prevalent, he will succeed.

The Two Richest Americans

In today's environment, success requires cultivating the oligarchy and political class as much as quality products and services.  Small fish can go unnoticed for a while, but big ones must conform to the ruling class.

Where government rules and regulations can ruin your business, relationships with the oligarchy may be the difference between success and failure.  The contrasts between Mr. Buffet and Bill Gates illustrate this issue.

Mr. Buffett was always sophisticated.  His father, Howard Buffett, was a four-term congressman.  Politically, Howard was a precursor to Ron Paul.  Warren's politics are the opposite of his father's and Ron Paul's.  He supported Obama in the last presidential campaign.

Bill Gates was the consummate geek.  He knew nothing of politics and cared less.  He was exclusively product-oriented and quickly became successful.  His success attracted the solons of the Potomac.  They saw a pot of money in Microsoft and wanted some of it.

Gates' ignorance of politics changed when the Washington gang began to strong-arm Microsoft.  The Department of Justice brought anti-trust action(s).  Mr. Gates was forced to pay political tribute to the rulers lest his company be under continuous assault.  Much like a mom-and-pop business pays protection to the Mafia, Gates began to make political contributions.

Mr. Buffett knew that no one with wealth could safely ignore the oligarchy.  He knew that government controlled the economy and could make or break a company.  He cultivated the oligarchy from the beginning.

Mr. Gates showed that success can be attained without Washington, but not sustained after some level.  High-profile wealth attracts the parasites.  Success cannot be maintained without proper tribute.

An apolitical, successful person in today's world is a contradiction.  Major successes must join the club.  Many businesses consider this protection ("contributions") so important that they pay it to both parties.  That way, regardless of who wins, they may be protected.

Mr. Buffett leans Democrat with mildly socialistic views.  Whether these are true beliefs or merely reflect a pragmatism regarding wealth protection is moot.  Mr. Gates is now properly in line.  He is less vocal and quietly pays his protection money to the Washington gang.

Who Benefits?

The question of who benefits more from the unhealthy relationship between corporations and politicians is complex and unanswerable.  The relationship is both a protection racket and a symbiotic one.

Corporations pay, but they also benefit via favorable rules, tax exemptions, etc.  The political class benefits via increased power over society and the economy.  Taxpayers and consumers are clear losers.

Warren Buffett allowed himself to be used by Obama in the 2008 presidential campaign.  He was a useful prop who provided Obama with economic credibility.  What considerations did he receive as a result?  That answer is unknown.

Paul Volcker was also used by Obama.  As a retiree, Mr. Volcker may have considered it his civic duty to help.  Both Volcker and Buffett were quietly and quickly discarded after Obama's election.  They had served a political purpose.  Obama never intended them to have economic input.

Warren Buffet has reappeared with support for higher taxes on wealthy individuals.  This position is incredibly disingenuous.  Buffet has always sought to minimize his personal taxes.  Presumably that is how Berkshire Hathaway behaves as well.  To do otherwise would be a dereliction of duty to shareholders.

It is not an accident or fluke of the tax code that Mr. Buffett pays a lower percentage of his income in taxes than his secretary.  He designs his affairs to produce that outcome.  Buffett admitted as much.  According to the American Thinker, "he thinks he has better ideas for how to spend his dollars than the government, and would do a better job of it, too."

What About the BAC Deal?

Did Mr. Buffet make the investment in BAC based on Smithian self-interest?   Or did he do it because it was in the interests of the ruling class?

Phoenix Capital Research questioned Buffet's recent BAC move from an investment perspective:

For starters, Buffett didn't even spend 24 hours studying BAC before buying it. And I can tell you point blank that no one, certainly not Buffett, has a clue about BAC's real balance sheet risk. The mere notion of due diligence or sound investing analysis here is absurd.

Moreover, the fact Buffett plowed $3-5 billion (depending on how the deal was structured) with so little research tells you what this was: a political move, and nothing more.

Buffet is terribly bright and shrewd despite the "aw shucks" Omaha mien. As a businessman, he is hard-nosed, despite his avuncular performances on CNBC and at stockholder meetings. He is analytical and does not make decisions without thorough analysis.

Phoenix reached the conclusion that:

The powers that be called on THE financial figurehead for the uber-bull crowd just as they did in September 2008 and October 2008 (the time of Buffett's "Buy America" op-ed in the New York Times).

To be sure, the whole thing smells of desperation. The fact Buffett didn't even buy BAC on the market but got a sweetheart deal only tells you how twisted the whole thing is (if he really thought BAC was a great deal why didn't he buy in the open market like the rest of us "high tax payers.").

It should be noted that Buffett's only other "quick" decision was an investment in Goldman Sachs back in September of 2008.  The GS investment is still "underwater" after three years.  What motivated this investment is also moot.

