Saturday, October 4, 2008

Warren Whitney

"Goldman Sachs Group Inc. [GSG] said it will get a $5 billion investment from billionaire Warren Buffet's company, marking one of the biggest expressions of confidence in the financial system since the credit crisis intensified early this month. ... The move by Mr. Buffett's Berkshire Hathaway Inc. capped a day of bruising hearings in Congress over the fate of the Treasury Department's plan to buy $700 billion in distressed assets from financial institutions, in a bid to shore up the banking system. The plan is still expected to pass, though coming under increasing fire. ... Berkshire will also get warrants granting it the right to buy $5 billion of [GSG] common stock at $115 a share, which is 8% below the 4 p.m. closing share price Tuesday of $125.05. ... While Mr. Buffett's investment is unquestionably a vote of confidence in Goldman, it is structured to protect him from losses. ... Buffett was one of the first people Lloyd Blankfein, now Goldman's chairman and chief executive, went to see when he became president of Goldman in 2003. 'They just don't come any smarter,' Mr. Buffett said of Mr. Blankfein in 2006", my emphasis, Susanne Craig, Matthew Karnitsching and Aaron Lucchetti (CK&L) at the WSJ, 24 September 2008.

Jesse at Jesse's Cafe Americain has a 24 September 2008 post referring to Richard Whitney (RW), replete with 1929 newspaper headlines worth reading. Jesse likens RW's 1929 actions to the current Paulson plan. I have a different take. Here's a link:

"For six months, as the credit crisis deepened, billionaire investor Warren Buffett turned away a string of Wall Street firms that came hat in hand looking for help. ... Tell us what kind of investment you'd consider making in Goldman, the banker urged him, and the firm would try to hammer out a deal. ... The swiftness of the deal underscores the intense pressure now faced by Goldman, long regarded as one of the most financially secure firms on Wall Street. ... Buffett's decision to invest now in Goldman gives an indication of how the famed investor believed the financial crisis might shake out. ... In a telephone interview Wednesday morning from his office in Omaha, Mr. Buffett said he believes the proposed federal bailout will be approved by Congress and that it will succeed. ... If Congress fails to approve the bailout, Mr. Buffett says, all bets are off. His investment in Goldman will 'get killed, and so will all our other investments' ... His holding company, Berkshire Hathaway, had often used Goldman as an investment banker on deals. His reputation, both for smart investing and solid ethics, would likely give investors the reassurance they needed, the executives reasoned", Susan Pulliam, Kate Kelly and Matthew Karnitshnig (PK&K) at the WSJ, 25 September 2008.

"Billionaire Warren Buffett, calling turmoil in the markets an 'economic Pearl Harbor,' said his $5 billion investment in [GSG] is an endorsement of the Treasury's $700 billion bank rescue plan. 'I am betting on the Congress doing the right thing for the American public and passing this bill,' Buffett said. ... 'I think the Treasury will pay back the $700 billion and make a considerable amount of money,' Buffett said", Erik Holm at the Houston Chronicle, 25 September 2008.

"In the latest unexpected deal stemming from the financial crisis, General Electric Co. turned to Warren Buffett to inject at least $3 billion in the company--and, GE hopes, provide a much-needed boost in investor confidence. ... The deal is vintage Buffett: buying into a blue-chip company on favorable terms when its shares are depressed. ... GE's immediate problems are rooted in its finance unit, which propelled much of the conglomerate's growth for the past 25 years. ... The GE deal again highlights the troubles of companies that rely on short-term funding when investors have become skittish about all but the safest investments. GE Capital has assets of $695 billion, more than many banks though at lower leverage. It lends money to businesses such as restaurant franchisees, and finances the loans by borrowing for short periods at low rates and lending at higher rates for longer periods. The company acts like a bank, but it can't borrow from the [Fed]. ... GE also said it would curb long- and short-term borrowing at the finance unit, suspending plans to sell $10 billion in long-term debt in the fourth quarter", Paul Glader and Liz Rappaport at the WSJ, 2 October 2008.

Jesse previously asked, "Or did Warren just decide to get a place at the table with the new ruling power in the US", 23 September 2008.

Warren Whitney? Confidence in GSG? Lloyd Blankfein smart? Of course, AB and JD Harvard. He must be smart. Look at consitutional scholar Obama, JD Harvard. Law Review to boot! Whitney? Who?

