

Buffett Defends Goldman Sachs - grellas
http://online.wsj.com/article/SB10001424052748704608104575218071029226354.html?mod=WSJ_hpp_LEADSecondNewsCollection

======
smakz
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.

------
louislouis
It also says Buffett has $5 billion invested in GS.

~~~
cynicalkane
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.

~~~
mcantelon
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.

~~~
jing
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.

~~~
jimbokun
"Their job is instead to be ready to sell to or buy from clients who come in
with requests."

So their clients walked in and requested securities made up of crappy
mortgages?

~~~
jing
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 property. For instance, commercial properties
that operate as hospitals and nursing homes may present special risks to
lenders due to the significant governmental regulation of the ownership,
operation, maintenance and financing of health care institutions. Hotel and
motel properties are often operated pursuant to franchise, management or
operating agreements which may be terminable by the franchisor or operator;
and the transferability of a hotel's operating, liquor and other licenses upon
a transfer of the hotel, whether through purchase or foreclosure, is subject
to local law requirements. All of these factors increase the risks involved
with commercial real estate lending. Commercial lending is generally viewed as
exposing a lender to a greater risk of loss than residential one-to-four
family lending since it typically involves larger loans to a single borrower
than residential one-to-four family lending. Commercial mortgage lenders
typically look to the debt service coverage ratio of a loan secured by income-
producing property as an important measure of the risk of default on such a
loan. Commercial property values and net operating income are subject to
volatility, and net operating income may be sufficient or insufficient to
cover debt service on the related mortgage loan at any given time. The
repayment of loans secured by income-producing properties is typically
dependent upon the successful operation of the related real estate project
rather than upon the liquidation value of the underlying real 26 estate.
Furthermore, the net operating income from and value of any commercial
property may be adversely affected by risks generally incident to interests in
real property, including events which the borrower or manager of the property,
or the issuer or servicer of the related issuance of commercial mortgage-
backed securities, may be unable to predict or control, such as changes in
general or local economic conditions and/or specific industry segments;
declines in real estate values; declines in rental or occupancy rates;
increases in interest rates, real estate tax rates and other operating
expenses; changes in governmental rules, regulations and fiscal policies; acts
of God; and social unrest and civil disturbances. The value of commercial real
estate is also subject to a number of laws, such as laws regarding
environmental clean-up and limitations on remedies imposed by bankruptcy laws
and state laws regarding foreclosures and rights of redemption. Any decrease
in income or value of the commercial real estate underlying an issue of CMBS
could result in cash flow delays and losses on the related issue of CMBS. A
commercial property may not readily be converted to an alternative use in the
event that the operation of such commercial property for its original purpose
becomes unprofitable. In such cases, the conversion of the commercial property
to an alternative use would generally require substantial capital
expenditures. Thus, if the borrower becomes unable to meet its obligations
under the related commercial mortgage loan, the liquidation value of any such
commercial property may be substantially less, relative to the amount
outstanding on the related commercial mortgage loan, than would be the case if
such commercial property were readily adaptable to other uses. The exercise of
remedies and successful realization of liquidation proceeds may be highly
dependent on the performance of CMBS servicers or special servicers, of which
there may be a limited number and which may have conflicts of interest in any
given situation. The failure of the performance of such CMBS servicers or
special servicers could result in cash flow delays and losses on the related
issue of CMBS. At any one time, a portfolio of CMBS may be backed by
commercial mortgage loans with disproportionately large aggregate principal
amounts secured by properties in only a few states or regions. As a result,
the commercial mortgage loans may be more susceptible to geographic risks
relating to such areas, such as adverse economic conditions, adverse events
affecting industries located in such areas and natural hazards affecting such
areas, than would be the case for a pool of mortgage loans having more diverse
property locations. Mortgage loans underlying a CMBS issue may provide for no
amortization of principal or may provide for amortization based on a schedule
substantially longer than the maturity of the mortgage loan, resulting in a
"balloon" payment due at maturity. If the underlying mortgage borrower
