Warren Buffett may be the hero of the moment but he is no Clark Kent By Tracy Corrigan Last Updated: 12:01am BST 26/09/2008
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Warren Buffett is the hero of the hour. His $5bn (£2.7m) investment in Goldman Sachs sent a powerful message that the world's savviest investor still believes there is money to be made in the financial sector - and by investing in it, rather than selling it short. We needed a hero because we have already identified the villains of the piece: the hedge funds which bet against HBOS are, according to the Archbishop of York, Dr John Sentamu, bank robbers.
But hang on a minute. I can just about see the bespectacled Mr Buffett as an ageing Clark Kent. Both are mild-mannered, hail from the Midwest, and have a track record of caring about the greater good of humanity (Mr Buffett is leaving the bulk of his fortune to charitable causes and is the only very rich person I can think of who argues passionately that he doesn't pay enough tax).
Clark Kent's alter ego, Superman, fared well against the forces of darkness because he was able to call on his superpowers. And Mr Buffett's own special powers were in evidence this week. No one else could have extracted such favourable terms from Goldman, which turned down better offers from other sources. Those chaps at Goldman are no fools. The terms were sweet because Mr Buffett's stamp of approval was worth its weight in Goldman preferred stock.
advertisementAnd that, I'm afraid, is where Mr Buffett's hero status comes unstuck. While Superman was thinking only of others, Mr Buffett has used his cachet to get himself the sort of deal the average investor can only dream of. Sure, it was a vote of confidence in the financial sector, and, as he said himself, also a bet that the $700bn Paulson plan to buy up toxic debt will make it through US Congress pretty smartly. But it's an awful lot easier to feel confident about what is almost a one-way bet. Even if the Paulson plan had failed, which now seems unlikely, Mr Buffett had the buffer of Goldman shareholders' equity. He has the option to buy more stock at an already attractive price and, in the meantime, he is earning a handsome yield on his investment.
More by Tracy Corrigan There is nothing wrong with any of this: Mr Buffett is using his good name to make, I expect, even more money for investors in his vehicle, Berkshire Hathaway. But let's be clear about two things: the Goldman move is neither a sign that the rest of us should be loading up on financial stocks without similar protection against further turmoil, nor is it a gutsy bet by a maverick.
Despite his outspokenness and lack of interest in the trappings of wealth - he still lives in the home in Omaha, Nebraska he bought 50 years ago - Mr Buffett is part of the establishment, as the Goldman deal demonstrates. His criticism of investment bankers as a breed has not hurt his close relationship with Goldman, which dates back to a memorable meeting between the 10-year old Warren and then Goldman senior partner Sidney Weinberg.
He has known every head of Goldman since then, including Hank Paulson, now US Treasury secretary and author of the eponymous plan, who, I am told, introduced Mr Buffett to Goldman's current chief Lloyd Blankfein. I have no doubt that Mr Buffett's support for the Paulson plan, and his high regard for Mr Paulson, are entirely genuine. "You couldn't have a better guy," Mr Buffett enthused. But, like Goldman itself, Mr Buffett stands to do rather well from the passing of the plan.
So much for Superman. What about Lex Luthor, Brainiac and General Zod? Short-sellers have undoubtedly added to the pressure which forced HBOS into the arms of Lloyds TSB. Some, like hedge fund manager John Paulson, have made a killing.
For Sir Callum McCarthy, outgoing boss of the Financial Services Authority, this is worrying: "There is a danger in a trading system which allows financial institutions to be targeted and subject to extreme short-selling pressures, because movements in equity prices can be translated into uncertainty in the minds of those who place deposits with those institutions with consequent financial stability issues." Exploiting this linkage is, indeed, predatory, and UK regulators were right to curb it in the short term.
But this is not what actually appears to have happened to HBOS, since only a tiny proportion of its stock was on loan when it came under fire.
And if we are worried about ethics, whose are worse - those of the bankers who pumped up their share prices by hyping the benefits of dodgy off-balance sheet structures, or those of the traders who spotted the flakiness of banks' balance sheets and took the - correct - view that the stocks were overvalued?
The financial crisis is not a morality play in which virtue is rewarded and avarice punished. Gordon Brown's conference speech notwithstanding, the credit crisis isn't fair at all. Warren Buffett and John Paulson are both likely to be even richer when the crisis is over. They have a lot more in common with each other than with the victims of the crisis who will lose their homes and jobs. Holding out for a hero? They are in short supply.
