This is going to cost Buffett a lot of credibility if Goldman comes out looking bad (and I don't think the SEC would make this move unless they have what they need to follow through).
$5 billion is only whats directly invested in GS. With a book as big as Buffet has and the interconnected web of finance GS going down hard could have repercussions to his portfolio of a far larger magnitude.
> Buffett is known for for his personal integrity...
Aside from this cult followers claiming that, I only see a one of the most successful businessman in the world. One could equally have a psychopathic, dishonest, thief as the most successful businessman in the world.
I guess, I would be more convinced of his "integrity" if he actually criticized GS or Moody's, while he still holds large investments in those firms.
Hate to break it to you, but Goldman already looks pretty bad. What people are looking for now is what kind of official version of 'bad' is going to come out of this and if there are going to be any significant repercussions.
Not that we know everything about this situation, but Buffett is known for his honesty and integrity. He would probably consider it his duty, as a part-owner, to defend the company. If it came to light that Goldman is provably guilty of fraud, you can bet he'll stop speaking well of the institution and its CEO--but he would still do his best to save the company. That is what happened when Salomon Brothers, an I-Bank of what Buffett owned a part, was caught manipulating the Treasury market.
Besides, the guy probably isn't to throw his integrity--from which a large part of his $200 billion business derives its value--for a mere $5 billion in warrants. I mean, stranger things have happened, but I'd be very surprised if such a turn of events came to pass.
Defending a company whose stock you own, because you own the stock, seems more like self-interest than integrity.
Implying, as he seems to, that it's okay to knowingly sell junk to clients ("It's a little hard for me to get terribly sympathetic for a bank [customer of Goldman Sachs] that made a bad credit deal") doesn't seem to fit the definition of integrity.
I didn't mean that defending a company implies intregity, but rather that Buffett's intregity implies that he will defend the company. A statement doesn't imply its converse, and there is absolutely no reason to jump to conclusions.
"Caveat emptor" is usually a bad principle with which to run an economy, but when it comes to financial people buying, selling, and trading assets, "caveat emptor" is the way things are done and many respectable people think this is probably the only correct way to do things, at least on the micro and meso scales. Whining about clients getting screwed is like whining about people showing up to Fight Club and getting punched. And Buffett and Munger even express a degree of distaste for the deals in question, lawful or not, which is more than most financial people would allow themselves.
Your quote doesn't even imply Buffett thinks it's "OK", merely that it's difficult to feel sympathy for those on the wrong end of the deal. Those clients aren't random consumers, they were financial guys who were supposed to know better.
Does that mean that we should throw the CEO of McDonald's in jail too because he knowingly sells junk food to customers? No, we shouldn't. And the reason is that people are free to buy whatever food they want. If they want shitty fast food, that's up to them. Similarly, the clients of Goldman were free to buy or sell whatever securities they want - Goldman's job is specifically not to make a claim as to whether something is "good" or "bad" especially when it's not very clear cut. Their job is instead to be ready to sell to or buy from clients who come in with requests. If these securities had worked out well, GS would be considered geniuses - hindsight is always 20/20, especially in the blogosphere.
I don't mean to sound rude, but your comment shows how little you know understand about securities, investing, risk, and reward.
Of course nobody comes in asking for "crappy mortgages". Pension funds, endowments, etc. have certain investing goals. These are typically set based on future obligations to their investors. Let's say for example that you are a portfolio manager at one of these institutions whose job is to achieve a 7.5% annual return because teachers, firemen, and police officers actually expect to get paid in retirement. Well, the first thing to note is that this isn't easy. The investors diversify their investments among stocks, hedge funds, fixed income (bonds), and yes - mortgage backed securities, based on where they think the best relative risk-reward is.
Along the entire spectrum of assets, investors expect a much higher yield for what the market perceives to be a crappy asset as compared to a good asset. You can loan money to the US government at a 1% yield or you can load money to high grade corporate companies in the US for 5%. Why would you choose the "safe" US government vs. the relatively "crappy" high grade corporate securities? Well, it all depends on what yield (interest rate) you seek versus what risk you are willing to take.