experiences business problems, or other factors limit refinancing
alternatives, such balloon payment mortgages are likely to experience payment
delays or even default. As a result, the related issue of CMBS could
experience delays in cash flow and losses. In addition, interest payments on
CMBS may be subject to an available funds-cap and/or a weighted average coupon
cap (which cap will, in each case, have the practical effect of deferring part
or all of such interest payments) if interest rate rises substantially.
Residential Mortgage-Backed Securities. The Reference Obligations will include
and the Collateral Securities may include Residential Mortgage-Backed
Securities. RMBS bear various risks, including credit, market, interest rate,
structural and legal risks. RMBS represent interests in pools of residential
mortgage loans secured by one- to four-family residential mortgage loans. Such
loans may be prepaid at any time. Residential mortgage loans are obligations
of the borrowers thereunder only and are not typically insured or guaranteed
by any other person or entity, although such loans may be securitized by
Agencies and the securities issued are guaranteed. The rate of defaults and
losses on residential mortgage loans will be affected by a number of factors,
including general economic conditions and those in the area where the related
mortgaged property is located, the borrower's equity in the mortgaged property
and the financial circumstances of the borrower. If a 27 residential mortgage
loan is in default, foreclosure of such residential mortgage loan may be a
lengthy and difficult process, and may involve significant expenses.
Furthermore, the market for defaulted residential mortgage loans or foreclosed
properties may be very limited. At any one time, a portfolio of RMBS may be
backed by residential mortgage loans with disproportionately large aggregate
principal amounts secured by properties in only a few states or regions. As a
result, the residential mortgage loans may be more susceptible to geographic
risks relating to such areas, such as adverse economic conditions, adverse
events affecting industries located in such areas and natural hazards
affecting such areas, than would be the case for a pool of mortgage loans
having more diverse property locations. In addition, the residential mortgage
loans may include so-called "jumbo" mortgage loans, having original principal
balances that are higher than is generally the case for residential mortgage
loans. As a result, such portfolio of RMBS may experience increased losses.
Each underlying residential mortgage loan in an issue of RMBS may have a
balloon payment due on its maturity date. Balloon residential mortgage loans
involve a greater risk to a lender than self- amortizing loans, because the
ability of a borrower to pay such amount will normally depend on its ability
to obtain refinancing of the related mortgage loan or sell the related
mortgaged property at a price sufficient to permit the borrower to make the
balloon payment, which will depend on a number of factors prevailing at the
time such refinancing or sale is required, including, without limitation, the
strength of the residential real estate markets, tax laws, the financial
situation and operating history of the underlying property, interest rates and
general economic conditions. If the borrower is unable to make such balloon
payment, the related issue of RMBS may experience losses. In addition,
interest payments on RMBS may be subject to an available funds-cap and/or a
weighted average coupon cap (which cap will, in each case, have the practical
effect of deferring part or all of such interest payments) if interest rate
rises substantially.

Note also Schedule A which LISTS EVERY SECURITY IN THE CDO. With a document
like this (which is required), it is very difficult for someone to make a
credible claim that GS did not forward appropriate info as to to what the
buyer was actually investing in. These investors took a risk. They knew they
were taking a risk and they knew the risk they were taking - these weren't mom
and pop retail investors, but some of the most professional in the business.
The simple fact is that they did a poor job of assessing risk versus reward
and lost a ton of money as a result.

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. They know the risk they're taking and have free
will to take that risk. It was the same with these investors, only now it's as
if they're suing McDonalds after having a heart attack.

~~~
rdtsc
> 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.

~~~
gaius
_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.

------
jakarta
I liked how Charlie Munger said at the meeting "just because what Goldman did
was legal doesn't make it ethical."

------
mcantelon
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).

~~~
ccarpenterg
He's defending those $5 billion invested in GS.

~~~
steveklabnik
Probably not. As cynicalkane says above, Buffett is known for for his personal
integrity, and he's not going to throw that away for $5billion.

~~~
rdtsc
> 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.

------
failquicker
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.

------
richardw
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.

