Warren Buffett on Saturday launched a strong defense of Berkshire Hathaway Inc’s US$5 billion investment in Goldman Sachs Group Inc and the investment bank’s embattled chief executive, Lloyd Blankfein.
Speaking at Berkshire’s annual meeting before an estimated 40,000 shareholders, Buffett’s forceful defense makes him perhaps Goldman’s most powerful defender in the wake of the US Securities and Exchange Commission’s (SEC) civil fraud lawsuit on April 16 against the company.
Buffett also said Berkshire swung to a US$3.63 billion first-quarter profit from a year-earlier US$1.53 billion loss, helped by an improving economy and gains from investments and derivatives. Operating earnings rose 30 percent to US$2.22 billion from US$1.71 billion, reflecting “a pretty good uptick” in business activity, he said.
The SEC lawsuit alleged that Goldman hid from investors the fact that securities underlying a risky debt transaction were chosen by Paulson & Co, a hedge fund firm that was betting they would lose value. Goldman has called the charges unfounded and Paulson was not charged.
Berkshire’s investment in Goldman preferred shares in September 2008 has become controversial for Buffett, given his long-standing emphasis on good corporate ethics and criticism of Wall Street excess.
News that investigators have opened a criminal probe into Goldman has led to increased speculation about Blankfein’s job security but Buffett expressed strong support.
Asked who should run Goldman if Blankfein were replaced, Buffett said: “If Lloyd had a twin brother, I would vote for him. I have never given that a thought.”
Charlie Munger, who is Berkshire’s vice chairman and sat beside Buffett, said “there are plenty of CEOs I’d like to see gone, but that Blankfein is not one of them.”
The US$5 billion investment consists of preferred shares that throw off US$500 million in annual dividends, plus warrants to buy an equal amount of common stock. Goldman can buy back, or “call,” the preferreds at a premium.
“We love the investment,” Buffett said. “Our preferreds are paying US$15 a second, so as we sit here, ‘Tick, tick, tick, tick,’ that’s US$15 every second.”
Buffett added that the SEC lawsuit was not a serious enough event to raise reputational issues that would call into question the Berkshire investment.
Asked whether Goldman should have disclosed it had received a “Wells notice” from the SEC indicating possible civil charges, Buffett said such notices are not necessarily material to larger companies such that disclosure is needed.
“If it leads to something more serious, then we will look at the situation at that time,” he said.
Buffett and Munger also discussed the potential overhaul of financial regulation now being weighed in Congress. Munger argued the system should become “less permissive” for banks.
“What we need is a new version of Glass-Steagall,” Munger said, referring to a Depression-era law that kept commercial and investment banks separate. It was repealed in 1999.
Berkshire has opposed a provision in proposed legislation that could force it to post more collateral on its roughly 250 derivatives contracts, mainly tied to longer-term performance of stock price indexes.
But Buffett said Berkshire would likely “not have to put up a dime” because the company is unlikely to be regarded as so “dangerous to the system” as to require such collateral.
Investments and derivatives generated US$1.41 billion of Berkshire’s preliminary first-quarter profit, compared with a year-earlier US$3.24 billion loss.
Insurance profit fell just 3 percent, while profit in regulated businesses such as utilities and newly acquired Burlington Northern Santa Fe Corp, as well as manufacturing, service & retailing businesses, roughly doubled.
Final results are expected on Friday.
Buffett said he still wants to make large acquisitions, even after spending US$26.5 billion in February to buy the railroad company Burlington Northern Santa Fe Co.
“We’re as interested as ever,” he said. “If I get a call for a US$10 billion deal on Monday and I like it, I will say yes.”
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