The investors who bought these securities were looking for a specific risk (and for the interest rate that they'd get for taking it) which was detailed very clearly in the offering memorandum (http://bit.ly/9zwBqB). Some specific lines I'll cite are as follows:
-----Prior to making an investment decision, prospective investors should ensure that they have
sufficient knowledge, experience and access to professional advisors to make their own legal, tax,
accounting and financial evaluation of the merits and risks of investment in the Notes and should carefully
consider the nature of the Notes, the matters set forth elsewhere in this Offering Circular and the extent of
their exposure to the risks described in "Risk Factors".
-----Concentration Risk. The concentration of the Reference Obligations in the Reference Portfolio in
any one particular type of Structured Product Security subjects the Notes to a greater degree of risk with
respect to credit defaults within such type of Structured Product Security. Investors should review the list
of Reference Obligations set forth herein and conduct their own investigation and analysis with regard to
each Reference Obligation. See "The Credit Default Swap—The Reference Portfolio".
----- The Collateral Securities may include Commercial
Commercial Mortgage-Backed Securities.
Mortgage-Backed Securities.
CMBS bear various risks, including credit, market, interest rate, structural and legal risks. CMBS
are securities backed by obligations (including certificates of participation in obligations) that are
principally secured by mortgages on real property or interests therein having a multifamily or commercial
use, such as regional malls, other retail space, office buildings, industrial or warehouse properties, hotels,
rental apartments, self-storage, nursing homes and senior living centers. Risks affecting real estate
investments include general economic conditions, the condition of financial markets, political events,
developments or trends in any particular industry and changes in prevailing interest rates. The cyclicality
and leverage associated with real estate-related investments have historically resulted in periods,
including significant periods, of adverse performance, including performance that may be materially more
adverse than the performance associated with other investments. In addition, commercial mortgage loans
generally lack standardized terms, tend to have shorter maturities than residential mortgage loans and
may provide for the payment of all or substantially all of the principal only at maturity. Additional risks may
be presented by the type and use of a particular commercial ...
> These investors took a risk. They knew they were taking a risk and they knew the risk they were taking
The point is, I don't think they really knew the risk. In other words, if the risk was so obvious and you claim that these are smart professionals, then how come so many bought the securities? It seems either the risks were not disclosed properly or these so called "the most professional in business" were really "mom and pop" type amateurs. So which one is it?
> The simple fact is that they did a poor job of assessing risk versus reward and lost a ton of money as a result.
Perhaps true, but if they didn't have the appropriate information to assess the risk because they were deceived, then that would be a serious problem. I am not arguing that's what happened, but rather, that it is hard to assess risk if you are provided with misleading data in general.
To use the McDonalds analogy, it is like them putting false nutritional information, or not disclosing important parts of the nutritional information to their buyers.
> Again, when you go into a McDonalds, nobody says, "please give me unhealthy food", but instead they say, "give me a double quarter-pounder with cheese". This person is taking the risk of heart disease versus the "reward" of enjoying a calorific sandwich.
Again, if you don't know about the amount of calories in a McDonalds, you don't really think you are taking the risk. You just think you are eating a yummy lunch.
The pension fund, didn't think it was taking a risk, it thought those securities were AAA rated. You need access to available and truthful information in order to make an informed decision about risk. I agree that investors were professional and the fact that so many didn't assess the real risk correctly, it means that something was hidden from them. That's the gist of the problem.
these so called "the most professional in business" were really "mom and pop" type amateurs. So which one is it?
Even today, there are an awful lot of fund managers and traders who got their jobs because they showed up to the interview wearing the "right" tie, i.e. through the Old Boys network.
Goldman Sachs, despite what it might look like from the outside, isn't really a part of this network. They started out as scrappy Jews competing with old-money white-shoe WASPs, they were the outsiders that everyone looked down on once. It's baked into their corporate DNA that these guys are prey.
If McDonald's somehow misrepresents what's in their double quarter pounder with cheese, yes, they will probably get sued. I suppose that you could argue that McDonald's customers should perform a chemical analysis of their meal before eating it, so they really know what's in it. But I do not think that is the standard that the law applies.
Can we apply this metaphor to the Goldman mortgage backed securities? Well, how many mortgages were wrapped up in those securities? Was there anyway to be sure what the security would be worth under various scenarios? I saw an article that Python was being considered as a language for specifying derivatives, so you could just run the program and know what the payouts would be under various scenarios with no ambiguity. Was there an expectation that Goldman was doing the work of picking securities with a certain risk profile, when in actuality they were picking securities with a higher risk profile?
