The shareholders are clearly mad about the government bailouts, particularly of the banks. And more than one has taken to phrasing an indictment of the government's action as a sort-of-question that's really more of a thinly veiled invitation for "Warren" and "Charlie" to denounce this decidedly un-frugal endeavor.
One of these questions involves bank cramdowns--as you may remember, Buffett recently took a high-profile stake in Goldman Sachs. Chrysler creditors, the questioner points out, are taking haircuts, but so far, preferred stockholders and creditors of financial institutions have been nearly unscathed, with only the common equityholders taking a hit. And at that, all that's happened is that they've been diluted by new capital.
Does Warren expect to take cramdowns on his financial services investments?
Photo by Flickr User Pictfactory
Buffett replies that these things are institution-specific, and there's quite a lot of underlying common equity left in his holdings, so there's no reason to worry about a cramdown. But this whole line of question highlights something for me: regulatory risk is a gigantic concern this year. Every third question seems to be about some major government project, and what sort of havoc it might wreak on his business.
Last night, I went to dinner with some investors, where a long conversation about the difference between investment and gambling ensued. Warren Buffett followers aim to invest, not gamble. But when the government is involved, it's all gambling--none of the people I've spoken to, and (I'd wager) virtually none of the people in the arena, have any particular insight into the workings of the government processes. Hell, these days, the people I speak to at Treasury and the Fed don't seem all that certain about what they're going to do next.
An investment in Goldman Sachs and Wells Fargo is a bet that, first, the world economy won't really collapse, and second, the government won't get mad and take your money. There's no reason to believe that Warren Buffett, or anyone else, has any good way to assess the probability of those beliefs.
Update: The journalist sitting next to me points out that Warren Buffett is good friends with the current administration, which probably limits the regulatory risk. This would no doubt cheer me if I were a Buffett shareholder, rather than a libertarianish journalist.
Update II: In the afternoon question session, Buffett, responding to another question, talks about the AIG 90% bonus tax, and says "That was uncontrolled fury. They just wanted to do something, and they did it. They still want to do something, maybe not something that spectacular, but Berkshire Hathaway will be affected by some of this."
"An investment in Goldman Sachs and Wells Fargo is a bet that, first, the world economy won't really collapse, and second, the government won't get mad and take your money."
An investment in Goldman Sachs is also a bet that the firm has enough influential alumni (including some currently in government) to bend government policy to Goldman's benefit. That's a bet that has paid off over the last year, even if you think Maxine Waters was crazy for suggesting that Goldman alumni might wield some influence in government.
Charles Mungar was on Nightly Business Report on Friday, being moronically interviewed by Suzie Gharib. He was pretty firm, financial regulation was crucial. To my dismay, Gharib failed to follow up on his comments properly; instead asking if he would then recommend getting out of financials when he had just said they were important and they planned to stay in them. (How I wish she'd asked what sorts of regulations and what actions investors should take to guarantee good regs happened.)
I would say the same is true of many who comment here.
I love your use of the term "cramdown". It turns what was, until 1978, a normal revaluing of the loan in bankruptcy, into a horrible act of robbery. "Cramdown" was common is some parts of the country until 1993 with no apparent detriment to the housing market. I might also point out that "cramdown" is still allowable in bankruptcy -- as long as you are rich enough to afford a boat or a second home....
I read somewhere that during the 30's capital investment was very close to zero.
I grew up in an area where government intervention was the rule. I was told more than once of an investor/mover-shaker who built something from scratch, an idea, a market, on his own dime. When the business became successful, within a year he had 5 competitors all with generous funding from government, brand new equipment and subsidized wages for the workers. A couple years later, there would be one or maybe two left, and the original guy long gone.
The uncertainty caused by government action forces people to sit on their hands. Or maybe better to say the certainty of government unpredictability forces people to sit on their hands.
Derek
"The journalist sitting next to me points out that Warren Buffett is good friends with the current administration, which probably limits the regulatory risk."
I imagine people said similar things about Igor Zyuzin until not too long ago.
Yes, that's why the big growth industry under Obama will be in lobbying government. In this brave new world, US business is all about who you know in government, just like the good old days in the Soviet Union. It worked out well for them, so why not give it a try here?
The most valuable asset of Berkshire Hathaway is close ties with certain politicians. Chicago politics have finally gone national.
The journalist sitting next to me points out that Warren Buffett is good friends with the current administration, which probably limits the regulatory risk.
I always wanted to know what it was like to live under Marcos in the Philippines. After a few decades of this maybe we too can have entire communities living in trash dumps.
If we argue that regulatory risk is becoming a primary concern in making an investment decision, aren't we beginning to argue about the intensity of class warfare?
Thank you for adopting the adjective that I had not dared to coin: "libertarianish".
IMHO, the concern isn't regulation per se, it's ad-hoc regulation. Traditional regulation comes in the form of laws, which are written down, passed by Congress, and then apply to everybody with no strings attached. Today's regulation seems to be decided in a conference room and announced by the President during a press conference.
.
This way might be faster and even more effective in the short term, but it's destroying a trust that is absolutely required for healthy commerce in the future.