SACRAMENTO — Billionaire investor Warren Buffett has been lauded for his plainspoken denunciation of the greed and foolishness behind the economic crisis. He's pushed the massive federal bailout of imploding banks as the essential response to an "economic Pearl Harbor."
When Buffett speaks, people in high places listen. He's so highly regarded that in a fall debate, both presidential candidates said they'd consider him for Treasury secretary.
A Sacramento Bee examination of regulatory records has found that his extensive holdings in financial firms have made Buffett, the world's second-wealthiest person behind Microsoft Chairman Bill Gates, one of the top beneficiaries of the banking bailout.
Just 28 companies received more than 90 percent of the funds so far disbursed to financial firms by the $700 billion Troubled Asset Relief Program.
Buffett's company, Berkshire Hathaway, hasn't received any of that federal aid, but Berkshire, based in Omaha, Neb., owns stock valued at more than $13 billion in the top recipients of TARP funds, including Goldman Sachs Group, US Bancorp, American Express and Bank of America, which analysts all thought were in deep trouble before TARP was approved in October.
That total, The Bee found, ranks Berkshire fifth among all investors in TARP-assisted companies. Berkshire's TARP holdings constitute 30 percent of its publicly disclosed stock portfolio, and that proportion reflects at least twice as much dependence on bailed-out banks as any other large investor.
Berkshire, for instance, is the largest shareholder in San Francisco-based Wells Fargo, which got $25 billion — 91 percent of the TARP funds invested in institutions headquartered in California.
Buffett increased his bank holdings in September, while he was arguing in the media that Congress should approve the bailout to prevent the collapse of the global financial system.
"If I didn't think the government was going to act, I would not be doing anything this week," Buffett told CNBC after investing $5 billion in Goldman Sachs. "I am, to some extent, betting on the fact that the government will do the rational thing here and act promptly."
The more the bailout props up these financial companies, the more secure Berkshire's and other shareholders' investments in them are. Berkshire shares have risen sharply with the financial sector stock rally in recent weeks, but they're still down nearly 40 percent since September. In Friday trading, they closed at $92,490 a share.
"People can draw their own conclusions" about Buffett's stake in the bailout, said Richard Coppes, an expert in business ethics at the international law firm Jones Day, and a former general counsel of the California Public Employees' Retirement System. "But it shows one reason Buffett is so intensely interested in TARP."
Buffett, whose company is also the largest investor in Goldman Sachs and American Express, declined to be interviewed. In a February letter to Berkshire shareholders, he said that without government intervention, the consequences for the economy would have been "cataclysmic."
"Like it or not," he wrote, "the inhabitants of Wall Street, Main Street and the various Side Streets of America were all in the same boat."
Experts agree that preserving a functional banking system, TARP's goal, benefits everyone. In dispute is whether the bailout was the fairest and best approach.
Some say that large shareholders such as Buffett have been the primary, and perhaps only significant beneficiaries of TARP. Bank stocks have recovered significantly in recent weeks — Goldman's share price has more than doubled since November — and no TARP bank has failed.
Critics, however, worry that TARP propped up Wall Street against bankruptcy at the expense of taxpayers. The Treasury Department expected TARP to get loans flowing again, but the market has barely thawed, and unemployment has surged.
Thomas M. Hoenig, the president of the Federal Reserve Bank of Kansas City, recently advocated a government takeover of moribund banks until their balance sheets can be cleaned up.
"Shareholders would be forced to bear the full risk of the positions they have taken," Hoenig said, "and suffer the resulting losses."
Foreign firms also have gained much from the U.S. bailout. The Bee's examination of federal data found that foreign investment firms hold more than $31 billion in TARP-assisted financial companies. That lends credence to U.S. concerns that some European countries should more forcefully stimulate their own economies.
The Europeans agreed to loans and trade guarantees at the G-20 economic summit last week in London, but not to the stimulus package sought by President Barack Obama.
"It shouldn't just be the obligation of the U.S. to bail out the global system," said Richard C. Ferlauto, the governance and pension director for the American Federation of State, County and Municipal Employees, AFL-CIO, whose members' pension assets total more than $1 trillion. "Each country has to step to the plate proportionately."