It seems to me that a general principle of the law should be that a seller who intentionally misrepresents what they are selling has some measure of liability. Do you disagree, or do you feel that no misrepresentation occurred in this case?
> So their clients walked in and requested securities made up of crappy mortgages?
Everything, even crap, has a price at which it makes sense.
Every purchase occurs because the buyer and seller have different beliefs about the worth of the thing being sold to them.
If you think that the housing market is doomed, you'll have a very different opinion of a mortgage pool than a seller who thinks that the market is sound.
>Does that mean that we should throw the CEO of McDonald's in jail too because he knowingly sells junk food to customers? ... If these securities had worked out well, GS would be considered geniuses
The thing is, the securities were designed to fail so they could short them. That would be like McDonald's deliberately selling lethal food and taking life insurance out on its customers.
Society bears the costs of fallout from commerce that is damaging to society. The fraud of Goldman Sachs, and other companies engaged in, resulted in the bailouts. If a business model is dependent on incurring significant social costs then a society which allows it won't be sustainable.
Keep in mind that Buffett also invested in Moody's, who made this mess possible by rating junk CDOs AAA. I agree that he's generally an ethical guy, but his investment doesn't automatically confer absolvement.
Buffet is one of the largest (if not the largest) Moody's investor. I can't speak to how "ethical" Buffett is, but what is apparent is his conflict of interest in this case.
In general, I tend to have a problem with cult figures. Buffett has acquired a large following of worshipers who are willing to defend what he says or does based on lofty pronouncements such as "he is ethical" or "he has integrity" and so on. One thing is obvious, and that is he is one of the wealthiest and best businessman in the world. Whether he is ethical or has integrity is probably independent of the fact that he has acquired all this wealth.
> Not that we know everything about this situation, but Buffett is known for his honesty and integrity.
You mean like advocating taxes that he won't pay, that he makes money from?
I'm referring to inheritance taxes. His estate is set up so it will never be taxed. He makes a lot of money from his companies that sell insurance to pay inheritance taxes.
> If it came to light that Goldman is provably guilty of fraud, you can bet
The above suggests that you have some relevant knowledge of Buffet. How about sharing it?
No = his "repuation" isn't an answer. How he earned that reputation is.
It seems to me that Buffett's reaction to Goldman Sachs is a little more emotional and a lot less objective then his other investments.
While I agree that the specific charges against Sachs should be proven first, it's hard to deny the questionable behavior and dealings that Goldman has been involved in since the bailout began, not the least of which was the ex.Chairman and CEO being the Treasury Secretary and billions of dollars disappearing as part of the initial TARP program.
It seems Buffett really wants Goldman to be a pioneering American investment bank with a solid ethical reputation, but unfortunately for him the reality is less rosy.
I'm reading a biography about him called The Snowball. I'm currently on the section where Salomon Bros has just done something illegal and he has to step up and fix the company. I'm sure he's feeling some deja vu about now.
Awesome book - long, but has much more detail than anything else I've read about him.
I'm currently at The Berkshire Shareholders Meeting weekend. Warren led the meeting off with his long talk on Goldman. I think the main thing that he was trying to drive home that is not getting reported is that there is a difference between being "accused" of wrong doing and actually having done something wrong.
He did go to great lengths to explain how he interpreted the goings on at Goldman. He even compared it to a recent blind bond insurance deal that Berkshire had made. And in his opinion, according to the information he had available, it didn't seem like there was any wrong doing on the part of Goldman.
However, he was very clear that if the ACCUSATION of impropriety became proof of wrong doing that he would have a different stance on the matter.
I'm just reporting what I heard him say. Interpret as you wish. As for the side that says he has a conflict of interest in this matter, he also said his investment in Goldman is paying $15 a second. I know that would be a conflict of interest for me, but I am not Warren Buffett.
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[ 16.0 ms ] story [ 810 ms ] threadAside from this cult followers claiming that, I only see a one of the most successful businessman in the world. One could equally have a psychopathic, dishonest, thief as the most successful businessman in the world.
I guess, I would be more convinced of his "integrity" if he actually criticized GS or Moody's, while he still holds large investments in those firms.
Besides, the guy probably isn't to throw his integrity--from which a large part of his $200 billion business derives its value--for a mere $5 billion in warrants. I mean, stranger things have happened, but I'd be very surprised if such a turn of events came to pass.
