Warren Buffett Thanks Uncle Sam

Pretty Good for Government Work
By WARREN E. BUFFETT


DEAR Uncle Sam,

My mother told me to send thank-you notes promptly. I’ve been remiss.

Let me remind you why I’m writing. Just over two years ago, in September 2008, our country faced an economic meltdown. Fannie Mae and Freddie Mac, the pillars that supported our mortgage system, had been forced into conservatorship. Several of our largest commercial banks were teetering. One of Wall Street’s giant investment banks had gone bankrupt, and the remaining three were poised to follow. A.I.G., the world’s most famous insurer, was at death’s door.

Many of our largest industrial companies, dependent on commercial paper financing that had disappeared, were weeks away from exhausting their cash resources. Indeed, all of corporate America’s dominoes were lined up, ready to topple at lightning speed. My own company, Berkshire Hathaway, might have been the last to fall, but that distinction provided little solace.

Nor was it just business that was in peril: 300 million Americans were in the domino line as well. Just days before, the jobs, income, 401(k)’s and money-market funds of these citizens had seemed secure. Then, virtually overnight, everything began to turn into pumpkins and mice. There was no hiding place. A destructive economic force unlike any seen for generations had been unleashed.

Only one counterforce was available, and that was you, Uncle Sam. Yes, you are often clumsy, even inept. But when businesses and people worldwide race to get liquid, you are the only party with the resources to take the other side of the transaction. And when our citizens are losing trust by the hour in institutions they once revered, only you can restore calm. Read on...

Buffett is dead-on in his praise. While many are ready to critique the bailouts and specific proposals enacted during the crisis, I think they are significantly downplaying or ignoring how close to the precipice we were and not recognizing the critical impacts of the behind-the-scenes reactions by key government officials. I am the first to criticize some of the actions taken: for instance the ban on short selling was a very poor choice as it removed all the natural buyers from financial companies in one fell swoop. The disorderly bankruptcy of Lehman Brothers was also probably a mistake for which we paid dearly. In hindsight, a controlled wind down procedure would have been a much better path. But overall I am a big fan of how smart the government was and how quickly they recognized the peril we faced.

Notably, raising the FDIC-insured limit to $250,000 from $100,000 went unnoticed by many but halted a great deal of panic for businesses with large checking accounts. The guarantee of money markets after the Primary Reserve Fund 'cracked the buck' by dropping below $1.00 for the first time in history stemmed the flood of billions out of the fund. While its exposure to Lehman proved to be ill-advised, reassurances from the fund's management did nothing to stop the overwhelming tide and $40 billion in redemptions out of the $63 billion fund came through in just days. The fund could not liquidate holdings nearly fast enough to meet the panic. Cash was no longer safe!

Re-capitalizing the country's banking institutions was the final step needed and Paulson's $700 billion TARP accomplished just that. Once again we can say that ideally they should have had greater management shakeups or pay restrictions ahead of time but either way, the government calmed the markets. The government became the lender of last resort when it was needed most, when the entire world wanted liquidity at the same time. The panic resulted in the first major deflationary spiral in many decades and firms would have gone bankrupt because of a financial panic. The federal government, for all its missteps, wisely and effectively stepped in to halt the economic freefall. Indeed, the world would be a very different place today had they opted out of this duty.


Brandon R. Rowley
"Chance favors the prepared mind."

*DISCLOSURE: Nothing relevant.

Stocks Gap Up and Hold, Buffett Sees No Double Dip

Stocks gap up 1%, trade sideways to close where they opened

All the fun in the market today was accomplished before the open with stocks gapping up 1%. The market spent the trading session in consolidation mode trading up, then down, then back up into the close for a relatively uneventful day. Doctor Copper jumped over 2% confirming the move in equity markets. Treasuries saw some support to halt the decline but there doesn't look to be a substantial reversal yet.

Microsoft (MSFT) investors were excited at the end of the day with a report that the company plans to sell debt to pay dividends or buy back shares. With $37 billion in cash it seems strange MSFT would see the need to raise debt but I suppose they find the extraordinarily low cost of debt to attractive to ignore. MSFT closed up over 5% on the day.

