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Jacob Wolinsky
Jacob Wolinsky
Articles  | Author's Website |

Think Warren Buffett is a Hypocrite For Buying Goldman Sachs? Look in the Mirror

I am going to be posting a few articles on Warren Buffett. This one really could have been written several months ago, but the idea struck me today, after Goldman Sachs recently redeemed the preferred shares from Warren Buffett. There are various ways of calculating how much Buffett made on the Goldman preferreds, but everyone agrees that it was several billion dollars.

Warren Buffet has been criticized for purchasing Goldman Sachs. It wasn’t so much that many individuals (a great deal of which are usually the uninformed and only believe what the media tells them) actually ended up disliking Goldman Sachs this time around, either. A lot of people seem to be upset that Warren Buffet purchased a company that has recently gotten a bailout from both the Federal Reserve and the U.S. Treasury. Their argument is why should a business receive aid just so that it can get back on its feet and then be gobbled up by a big show investor?

I think we would all be on soup lines if not for the actions of the Fed and Treasury in late 2008 and early 2009, but that is a topic for another time.

I think that most people are simply upset at the overlying idea that the bailout existed in the first place, yet they don’t really know of all of the companies out there that ended up receiving a bailout in the first place. In fact, Senator Bernie Sanders of Vermont has recently run an audit on the transactions of the Federal Reserve, and his findings will come out as surprising. While I will point out that Bernie Sanders has been affiliated with Ron Paul (although from complete opposite sides of the political spectrum), and both of them have been (more or less) attacking the Federal Reserve for years, it is still trustworthy information.

The Fed released a list of companies, which it provided emergency loans to during the financial crisis. Some very surprising names are on the list and not just the big banks or auto that many people think. Companies such as McDonalds, General Electric, Harley Davidson, and Caterpillar were all listed amongst the companies that received funding. Also listed in the category were the big names of both Toyota and Verizon. It isn’t just the major banking companies after all; at least that’s what you can assume if all of these companies did in fact receive a bailout as well.

In fact, while we could argue about the banks in general, it is far from fair to claim the Buffet and Goldman Sachs were the sole beneficiaries of some one-time, never-been-done-before and unheard-of service. In the information presented to us by Senator Sanders, Goldman received almost $600 billion in bailout funding. However, it is also important to compare that to some of the other companies that were listed in this report. Bear Stearns received close to $1 trillion, Merrill Lynch close to $1.5 trillion, Citigroup $1.8 trillion, and even Morgan Stanley received almost at $2 trillion dollars!

This is a significant amount of money that was more or less funded as free loans by taxpayers. However, the main point that I am trying to make right now is not who is the bad guy in all of this; it is simply to say that a great deal of companies received free government funds in the form of bailouts. So, please, with all of this in mind do not criticize Warren Buffet and Goldman Sachs for taking part in the bailout. For as you can see with some of the information brought forth by Senator Sanders recently, a lot more companies ended up taking the handouts than many people probably would have even imagined. In fact, a large sum of money as listed by the Senator’s information, even suggests that the Fed passed out bailout funds to two European Megabanks: Deutsche Bank and Credit Suisse.

While there is still more information yet to come, it is important to realize that whether or not the actions of one individual can be applauded or frowned upon (be my guest, take your own side on this one), please do not chastise one individual or one company when the real stories of many, many more are coming out all the time.

I would venture to say that many people who criticize Buffett for his Goldman deal own some of the companies that received a bailout courtesy of Ben Bernanke.

Disclosure: no position in any companies mentioned in the article


About the author:

Jacob Wolinsky
My investment ideas have been inspired by many of value investors including Benjamin Graham, Charles Royce, John Neff, Joel Greenblatt, Peter Lynch, Seth Klarman,Martin Whitman and Bruce Greenwald. .I live with my wife and daughter in Monsey, NY. I can be contacted jacobwolinsky(AT)gmail.com and my blog is www.valuewalk.com

Visit Jacob Wolinsky's Website

Rating: 4.0/5 (8 votes)


Mmel - 6 years ago    Report SPAM

While I am on your side in this argument and believe the ire to be misplaced, I think that a big part of the reason people dislike the whole thing is also the fact that many feel that WEB gets deals that no one else gets. That is indeed a fact in this investment and it deserves mention. If this was a one-time thing, people might not care, but many people see the companies he acquires and look to their portfolio to see if it is something they own, when it is often not the case. I feel that this furthers the fury because they continue to believe that he is getting some sort of under the table deal on these acquisitions that no regular investor could make. What they really need to know is that their financial advisor's or the people giving them tips are looking in all the wrong areas for investments and they need to adjust to a more lucrative investment strategy, mainly value investing.
Bill Smith
Bill Smith - 6 years ago    Report SPAM
I find it amusing when people bash him. My response is usually "if you can't beat 'em, join 'em...buy BRK."

Yswolinsky - 6 years ago    Report SPAM
Very good point, and I did not touch on this point I thought at first you were going in this direction; Buffett not only got a bailout but he invested in Goldman and then publicly pleaded for a bailout. I think that is a valid argument, although I do not agree with it.
Noblepaladin - 6 years ago    Report SPAM
Many Fortune 500 companies said they could not meet payroll cause the commercial paper market was drying up. Most people don't know that the companies (even large ones like IBM) they work at don't have the money for their paycheck just lying around in a vault. It's all funded on short term loans. With the commercial paper market drying up, the government stepped in to backstop it. Imagine if you worked at a company like Exxon or IBM and your paycheck bounced? There would be chaos and a run on every bank in the world, whether they are healthy or not.

We have to also keep in mind that for most of the companies, the bailout simply backstopped chaos. They returned it pretty quickly when everything calmed down. The money was essentially put into a vault so the company can claim "hey, we have money, don't worry about your paycheck bouncing or not being paid on your receivables". After the fear was gone, the money was returned to the government with interest. These were all high quality companies that wouldn't need the money if it wasn't because of dire fear that the financial world was going to collapse.

Goldman Sach's situation is actually a bit weird because they were the best behaved bank. They participated the least in the toxic assets, which is why they were the healthiest bank. People just hate them because they made the most money the year right after the collapse happened. It really has more to do with the fact that they didn't screw up that much and their competitors did and went out of business or are crippled by other problems. I'm not absolving Goldman Sachs of all wrongdoing. But the other banks deserve many times more blame than Goldman, but people are not pointing as much anger towards them because they make less money.
Yswolinsky - 6 years ago    Report SPAM
#4 good point and that is what I was referring to when I said that I think we would all be in bread lines if not for the actions of the Fed and Treasury, I just did not want to get sidetracked on that.

I do not think GS is the best behaved bank, but I do agree most of the anger is due to jealousy.
Paulwitt - 6 years ago    Report SPAM
I think we would all be in bread lines if not for the actions of the Fed and Treasury,

Agree 110%.

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