Implying, as he seems to, that it's okay to knowingly sell junk to clients ("It's a little hard for me to get terribly sympathetic for a bank [customer of Goldman Sachs] that made a bad credit deal") doesn't seem to fit the definition of integrity.
"Caveat emptor" is usually a bad principle with which to run an economy, but when it comes to financial people buying, selling, and trading assets, "caveat emptor" is the way things are done and many respectable people think this is probably the only correct way to do things, at least on the micro and meso scales. Whining about clients getting screwed is like whining about people showing up to Fight Club and getting punched. And Buffett and Munger even express a degree of distaste for the deals in question, lawful or not, which is more than most financial people would allow themselves.
Your quote doesn't even imply Buffett thinks it's "OK", merely that it's difficult to feel sympathy for those on the wrong end of the deal. Those clients aren't random consumers, they were financial guys who were supposed to know better.
To continue the analogy, the "whining" is really about some using brass knuckles against others when it is supposed to be a fair fight.
So their clients walked in and requested securities made up of crappy mortgages?
Of course nobody comes in asking for "crappy mortgages". Pension funds, endowments, etc. have certain investing goals. These are typically set based on future obligations to their investors. Let's say for example that you are a portfolio manager at one of these institutions whose job is to achieve a 7.5% annual return because teachers, firemen, and police officers actually expect to get paid in retirement. Well, the first thing to note is that this isn't easy. The investors diversify their investments among stocks, hedge funds, fixed income (bonds), and yes - mortgage backed securities, based on where they think the best relative risk-reward is.
Along the entire spectrum of assets, investors expect a much higher yield for what the market perceives to be a crappy asset as compared to a good asset. You can loan money to the US government at a 1% yield or you can load money to high grade corporate companies in the US for 5%. Why would you choose the "safe" US government vs. the relatively "crappy" high grade corporate securities? Well, it all depends on what yield (interest rate) you seek versus what risk you are willing to take.
The investors who bought these securities were looking for a specific risk (and for the interest rate that they'd get for taking it) which was detailed very clearly in the offering memorandum (http://bit.ly/9zwBqB). Some specific lines I'll cite are as follows:
-----Prior to making an investment decision, prospective investors should ensure that they have sufficient knowledge, experience and access to professional advisors to make their own legal, tax, accounting and financial evaluation of the merits and risks of investment in the Notes and should carefully consider the nature of the Notes, the matters set forth elsewhere in this Offering Circular and the extent of their exposure to the risks described in "Risk Factors". -----Concentration Risk. The concentration of the Reference Obligations in the Reference Portfolio in any one particular type of Structured Product Security subjects the Notes to a greater degree of risk with respect to credit defaults within such type of Structured Product Security. Investors should review the list of Reference Obligations set forth herein and conduct their own investigation and analysis with regard to each Reference Obligation. See "The Credit Default Swap—The Reference Portfolio". ----- The Collateral Securities may include Commercial Commercial Mortgage-Backed Securities. Mortgage-Backed Securities. CMBS bear various risks, including credit, market, interest rate, structural and legal risks. CMBS are securities backed by obligations (including certificates of participation in obligations) that are principally secured by mortgages on real property or interests therein having a multifamily or commercial use, such as regional malls, other retail space, office buildings, industrial or warehouse properties, hotels, rental apartments, self-storage, nursing homes and senior living centers. Risks affecting real estate investments include general economic conditions, the condition of financial markets, political events, developments or trends in any particular industry and changes in prevailing interest rates. The cyclicality and leverage associated with real estate-related investments have historically resulted in periods, including significant periods, of adverse performance, including performance that may be materially more adverse than the performance associated with other investments. In addition, commercial mortgage loans generally lack standardized terms, tend to have shorter maturities than residential mortgage loans and may provide for the payment of all or substantially all of the principal only at maturity. Additional risks may be presented by the type and use of a particular commercial ...
The point is, I don't think they really knew the risk. In other words, if the risk was so obvious and you claim that these are smart professionals, then how come so many bought the securities? It seems either the risks were not disclosed properly or these so called "the most professional in business" were really "mom and pop" type amateurs. So which one is it?
> The simple fact is that they did a poor job of assessing risk versus reward and lost a ton of money as a result.