I sold my second half of Amazon (AMZN) today from my original buys two weeks ago. The 16% move from my buy at $125 in just two weeks was too much not to take the trade off. While AMZN is an exciting company with a large presence is the rapidly-expanding cloud space, I have a hard time seeing the logic of a 40x forward PE. Without the fundamental logic, I have to play the stock as nothing more than a momentum play so I'm happy to jump off the bandwagon after grabbing a nice chunk in the market's latest move. When contrasted with Apple (AAPL) trading at 15x forward earnings, the relative valuation appears expensive and I'd prefer working my way into a larger AAPL position. Though, I realize the "expensive" valuation has long been the case in AMZN's history.

Buffett sees no double-dip

Warren Buffett said the prospects of a double-dip recession are off the table based on what he's seeing in Berkshire Hathaway's (BRK.A) numerous businesses. "I am a huge bull on this country. We will not have a double-dip recession at all. I see our businesses coming back almost across the board." (Bloomberg)

Few have their hands on the pulse of so many varied companies across the United States as Buffett does. I certainly give his opinions much greater weight than economists and academics espousing their claims of major economic weakness. Buffett said further "I’ve seen sentiment turn sour in the last three months or so, generally in the media. I don’t see that in our businesses. I see we’re employing more people than a month ago, two months ago." I have my bets placed in line with Buffett. I see the sentiment shifting in equity markets and the economic dialogue improving in just the last two weeks.


Brandon R. Rowley
"Chance favors the prepared mind."

*DISCLOSURE: Long SPY, AAPL. Flat AMZN.

Buffett Sees Economy Recovering

Paul Krugman's New York Times Op-Ed last week received a lot of fanfare after he wrote that he fears we are "in the early stages of a third depression". I respect Krugman for his Keynesian table-pounding and insightful economic analysis and I am a regular reader of his blog, "The Conscience of a Liberal". On the other hand, I think Warren Buffett is the most brilliant investor and has a particularly keen pulse on the US economy through his 70-plus subsidiaries.


Disclosure: No relevant positions.

In Defense of Warren Buffett

Rarely do I become emotionally outraged by biased stories I read in the media. Frankly, I find much of it to be useless drivel. Yet, when people attack a man like Warren Buffett, it really strikes a nerve with me. I have read Roger Lowenstein's brilliant biography of Buffett, I read his annual letters, any public articles he writes and I watch every interview that he does on CNBC and other networks. I do not know Buffett personally (I wish I did!) and I may not be an total expert on him but I have a decent handle on his beliefs and actions. I could not have more respect for the man and the criticisms of him are unjustified and damaging not only to him but I would argue to the financial system as a whole.

I admire Warren Buffett because of:

1. His open and honest assessment of his investment mistakes in every annual letter to shareholders. He has a laudable amount of humility; his writings contain absolutely no level of arrogance.

2. His accounting conservatism at Berkshire Hathaway (he measures Berkshire's performance by the change in book value, can you name another public firm that does that?)

3. His entirely unpretentious lifestyle. For a man that could afford nearly anything in terms of material wealth he lives in the small house he grew up in located in middle America's Omaha, Nebraska.

4. His salary at $100,000 a year. He makes and loses his real income every year right alongside his shareholders, whom he rightly refers to as partners. What other CEO do you see doing that besides one of my other heros in business, Steve Jobs (who actually gets paid $1 per year)?

5. His donation of 85% of his wealth to charity through the Bill & Melinda Gates Foundation. He has a strong belief that he has lived under an incredible economic system in a wonderful country that has allowed him to prosper far beyond his needs. Therefore, he believes he owes something back for being given such opportunity and he has backed up his words with action. Philanthropy on that scale should be awed and applauded.

6. His lack of excessive risk-taking as a manager. There is no agency problem at Berkshire because Buffett and long-term business partner, Charlie Munger, put their life savings into the company. They treat the business as their own and only ask of all their managers that they do the same with their individual businesses.

7. His willingness to openly share his investing wisdom in interviews and various events, especially during the annual Woodstock for Capitalists held in Omaha. He has also written well-timed articles advising Americans when to sell bubbles and when not to panic.

Recent criticisms of Buffett:

1. He has supported Goldman Sachs' actions throughout 2007 and thinks Lloyd Blankfein is a decent guy. I don't see why Buffett should be criticized for supporting Goldman. Most of us just started thinking about the "evil" Goldman Sachs about 2 years ago when the size of their bonuses shocked us. Buffett has worked with the investment bank for 4 decades doing a multitle of different transactions with them. A seasoned man of finance, he trusts himself in his investment decisions and does not believe a market maker should be required to disclose the counterparty to a transaction. I do not see where in the law it requires a market maker to do so.