What's in It for Warren?

The BAC deal looks as if Mr. Buffett was asked to assist the oligarchy at his own expense.  That is unlikely.  Mr. Buffett has probably protected himself with some quid pro quo arrangement.  What that might be is unknown, although that information may surface before this economic nightmare ends.

Many speculative possibilities exist.  Here are four:

  • Mr. Buffet as a high-profile individual is himself at risk.  The government is now so powerful that it could, if it chose, wipe him out.  His commitment to BAC may represent nothing more than an extortion payment to prevent or defer this outcome.
  • Mr. Buffett is a major holder of Wells Fargo (WFC), another bank on shaky grounds.  Had he increased his investment in WFC, it would not have had as dramatic an effect as stepping up for BAC.  Perhaps the government promised to step in if (when) WFC requires a bailout.
  • Mr. Buffet may have received some implicit government guarantee that backstops his investment in BAC, ensuring the continued solvency of the company.
  • Berkshire Hathaway is a holding company with a large number of operating companies.  Could any of these be in trouble?  The recent stock performance may indicate so.  Standard and Poor's recently downgraded Berkshire's insurance holdings from "stable" to "negative."  Perhaps the government promised to assist Berkshire in the event of trouble.

Warren Buffett is no patsy.  He is shrewd, smart, and motivated.  The BAC deal was made only because it was in Mr. Buffett's interest to make it.  The four possibilities above provide plausible reasons.

While it may have been in Buffett's interest, it was not in the Smithian concept of self-interest, at least for the rest of us.

Did Buffett Make a Mistake?

If Buffett's commitment were made for any reason other than the first one (extortion and survival), he may have made a mistake.  As stated in my initial reaction to the announcement

Big government types always assume that government is big enough to solve (or, more properly termed, "cover up") any problem.  It is not.  The banking system will be the Waterloo of this concept.  The banking system is insolvent.  In my opinion, the amount of money necessary to solve the problem exceeds government's resources.  This cancerous growth on the economy will eventually kill the economy and the government.

A request to Mr. Buffett to intervene is consistent with the government's Kevorkian Economic strategy.  It represents another way to "extend and pretend" the myth of an economic recovery.  Government has solved none of the economic problems.  The banking system is arguably in worse shape than it was in 2008.  Using Mr. Buffett in this fashion is likely another desperate attempt to fool voters and investors.

There is no bailout or Federal Reserve action that can turn the economy around or save the financial system.  Decades of interventions have destroyed both.  An implosion is inevitable.  The government is out of ammunition.

Ben Bernanke will eventually commit to some new QE3 monetary expansion but it will only make matters worse.  The Ponzi scheme we know as government is bankrupt.  We are entering the death throes of what was once a great and prosperous economy.

The world is changing dramatically. In Peter Drucker's terminology, we are on the verge of major discontinuities.  Extrapolating the past forward no longer provides a reasonable view of what lies ahead.

Entrepreneurs like Mr. Buffet do not think in terms of Apocalypse.  They are optimists by nature and that is an integral reason for their success.  Betting on Apocalypse is not a good bet.  It happens only once, and even if you are on the right side of the bet, there is no one left to pay.

Because it is a bad bet does not mean it won't happen.  The odds have shifted dramatically in favor of Economic Apocalypse.  The ingrained optimism of entrepreneurs prevent most from preparing for such an event.  Mr. Buffet likely misread the "Too Big to Fail" sign, which now is flashing "Too Big to Bail."

Mr. Buffet is a captive of "The Family," an organization that once joined is impossible to leave.  At this stage he has no choice but to go along, even if he disagrees with the strategy.

Hang on -- it's gonna be one helluva ride!

Monty Pelerin blogs at Monty Pelerin's World.

The dire financial condition of the US has not been altered by Warren Buffet's recently announced investment in Bank of America (BAC).  His participation should not be read as a sign that either Bank of America or the economy is improving.

Warren Buffet, according to Forbes, is the world's third-richest person.  Other than Bill Gates, he is the wealthiest American.

Mr. Buffet is an American icon, generally well-respected and liked.  He is a legendary investor, noted for an unusual ability to discover undervalued companies.  His investment in BAC provides assurance that all is well with BAC and the financial industry.

That is the idea the ruling class would have you believe.  Buffet is part of this oligarchy.  Despite the Hollywood imagery of the great "white knight" riding to the rescue, the reality is that Buffet cannot save BAC.  Nor can anyone save the financial system.

The reported $3- to $5-billion investment is a fraction of what the company needs.  Without true asset valuations, no one knows what capital infusion is required to ensure solvency.

Mr. Buffett's legendary investment powers, if indeed they ever existed, appear overrated.  Berkshire Hathaway Class B shares closed at 99.00 on December 7, 2007.  Last week they closed at 62.38, a loss of 37% over almost four years.  The Dow Jones Industrial Average declined by 16% over the same period.

