Warren Buffett on the Goldman Sachs case

Interesting to see that Warren Buffett’s take on Goldman Sachs is essentially the same as mine. Goldman is being investigated on charges that it did not disclose to investors that hedge-fund manager John Paulson helped put together an investment vehicle that he then bet against.

Buffett’s view, writes Andrew Ross Sorkin in the New York Times, is that such information is irrelevant as long as investors knew what they were buying. Buffett put it this way:

For the life of me, I don’t see whether it makes any difference whether it was John Paulson on the other side of the deal, or whether it was Goldman Sachs on the other side of the deal, or whether it was Berkshire Hathaway on the other side of the deal….

It’s very strange to say, at the end of the transaction, that if the other guy is smarter than you, that you have been defrauded. It seems to me that that’s what they are saying.

The scandal that nearly brought down the entire financial system wasn’t what was illegal — it was what was legal.

Now if only I shared Buffett’s investing acumen.

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12 thoughts on “Warren Buffett on the Goldman Sachs case

  1. BP Myers

    Fareed Zakaria makes the same point in this week’s Newsweek.

    Though I’m not qualified to have a “take” on this, I’m going to assume that the SEC has more information than they’ve shared, and they certainly know the securities laws better than any of us.

    And they are going to look really, really stupid (like, organization destroying stupid) if they blew this one.

  2. Bob Gardner

    Warren Buffet’s argument makes sense if you think these securities were transparent. Were they? One thing nobody argues with is that the great majority of investment vehicles like this were opaque.
    I think you could argue that Goldman Sachs had an obligation to disclose what they did know. If you had a choice between two portfolios–one a group of high risk mortgages and the other a selection of high risk mortgages assembled by someone who wanted them to fail, wouldn’t you want to know which portfolio was which?

    1. Dan Kennedy

      @Bob: This isn’t exactly my area of expertise. But hasn’t it been established that investors knew exactly what they were buying? If that is the case, in what sense was it opaque?

  3. John F.J. Sullivan

    One of Buffett’s wisest comments (elsewhere) about his investing is his referring to Wall Street as “the casino.” With that in mind, the risk of any investment strategy’s outcome becomes a little clearer.

  4. Mike Benedict

    @Aaron: Agreed. The ratings agencies clearly did not know what was in the CDOs, for example, else why would they give a product 90% full of the worst of the worst subprime mortgages an AAA rating. And what’s emerged is that precious few investors looked any further than the rating before making the decision to buy. Even Goldman was buying up the *wrong* side of the CDOs that other Goldman desks were selling. These things were ticking time bombs. No competent investor would go long on something so sure to fail.

  5. L.K. Collins

    Playing both sides of the street is a time-honored investment tradition.

    What is unconscionable is playing both sides of the street that you, yourself, have constructed, and retaining the ability to alter the shape and course at will to your own advantage.

    We may soon see what some of the facts really are since G-S is in settlement talks with the SEC.

    But given the pitiful oversight and transparency records of the nation’s financial regulatory bodies, I doubt seriously that we will see anything other than limited, self-serving apologies, and gentle slaps on the wrist.

  6. Bob Gardner

    Warren Buffet may be the most honest, non-biased observer who also has a $5 billion investment riding on the outcome, but to me, that’s not saying much.

  7. BP Myers

    @Mike Benedict said: “. . . why would [the ratings agencies] give a product 90% full of the worst of the worst subprime mortgages an AAA rating.”

    $$$

  8. Mike Benedict

    @BP: To the best of my knowledge, they get paid regardless of the rating, and since there are only a few rating agencies, it’s not like investment banks can do much rating shopping.

  9. BP Myers

    @Mike: The incestuous relationship between the investment banks and, ironically, the ratings agencies making public their models, went a long way toward what happened. Quick Google brought me this (from DealBook:)

    http://tinyurl.com/28tuhaw

    The Goldman e-mails and internal documents also reveal them pressuring ratings agencies that wouldn’t give them the rating they wanted by threatening to take their business elsewhere.

  10. L.K. Collins

    “The Goldman e-mails and internal documents also reveal them pressuring ratings agencies that wouldn’t give them the rating they wanted by threatening to take their business elsewhere.”

    Playing both sides of the street with nice, arms-length transactions, eh?

    Guess who got rolled under the steamroller?

    And I’m willing to bet that Investor Buffet is wondering whether or not he’s next in line for a rolling. $5 Bill is a BIG rolling if it all goes under.

    What I am also beginning to sense is that the NY Fed under Geithner may not have exactly been a passive player in the relationships with Goldman-Sachs and the CDOs in late 2008, and a good part of this damage control with settlement negotiations with the SEC may be designed to minimize the fall-out of that far-too-close relationship.

    Congress is already chomping at that bit.

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