Now, there is a legitimate argument to be made in Congress as to whether a market maker should be able to trade its own book. Hearings like the one recently run by Senator Levin are great and constructive to the reform process. Congress should openly debate the current structure of our system and decide what the role of a market maker should be in the financial markets. And, if the "Fabulous Fab" Fabrice Tourre materially misrepresented Paulson's involvement in the ABACUS deal, then I completely agree, censure is justified and deserved. Securities law does not allow an entity to present materially false information, that is rightly classified as outright fraud. Fines may certainly be in order should this misrepresentation be proved in court.

But, this idea that Goldman was some amazing profiteer just doesn't hold water. Goldman made $500 million in 2007 on their net short position in mortgage-backed securities, less than 1% of firm revenues. I'm sorry, but you're dealing with Wall Street, and a prop desk no less. If these traders were as smart as we make them out to be, they would have made a hell of a lot more than half a billion. I believe Blankfein when he says their objective was to get close to home (flat) and a less than 1% of revenue net impact is pretty damn close to net flat in my book. I mean, seriously, they paid out $12.1 billion in employee bonuses in 2007 giving indication of how relatively small a $500 million profit in RMBS was on their books.

It also seems to me that many of us are suffering from a case of hindsight bias. We look back and say, "it was obvious". Well, bubbles become bubbles precisely because they're not obvious until the end and even when the are, it's so hard to time it correctly. I did a presentation back in college in 2004 for my international finance class that included the cartoon below. I was highlighting the bubble in real estate in 2004...it didn't pop until 2007! Even though many knew there was a bubble, the ability to time the correction was incredibly difficult. Paulson could have just as easily been too early and blew himself up. In any given bubble, there will be a select few who time it perfectly and make amazing profits. I say good for them because they risked destruction stepping in front of the runaway train and they deserve the out-sized profits that come with that level of risk.

2. Buffett is NOT a hypocrite as Lauren Tara LaCapra claims over at TheStreet.com. He is lobbying to make the financial reforms on derivatives not retroactive. Buffett previously entered into contracts with a set of agreements in place and plenty of capital to withstand adverse movements. Congress would be fundamentally altering his contracts and changing the terms. Buffett may not have entered the contract if he had to post massive collateral! Most of the criticisms come from Buffett's oft-quoted statement that derivatives are "weapons of mass destruction" and while that is true, derivatives do have a very legitimate purpose and can be used wisely in the right hands.

An investment bank already levered 30-to-1 on an asset-to-equity basis building a portfolio with a notional value in the trillions of dollars is incredibly reckless and irresponsible. An extremely well-capitalized, unlevered firm effectively writing insurance policies in the midst of the greatest financial market panic in 80 years is not reckless, it's admirably prescient business. This is what Buffett did. He sold puts on the S&P 500 at panic-level prices expiring a decade out, the first expiring in 2019. Now, how was that a foolish move? Yet, because of the irresponsible users of these instruments, Congress aims to retroactively punish someone like Buffett. Contracts simply should not be changed after the fact and this is precisely Buffett's complaint. Buffett's lobbying efforts basically say "yes, change the rules going forward but do not force changes to existing contracts". This is far from hypocritical.

3. David Weidner's satirical piece of Buffett on MarketWatch this week was infuriating. Comparisons to Bernie Madoff are absolutely disgusting, even in satire. Weidner wrote as a mock of what Buffett would say at his annual shareholders meeting: "You know who else get's a bad rap? Bernie Madoff. Like I said about Goldman, I haven't seen anything in Madoff's behavior that makes him any more subject to criticism than investment managers generally. Investment management is a very defective system. When systems are defective, very good people will start doing things that are counterproductive. In this case, that means bankrupting widows, orphans and charities." Are you f#$%ing kidding me, Weidner? Madoff was a blatant fraud with absolutely no remorse who outright stole tens of billions of dollar from his clients in a couple decade-long Ponzi scheme. He destroyed lives and bankrupted people single-handidly. Buffett, on the other hand, has run an upfront investment business demonstrating the highest of ethical standards creating billions of dollars in wealth for his thousands of shareholders. The hypothetical quoting of Buffett, even in jest, is inexcusable and defamatory.