The Concept of Self-Interest

Why has Mr. Buffett come to the aid of BAC?  The obvious answer is that he negotiated a great deal and expects to make a lot of money.  That may ultimately be true, but I doubt it.  The situation is complex, rife with political as well as economic considerations.

Adam Smith's "invisible hand" concept explained the benefits of self-interest:

It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest.

By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it.

Smith also warned about the dangers of businessmen colluding to commit a "conspiracy against the public or in some other contrivance to raise prices."  He routinely criticized the concentration of power and wealth.

Smith's concept works in free markets.  Today the "invisible hand" of markets has been displaced by the "heavy hand" of government.  A powerful central government and corporate interests, most notably the financial sector, now direct the economy.  This oligarchy controls the country and its markets.  "Self-interest" in this world is not constrained by market forces, nor is it anything that Adam Smith would recognize or condone.

Mr. Buffett did not become successful by reading ancient economists.  He is a pragmatist, not a theorist.  Whatever rules of the game are prevalent, he will succeed.

The Two Richest Americans

In today's environment, success requires cultivating the oligarchy and political class as much as quality products and services.  Small fish can go unnoticed for a while, but big ones must conform to the ruling class.

Where government rules and regulations can ruin your business, relationships with the oligarchy may be the difference between success and failure.  The contrasts between Mr. Buffet and Bill Gates illustrate this issue.

Mr. Buffett was always sophisticated.  His father, Howard Buffett, was a four-term congressman.  Politically, Howard was a precursor to Ron Paul.  Warren's politics are the opposite of his father's and Ron Paul's.  He supported Obama in the last presidential campaign.

Bill Gates was the consummate geek.  He knew nothing of politics and cared less.  He was exclusively product-oriented and quickly became successful.  His success attracted the solons of the Potomac.  They saw a pot of money in Microsoft and wanted some of it.

Gates' ignorance of politics changed when the Washington gang began to strong-arm Microsoft.  The Department of Justice brought anti-trust action(s).  Mr. Gates was forced to pay political tribute to the rulers lest his company be under continuous assault.  Much like a mom-and-pop business pays protection to the Mafia, Gates began to make political contributions.

Mr. Buffett knew that no one with wealth could safely ignore the oligarchy.  He knew that government controlled the economy and could make or break a company.  He cultivated the oligarchy from the beginning.

Mr. Gates showed that success can be attained without Washington, but not sustained after some level.  High-profile wealth attracts the parasites.  Success cannot be maintained without proper tribute.

An apolitical, successful person in today's world is a contradiction.  Major successes must join the club.  Many businesses consider this protection ("contributions") so important that they pay it to both parties.  That way, regardless of who wins, they may be protected.

Mr. Buffett leans Democrat with mildly socialistic views.  Whether these are true beliefs or merely reflect a pragmatism regarding wealth protection is moot.  Mr. Gates is now properly in line.  He is less vocal and quietly pays his protection money to the Washington gang.

Who Benefits?

The question of who benefits more from the unhealthy relationship between corporations and politicians is complex and unanswerable.  The relationship is both a protection racket and a symbiotic one.

Corporations pay, but they also benefit via favorable rules, tax exemptions, etc.  The political class benefits via increased power over society and the economy.  Taxpayers and consumers are clear losers.

Warren Buffett allowed himself to be used by Obama in the 2008 presidential campaign.  He was a useful prop who provided Obama with economic credibility.  What considerations did he receive as a result?  That answer is unknown.

Paul Volcker was also used by Obama.  As a retiree, Mr. Volcker may have considered it his civic duty to help.  Both Volcker and Buffett were quietly and quickly discarded after Obama's election.  They had served a political purpose.  Obama never intended them to have economic input.

Warren Buffet has reappeared with support for higher taxes on wealthy individuals.  This position is incredibly disingenuous.  Buffet has always sought to minimize his personal taxes.  Presumably that is how Berkshire Hathaway behaves as well.  To do otherwise would be a dereliction of duty to shareholders.

It is not an accident or fluke of the tax code that Mr. Buffett pays a lower percentage of his income in taxes than his secretary.  He designs his affairs to produce that outcome.  Buffett admitted as much.  According to the American Thinker, "he thinks he has better ideas for how to spend his dollars than the government, and would do a better job of it, too."

What About the BAC Deal?

Did Mr. Buffet make the investment in BAC based on Smithian self-interest?   Or did he do it because it was in the interests of the ruling class?

Phoenix Capital Research questioned Buffet's recent BAC move from an investment perspective:

For starters, Buffett didn't even spend 24 hours studying BAC before buying it. And I can tell you point blank that no one, certainly not Buffett, has a clue about BAC's real balance sheet risk. The mere notion of due diligence or sound investing analysis here is absurd.