Perhaps true, but if they didn't have the appropriate information to assess the risk because they were deceived, then that would be a serious problem. I am not arguing that's what happened, but rather, that it is hard to assess risk if you are provided with misleading data in general.
To use the McDonalds analogy, it is like them putting false nutritional information, or not disclosing important parts of the nutritional information to their buyers.
> Again, when you go into a McDonalds, nobody says, "please give me unhealthy food", but instead they say, "give me a double quarter-pounder with cheese". This person is taking the risk of heart disease versus the "reward" of enjoying a calorific sandwich.
Again, if you don't know about the amount of calories in a McDonalds, you don't really think you are taking the risk. You just think you are eating a yummy lunch.
The pension fund, didn't think it was taking a risk, it thought those securities were AAA rated. You need access to available and truthful information in order to make an informed decision about risk. I agree that investors were professional and the fact that so many didn't assess the real risk correctly, it means that something was hidden from them. That's the gist of the problem.
Even today, there are an awful lot of fund managers and traders who got their jobs because they showed up to the interview wearing the "right" tie, i.e. through the Old Boys network.
Goldman Sachs, despite what it might look like from the outside, isn't really a part of this network. They started out as scrappy Jews competing with old-money white-shoe WASPs, they were the outsiders that everyone looked down on once. It's baked into their corporate DNA that these guys are prey.
Can we apply this metaphor to the Goldman mortgage backed securities? Well, how many mortgages were wrapped up in those securities? Was there anyway to be sure what the security would be worth under various scenarios? I saw an article that Python was being considered as a language for specifying derivatives, so you could just run the program and know what the payouts would be under various scenarios with no ambiguity. Was there an expectation that Goldman was doing the work of picking securities with a certain risk profile, when in actuality they were picking securities with a higher risk profile?
It seems to me that a general principle of the law should be that a seller who intentionally misrepresents what they are selling has some measure of liability. Do you disagree, or do you feel that no misrepresentation occurred in this case?
Everything, even crap, has a price at which it makes sense.
Every purchase occurs because the buyer and seller have different beliefs about the worth of the thing being sold to them.
If you think that the housing market is doomed, you'll have a very different opinion of a mortgage pool than a seller who thinks that the market is sound.
The thing is, the securities were designed to fail so they could short them. That would be like McDonald's deliberately selling lethal food and taking life insurance out on its customers.
Society bears the costs of fallout from commerce that is damaging to society. The fraud of Goldman Sachs, and other companies engaged in, resulted in the bailouts. If a business model is dependent on incurring significant social costs then a society which allows it won't be sustainable.
In general, I tend to have a problem with cult figures. Buffett has acquired a large following of worshipers who are willing to defend what he says or does based on lofty pronouncements such as "he is ethical" or "he has integrity" and so on. One thing is obvious, and that is he is one of the wealthiest and best businessman in the world. Whether he is ethical or has integrity is probably independent of the fact that he has acquired all this wealth.
You mean like advocating taxes that he won't pay, that he makes money from?
I'm referring to inheritance taxes. His estate is set up so it will never be taxed. He makes a lot of money from his companies that sell insurance to pay inheritance taxes.
> If it came to light that Goldman is provably guilty of fraud, you can bet
The above suggests that you have some relevant knowledge of Buffet. How about sharing it?
No = his "repuation" isn't an answer. How he earned that reputation is.
While I agree that the specific charges against Sachs should be proven first, it's hard to deny the questionable behavior and dealings that Goldman has been involved in since the bailout began, not the least of which was the ex.Chairman and CEO being the Treasury Secretary and billions of dollars disappearing as part of the initial TARP program.
It seems Buffett really wants Goldman to be a pioneering American investment bank with a solid ethical reputation, but unfortunately for him the reality is less rosy.
Awesome book - long, but has much more detail than anything else I've read about him.
He did go to great lengths to explain how he interpreted the goings on at Goldman. He even compared it to a recent blind bond insurance deal that Berkshire had made. And in his opinion, according to the information he had available, it didn't seem like there was any wrong doing on the part of Goldman.
However, he was very clear that if the ACCUSATION of impropriety became proof of wrong doing that he would have a different stance on the matter.
I'm just reporting what I heard him say. Interpret as you wish. As for the side that says he has a conflict of interest in this matter, he also said his investment in Goldman is paying $15 a second. I know that would be a conflict of interest for me, but I am not Warren Buffett.