Warren Buffett is an admirable man of finance that should be seen as an example of what the financial business could, and should, be. The field is filled with liars, cheats, frauds and every level of con artist imaginable. In the midst of this stands a guy of the utmost integrity and discipline looking to invest wisely and honestly to increase the financial well-being of his partners. The criticisms could not be more unwarranted.

Oil Continues Gushing Yet Markets Bounce on Greece

After last week's less than devastating 195-point drop, the markets bounced back on the first trading day of May to close up 143 points (1.3%). After last week's downgrades in Europe fueled fears of contagion and compelled investors to sell, Greece's acceptance of the EU austerity measures this weekend elicited a wave of buying in US equity markets to start the week.

Commodity sectors were notably weak even after a late-day New York Times article claimed "BP Says Crews make Progress Stemming Oil Leaks" and helped the entire sector mount a rally off lows. The article said the first of three containment domes have been constructed and all domes should be put in place over the leaks this weekend. The domes should then allow oil to be pumped to the surface in a controlled manner. We'll see if it works, I remain skeptical. BP (NYSE:BP) recovered from over 9% losses early in the day to close down 3.8%. The Oil Service Holders (NYSE:OIH) bounced back from 4% early losses to close up on the day 0.7%. The sector was primed for a bounce after last week's drubbing. Investors should have caution though as David R. Kotok of Cumberland Advisors advised in a letter to his clients. Kotok urges us to realize that this oil spill is already far worse than many claim and could be terribly ugly taking a decade to clean up, possibly inducing a double-dip and effectively disarming any ammo in the offshore drilling camp.

Shares of Goldman Sachs (NYSE:GS) found buyers today after Warren Buffett expressed his support for the embattled firm this weekend fueling a 3% snapback. Gold rallied early on to highs of 1,188 before drifting back down to the low 1,180s by the New York equity close.

Barry Ritholtz ran a competition last week for who could come up with the best caption for a picture of Lloyd Blankfein during his Senate committee testimony. My personal favorite: "You fool! You fell victim to one of the classic blunders – The most famous of which is “never get involved in a land war in Asia” – but only slightly less well-known is this: “Never go against Goldman when money is on the line”!" LOL, The Princess Bride is awesome! This admission won in my book only slightly over an all-time Seinfeld classic: "Was that wrong? Should I not have done that? I tell you, I gotta plead ignorance on this thing, because if anyone had said anything to me at all when I first started here that that sort of thing is frowned upon… you know, cause I’ve worked in a lot of offices, and I tell you, people do that all the time."

Markets Optimistic Headed Into Easter

Tokyo ended 1.4% higher with the Nikkei now trading comfortably back above 11,000. Optimism spread to London closing up 0.8% and New York opened up over 70 points on the Dow. Participants are awaiting tomorrow's monthly jobs report. With US equity markets closed for Good Friday, we'll only see the initial reaction in futures markets and will have the weekend to digest the number.

Bloomberg reported yesterday that a plane ticket from New York to Omaha costs $1,433 for the weekend of Berkshire Hathaway's annual meeting while a flight to Paris on the same weekend only costs $1,142. A record 35,000 people attended last year's "Woodstock for Capitalists" and this year is likely the same. The snippets of wisdom spoken from the man himself are often lessons for a lifetime.

Spelling my site with Flickr:

Berkshire Hathaway's Top 15 Holdings

Warren Buffett has a cult-like following after decades of successfully investing capital under the legendary Benjamin Graham's value investing philosophy. I, for one, am a big believer in the style and keep a close eye of Buffett's moves to study his company choices. Below are Berkshire Hathaway's top 15 stock holdings. This list excludes the multitude of fully-owned companies under the empire.

Company	Holding Value	Stake in Company
Coca-Cola	$11.06 billion	8.68%
Well Fargo	$8.81 billion	6.18%
American Express	$6.25 billion	12.72%
Procter & Gamble	$5.48 billion	3.01%
Kraft Foods	$3.97 billion	9.37%
Wal-Mart	$2.04 billion	0.98%
Wesco Financial Corp	$2.04 billion	80.1%
ConocoPhillips	$1.85 billion	3.87%
Johnson & Johnson	$1.74 billion	0.98%
US Bancorp	$1.64 billion	3.61%
Moody's	$862.96 million	13.43%
Washington Post	$717.2 million	18.38%
M&T Bank Corp	$500.34 million	5.68%
Nike	$492 million	1.55%
Costco Wholesale	$321.18 million	1.2%