Moreover, the fact Buffett plowed $3-5 billion (depending on how the deal was structured) with so little research tells you what this was: a political move, and nothing more.

Buffet is terribly bright and shrewd despite the "aw shucks" Omaha mien. As a businessman, he is hard-nosed, despite his avuncular performances on CNBC and at stockholder meetings. He is analytical and does not make decisions without thorough analysis.

Phoenix reached the conclusion that:

The powers that be called on THE financial figurehead for the uber-bull crowd just as they did in September 2008 and October 2008 (the time of Buffett's "Buy America" op-ed in the New York Times).

To be sure, the whole thing smells of desperation. The fact Buffett didn't even buy BAC on the market but got a sweetheart deal only tells you how twisted the whole thing is (if he really thought BAC was a great deal why didn't he buy in the open market like the rest of us "high tax payers.").

It should be noted that Buffett's only other "quick" decision was an investment in Goldman Sachs back in September of 2008.  The GS investment is still "underwater" after three years.  What motivated this investment is also moot.

What's in It for Warren?

The BAC deal looks as if Mr. Buffett was asked to assist the oligarchy at his own expense.  That is unlikely.  Mr. Buffett has probably protected himself with some quid pro quo arrangement.  What that might be is unknown, although that information may surface before this economic nightmare ends.

Many speculative possibilities exist.  Here are four:

  • Mr. Buffet as a high-profile individual is himself at risk.  The government is now so powerful that it could, if it chose, wipe him out.  His commitment to BAC may represent nothing more than an extortion payment to prevent or defer this outcome.
  • Mr. Buffett is a major holder of Wells Fargo (WFC), another bank on shaky grounds.  Had he increased his investment in WFC, it would not have had as dramatic an effect as stepping up for BAC.  Perhaps the government promised to step in if (when) WFC requires a bailout.
  • Mr. Buffet may have received some implicit government guarantee that backstops his investment in BAC, ensuring the continued solvency of the company.
  • Berkshire Hathaway is a holding company with a large number of operating companies.  Could any of these be in trouble?  The recent stock performance may indicate so.  Standard and Poor's recently downgraded Berkshire's insurance holdings from "stable" to "negative."  Perhaps the government promised to assist Berkshire in the event of trouble.

Warren Buffett is no patsy.  He is shrewd, smart, and motivated.  The BAC deal was made only because it was in Mr. Buffett's interest to make it.  The four possibilities above provide plausible reasons.

While it may have been in Buffett's interest, it was not in the Smithian concept of self-interest, at least for the rest of us.

Did Buffett Make a Mistake?

If Buffett's commitment were made for any reason other than the first one (extortion and survival), he may have made a mistake.  As stated in my initial reaction to the announcement

Big government types always assume that government is big enough to solve (or, more properly termed, "cover up") any problem.  It is not.  The banking system will be the Waterloo of this concept.  The banking system is insolvent.  In my opinion, the amount of money necessary to solve the problem exceeds government's resources.  This cancerous growth on the economy will eventually kill the economy and the government.

A request to Mr. Buffett to intervene is consistent with the government's Kevorkian Economic strategy.  It represents another way to "extend and pretend" the myth of an economic recovery.  Government has solved none of the economic problems.  The banking system is arguably in worse shape than it was in 2008.  Using Mr. Buffett in this fashion is likely another desperate attempt to fool voters and investors.

There is no bailout or Federal Reserve action that can turn the economy around or save the financial system.  Decades of interventions have destroyed both.  An implosion is inevitable.  The government is out of ammunition.

Ben Bernanke will eventually commit to some new QE3 monetary expansion but it will only make matters worse.  The Ponzi scheme we know as government is bankrupt.  We are entering the death throes of what was once a great and prosperous economy.

The world is changing dramatically. In Peter Drucker's terminology, we are on the verge of major discontinuities.  Extrapolating the past forward no longer provides a reasonable view of what lies ahead.

Entrepreneurs like Mr. Buffet do not think in terms of Apocalypse.  They are optimists by nature and that is an integral reason for their success.  Betting on Apocalypse is not a good bet.  It happens only once, and even if you are on the right side of the bet, there is no one left to pay.

Because it is a bad bet does not mean it won't happen.  The odds have shifted dramatically in favor of Economic Apocalypse.  The ingrained optimism of entrepreneurs prevent most from preparing for such an event.  Mr. Buffet likely misread the "Too Big to Fail" sign, which now is flashing "Too Big to Bail."

Mr. Buffet is a captive of "The Family," an organization that once joined is impossible to leave.  At this stage he has no choice but to go along, even if he disagrees with the strategy.

Hang on -- it's gonna be one helluva ride!

Monty Pelerin blogs at Monty Pelerin's World.

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