"Richard Whitney was born in ... 1888. ... Richard graduated from Groton and Harvard, where he was elected to the prestigious Porcelland Club. ... Whitney's claim to fame [in the 1920s] was that he was J.P. Morgan & Company's broker, while his brother was a partner at Morgan. ... He also belonged to all the right clubs and bred race horses. ... Black Thursday, October 24, 1929, was the beginning of horrible things to come for the stock market. ... The leading bankers on Wall Street gathered at Morgan's offices to form a 'pool,' raising $130 million to be spent on selected blue chip stocks in the hope that it would stop the panic and bring some level of confidence back into the market. [RW] was chosen as the 'pool's' agent and went to the exchange at around 1:30 p.m. to 'walk the floor'. Stoppping at the post for U.S. Steel, he announced in a loud voice, "I bid 205 for 10,000 steel.' A huge cry went up and Whitney made similar purchases of AT&T, Anaconda Copper and General Electric, among others. The strategy had its desired effect and the Dow Jones roared back, closing Black Thursday at 299. ... Richard served three years and four months of a five-to-10 year sentence in Sing Sing. ... Whitney died on December 5th, 1974",

I do not know why Buffett does anything. But I think a man who gave away $31 billion is not interested in making more money. Could Buffett be today's RW? Jesse's question is worth pondering. Consider Buffett's position on estate taxes. No matter what Buffett was or wasn't in the past, I conclude he is a socialist now. If Berkshire spent $5 billion to ensure Buffett's place at the Wall Steet table, I view it as Buffett's "consumption expenditure". He has lived in the same house since 1968. Jesse also wrote, "Goldman is paying Warren a pretty rich return for his buy-in". If GSG used Buffett deal for "signalling" thinking it would push Paulson's plan over the top, the $5 billion in question is peanuts.

GSG rents Buffett's name to lend credibility to Paulson's bailout plan. Wonderful. GSGs action shows how little credibility it and its "former" executive Paulson have. The title of this article was: "Buffett Drove Hard Bargain With Goldman". I wish the WSJ would stop editorializing on its newspages.

Buffett is entitled to express his opinion. However, the markets do not share it. Neither do I. His GSG 'investment" is a political statement, not an investment as I understand the term.

What's Buffett doing? Just what RW did in going from post to post on the NYSE in 1929. Imagine, he even bought into GE, just like RW! History does repeat. Not "unexpected" by me. This time, the crash will not be in the stock market, oh no. The bond market. Full disclosure: I have never liked GE, considering it to be an incompetently managed bank with an egomainiac CEO. These clowns didn't even match maturities. What was GE, a poorly managed S&L of 25 years ago? See also my posts on GE's Joe Jett fiasco.


John's Arts & Crafts said...

great Article! a new blog with deep meaning

Nicholas said...

I briefly discussed your take on GSG in:

“Anti-Goldman-Sachsism, the F├╝hrer Principle, and Other Delusions of Crowds.”

I didn’t have space within a blog posting, however, to get into your fascinating discussion of possible historical parallels between Richard Whitney in 1929, and Warren Buffett in 2008.

Your contention that Buffett is now a socialist, raises the hypocrisy problem. To what degree can someone be called a believer in a philosophy that he does not personally practice, and whose ill-effects cannot harm him?

When Buffett and Gates supported the inheritance tax a few years ago, their critics pointed out that, unlike ordinary Joes, the billionaires were rich enough to protect themselves from the tax’s consequences.

Since leaving college, I’ve never known a poor socialist. The socialists I’ve encountered were all well-to-do, obsessed with the good life that they sought to deny the working and lower-middle classes, and as snobby in person as any Republican hack.

So, do they really believe in socialism, or simply wield it as a weapon in their ongoing class war against whites from lower tax brackets? Or am I positing a false dichotomy?

Nicholas Stix

Independent Accountant said...


You've raised a point which has troubled me too. However, living well never bothered Mao Ze Dong, nor Korea's Kim Dynasty. Apparently Communism lets the party cadres live well. No, you are not posing a false dichotomy. Where is socialism more popular, the Ivy League or your typical state U? Were Britain's Fabians poor? Did Marx live off Engels? What did Engels do for a living anyway?