Lionized as the world’s most astute investor, Warren Buffet’s recent acquisitions drew on networks that this Wall Street legend may prefer remain obscure. Yet the ongoing market meltdown reveals how Berkshire Hathaway tapped the U.S. Treasury to buy Wachovia Bank with the help of tax dodges that left even the experts speechless.
One day after Wachovia agreed to be acquired by Citigroup, Treasury Assistant Secretary Eric Solomon published a notice that transformed Wachovia’s $74 billion in losses into $25 billion in potential tax savings for Wells Fargo, Berkshire’s second largest holding. Based on that notice, Buffet renewed a Wells Fargo bid for Wachovia that he had withdrawn just days earlier.
That acquisition typifies the murky relationships key to Buffet’s top ranking in the Forbes 400 list of richest Americans. He bested Citi not with financial expertise but with well-timed political influence that, in effect, treated the U.S. Treasury as his personal bank.
His latest built on the foundation of an earlier bank stock meltdown when, in 1990, Berkshire acquired 10% of Wells Fargo as its share price plummeted by half in the financial bloodbath that followed a nationwide savings and loan fraud. Today’s Wall Street rout resembles the S&L bust but without the perspective of time required to grasp that this latest collapse is likewise a nationwide fraud—in which Buffet was both perpetrator and beneficiary.
At the core of this latest pump-and-dump are the credit rating agencies: Fitch, S&P and Moody’s. Investors recall the key role played in the dotcom fraud by Citigroup analyst Jack Grubman. His inflated financial projections lured investors to over-priced telecom stocks while Citi lent them money, provided them investment banking, sold them insurance and even managed their pension funds. Rating agencies filled the analyst’s role in this latest fraud by making junk securities appear equivalent in risk to gilt-edged government bonds.
Berkshire Hathaway not only owns a 20% interest in Moody’s, Buffet also controls a bond insurer to which Moody’s gave a triple-A rating. But that’s only the most obvious of the conflicts-of-interest that enriched the Oracle of Omaha and his loyal followers who make an annual pilgrimage to Nebraska to marvel at his homespun wisdom.
Much as Solomon’s ruling transformed Wachovia losses into Wells Fargo assets, Moody’s ratings converted financial straw into gold. Or, as during the dotcom era, into fool’s gold when investors realized that genuine risk analysis had been replaced with what the public could be deceived to believe. In return, Moody’s pocketed record fees for Buffet.
Solomon’s ruling was the first of two expanding the losses that banks could use to reduce future taxes. In effect, he shifted to the Treasury much of the cost of those phony ratings along with the entire cost of Buffet’s $15.4 billion purchase of Wachovia. As taxpayers absorb the fiscal pain—an estimated $140 billion—savvy insiders will pocket the gain while also quickening the pace at which banks are consolidated into ever fewer hands.
That barely scratches the surface of the mega-fraud now underway. Over a 10-day stretch in September—amid taxpayer bailouts for AIG, Fannie Mae and Freddie Mac and a bankruptcy filing by Lehman Brothers—the shares of Goldman Sachs dropped 36%. The firm quickly gained approval to become a bank holding company and completed a $5 billion offering, diluting its shareholders by 20%. Under the leadership of Lloyd Blankfein, Goldman had operated more as a hedge fund than a brokerage firm or an investment bank, generating steady returns that relied on bogus credit ratings.
As those phony ratings became transparent and capital markets tumbled, Berkshire received $8.2 billion in value for its $5 billion cash infusion when Buffet further hammered Goldman’s public shareholders by using Berkshire’s cash hoard to extract massive stock warrants and dividend-assured preferred shares paying $1.3 million per day.
The role played by the Treasury was again obscured, hidden in the $150 billion-plus bailout of AIG. Former CEO Maurice “Hank” Greenberg had used that insurance giant as the counterparty for credit default swaps and financial derivatives originated by Goldman and Lehman. Had Treasury Secretary Henry Paulson not backed the AIG bailout, Goldman would have suffered a $20 billion loss. As a former co-chairman of Goldman with a personal net worth exceeding $850 million, Paulson could not have been unmindful that Goldman’s bonus pool for 2007 was $20 billion.
Former Treasury Secretary Robert Rubin, a senior Citigroup director and previously a co-chairman at Goldman, insisted that Citi invest heavily in securitized loans backed by sham credit ratings. When Buffet prevailed over Citi in his Treasury-funded bid for Wachovia, his triumph cleared the way for Goldman alumni at Treasury to offer Citi a $306 billion bailout.
This scale of fraud only works when the public cannot prove who is stealing from whom.