The Bee also found that many of the leading TARP recipient companies cross-own large shares of other TARP banks.
Northern Trust received about $1.5 billion in government investments, yet its holdings in other TARP-assisted banks are about four times that amount. State Street got $2 billion, and holds nearly $24 billion in shares of other TARP recipients.
Each company has a stake in at least a dozen California banks, large and small, that received TARP funds.
Those commingled interests are partly responsible for the financial meltdown, Ferlauto said. "Ownership interlocks among these large financial institutions meant that no one was willing to rock the boat," he said, in the period leading up to the financial meltdown.
"There needs to be a lot more transparency on the part of large financial institutions as to how they act as fiduciaries of other financial companies," he added. "It's collusion of ownership."
To be sure, most of the investments by banks in other banks are investments of private clients managed by the banks. Those clients, however, aren't disclosed to regulators — another way that some beneficiaries of the bailout are shielded from public scrutiny.
When told of The Bee's findings, Robert Kuttner, the author of a recent best-seller on the economic crisis, said they reveal a bailout program designed out of public view, and one that "reeks of favoritism and special treatment."
"TARP was designed that way," Kuttner said, "to concentrate power with almost no effective oversight. That, to me, is the scandal."
The lack of clear criteria for awarding TARP funds continued after the recent change in government, according to Kuttner and other experts.
"The Obama administration said it would offer transparency and openness. But the single most important thing they are doing is being done largely behind closed doors, and the design is by, for and in the interest of large banks, hedge funds and private equity companies," he said. "Because there are no explicit criteria, it's very hard to know if a Citigroup or a Goldman got special treatment."
The Bee's findings follow a recent controversy over some Buffett holdings that may have contributed to the economic crisis.
Berkshire owns more than 20 percent of Moody's, a top credit rating agency, making it by far the largest stakeholder. Moody's has been faulted for enabling the global crisis by overvaluing mortgage assets.
Although Buffett has been outspoken about the need for government intervention in the crisis caused by the mortgage meltdown, he's said nothing publicly about the role of a company in which his firm is a minority holder.
Buffett also has decried "credit default swaps" — which are similar to insurance policies, in which mortgage bonds and other financial instruments are insured against default — as "financial weapons of mass destruction." He criticized the profligate use of these unregulated financial tools, or derivatives, widely blamed as a root of the credit collapse.
Yet Berkshire has issued tens of billions of dollars in derivatives. In a letter to shareholders, Buffett justified derivatives as relatively safe and likely to yield vast profits.
Leading economists, however, said that Berkshire's credit default swaps are much the same as those that sank American International Group, the insurer at the epicenter of the derivative fiasco.
"I assume that (Buffett) is being more responsible than they were," said Dean Baker, the co-director of the Center for Economic and Policy Research in Washington. "But this is a difference in quantity, not quality."
Simon Johnson, a professor at MIT's Sloan School of Management and the former chief economist for the International Monetary Fund, said that despite the banking collapse, financial leaders such as Buffett have retained surprising control over the government.
"There's this general presumption that Wall Street knows best. But they may not know best for the taxpayer," Johnson said. "We've gotten into the habit of deferring to them a little too much — including Warren Buffett."
(Phillip Reese of the Sacramento Bee contributed to this article.)
ABOUT THIS STORY
This report is based, in part, on an evaluation of investor filings to the Securities and Exchange Commission as of Dec. 31, the most comprehensive recent data, and on Treasury Department disclosures of federal stock purchases.
For overall shareholder figures, The Sacramento Bee considered the 28 firms that received at least $600 million from the Troubled Asset Relief Program as of March 24 — comprising about 92 percent of TARP outlays.
TARP-assisted California banks were separately reviewed if their market capitalization was at least $25 million. The figures cited exclude federal investments in American International Group and federal loans and investments for auto companies.
The value of investor holdings in TARP-assisted companies was current as of the market close on March 27. Assistance on ownership analysis was provided by Cary Krosinsky, vice president of the research firm Trucost.
References to Berkshire Hathaway's total stock portfolio include a $5 billion investment in Goldman Sachs Group. That investment pays a 10 percent annual dividend and includes the right to purchase another $5 billion in Goldman stock.
McClatchy Newspapers 2009