By Andrew Frye
April 29 (Bloomberg) -- Warren Buffett, who called Goldman Sachs Group Inc. an “exceptional institution” when he invested $5 billion in the firm, will have his biggest platform to discuss the bank after it was sued for fraud by regulators and pilloried in Congress.
Buffett, who will host shareholders of his Berkshire Hathaway Inc. at the May 1 annual meeting, was a satisfied Goldman Sachs client when he extended capital and credibility to the firm during the credit crisis in 2008. Buffett has since defended the bank amid public outrage about its pay and conduct, drawing on a relationship that dates to a visit with a Goldman Sachs executive in New York at the age of 10.
“That’s more than 60 years of experience with Goldman Sachs that’s talking,” said Jeff Matthews, author of “Pilgrimage to Warren Buffett’s Omaha” and founder of the hedge fund Ram Partners LP. “Buffett is not going to be turning around selling his Goldman Sachs.”
Buffett said people who feel cheated by the recession have unfairly lashed out at Wall Street when regulators, mortgage lenders and politicians should share the blame.
“They’re going to rewrite Genesis and have Goldman Sachs offering the apple,” Buffett said in a March 1 interview with CNBC.
The billionaire has “great confidence” in his investment, according Berkshire Director Thomas Murphy, who told Bloomberg Television that he spoke with Buffett after the Securities and Exchange Commission sued Goldman Sachs on April 16. Goldman Sachs Chief Executive Officer Lloyd Blankfein said he also spoke privately with Buffett after the lawsuit.
Shareholder Questions
Buffett will take about five hours of shareholder questions at the meeting and, according to Murphy, should expect inquiries about Goldman Sachs, which was accused of misleading clients on the sale of mortgage-related investments. About 35,000 people attended last year’s meeting at Omaha’s Qwest Center arena. Buffett’s comments from the gathering and subsequent press conference are read throughout the world.
Buffett, a critic of Wall Street greed and corruption, has supported a firm that’s been a lightning rod for criticism. Public regard for Goldman Sachs plunged in the year and a half since Buffett, Berkshire’s chairman and chief executive officer, bought preferred securities paying 10 percent interest.
Berkshire makes $500 million a year in interest on the Goldman Sachs perpetual preferred stock, which the bank may call at any time by paying a 10 percent premium. The warrants Buffett negotiated as part of the deal give Berkshire the option to buy $5 billion of common stock for $115 a share. Berkshire’s paper profit on the warrants was about $1.8 billion as of yesterday, down from $3 billion before the SEC lawsuit was announced.
Goldman Shares
Goldman Sachs advanced $3.97, or 2.6 percent, to $157.01 yesterday in New York trading. The bank closed at $184.27 on April 15. Berkshire rose $675 to $115,625.
The transaction is reminiscent of a 1987 deal with Salomon Inc. in which Buffett invested $700 million.
Buffett was named interim chairman of Salomon in 1991 after the firm was accused of misconduct in the Treasury debt auction market, and he worked with regulators to restore the company’s credibility. In testimony to Congress, he summarized his message for Salomon employees:
“Lose money for the firm, and I will be understanding,” Buffett said. “Lose a shred of reputation for the firm, and I will be ruthless.”
Senate Hearing
Goldman Sachs executives endured more than 10 hours of grilling before the Senate’s Permanent Subcommittee on Investigations on April 27 about their duty to clients and the ethics of betting against the housing market as the bank sold mortgage-linked securities. Michigan Democrat Carl Levin said he was “troubled” that the company doesn’t seem to understand conflicts of interest.
Goldman Sachs has said the SEC suit is unfounded.
“What clients or customers are buying is they are buying an exposure,” Blankfein told the committee. “The thing we are selling to them is supposed to give them the risk they want. They are not coming to us to represent what our views are.”
Goldman Sachs posted a record $13.4 billion profit in 2009, a year after receiving $10 billion in a taxpayer bailout. It repaid the funds with interest in June.
Buffett told television interviewer Charlie Rose in November that the bank didn’t need the bailout. As politicians railed about bonuses, Buffett, the world’s third-richest person, praised Blankfein and said, “I don’t mind paying for performance.”
Finding a Target
“You’ve got to expect vilification of banks,” Buffett said in a January interview. “If I lost my job I’d be mad at somebody, I’d probably be mad at everybody. And that’s human nature. And it sometimes gets fanned by people to whom it’s to their advantage to have a target.”
The Goldman Sachs case is the SEC’s first contested lawsuit against a major investment bank in more than a decade, and comes as the regulator seeks to restore a reputation tarnished by its failure to detect Bernard Madoff’s Ponzi scheme.
Buffett, who has ridiculed investment bankers for the size of their fees, relied on Goldman Sachs for some of his biggest deals, including the $4.5 billion acquisition of Marmon Holdings Inc. in 2008 and the $1.45 billion takeover of McLane Co. Those deals were facilitated by Byron Trott, the former Goldman Sachs managing director of whom Buffett said “I trust him completely.”
An Investing Icon
At last year’s meeting, Buffett praised Wells Fargo & Co. and dismissed the importance of government analysts who were reviewing banks in an industrywide stress test. The San Francisco-based bank jumped 44 percent the following week.
“Warren Buffett is certainly an icon in terms of picking the right companies and investing with a long-term strategy,” said Jeff Resnick of Opinion Research Corp., a specialist in brand and reputation consulting. A good reputation “will give you a reservoir of goodwill among your most important stakeholders.”
Berkshire rose to first place this month in Harris Interactive’s annual survey of corporate reputations. Goldman Sachs came in 56th out of 60.
“He’s an important client as well as an investor,” Blankfein said of Buffett in the April 27 Bloomberg Television interview. “I can’t speak for Warren.”
Buffett said last year in Omaha that almost everyone associated with finance, from bankers to regulators to insurers, contributed to the crisis.
“Some of it stemmed from greed, some from stupidity, some from people saying the other guy was doing it,” Buffett said.
--Editors: Dan Kraut, Dan Reichl
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