By SCOTT PATTERSON And ERIK HOLM
OMAHA, Neb.— Warren Buffett offered a vigorous defense of Goldman Sachs Group Inc. Saturday, saying the embattled firm hadn't engaged in improper activity and shouldn't be blamed for the losses of its clients.
Goldman has been reeling from Securities and Exchange Commission allegations that the bank had engaged in fraudulent activities in relation to a mortgage deal called Abacus 2007-AC1. Goldman says it did nothing wrong.
Mr. Buffett's comments—which came early in the day at Berkshire Hathaway Inc.'s annual shareholders meeting—offer a powerful vote of confidence in Goldman, which has seen its shares slide since the SEC announced the investigation on April 16. Goldman's stock fell 9.4% on Friday alone after it emerged that the Manhattan district attorney's office was conducting a preliminary criminal probe into its mortgage-trading activities.
"We have had a lot of very satisfactory transactions with Goldman Sachs," Mr. Buffett said.
The billionaire investor said he fully supported Goldman CEO Lloyd Blankfein. Asked if he could choose a successor for Mr. Blankfein, Mr. Buffett said: "If Lloyd had a twin brother I'd go for him."
Speaking to a packed auditorium of some 40,000 investors hanging on his every word, Mr. Buffett said Berkshire Hathaway recorded a first-quarter profit of $3.6 billion, compared with a net loss of $1.5 billion a year earlier. Mr. Buffett said the company's results show that the global economy is showing significant signs of recovery for the first time. Operating profit was $2.2 billion, reversing a year-ago loss of $3.2 billion, he said, adding that individual units showed significant signs of improvement in March, after slight gains in prior months.
"What was sort of a sputtering recovery months ago seemed to pick up steam in March and April," Mr. Buffett said. "We're seeing a pretty good uptick."
The audience's reaction to Mr. Buffett's comments on Goldman was tepid. While a number of comments by the Berkshire chairman in the morning were greeted with strong applause by the crowd—almost entirely made up of Berkshire investors—his comments on Goldman were largely met with silence.
"I was surprised by how strong he stood by [Goldman] out of the gate and that he wasn't more critical of the Wall Street culture," said Justin Fuller, partner at Midway Capital Research & Management, which closely tracks Berkshire.
The SEC suit alleges that Goldman defrauded investors when it created a mortgage investment with the help of a bearish hedge fund and failed to disclose the fund's role and position. The suit is potentially of special concern to Mr. Buffett, known for his ethical standards. Ever since he was a small-town money manager in Omaha, where he has lived most of his life, he has lambasted the aggressive, self-serving tactics of Wall Street's banking elite.
Mr. Buffett, who invested $5 billion in Goldman at the height of the financial crisis, said he didn't believe that Goldman had acted improperly. Rather, counterparties to the deals, which plunged in value when the housing market fell apart in 2007, should be responsible for their own actions.
Mr. Buffett said he believed that one of the banks that had purchased Abacus deals in the transaction, the Dutch bank ABN Amro Group, was a sophisticated investor. "It's a little hard for me to get terribly sympathetic for a bank that made a bad credit deal," said Mr. Buffett.
He said a firm that had acted as an intermediary in the deal, ACA Management, had drifted from its original business of insuring municipal bonds into structured finance, a more complicated and risky business. He said he believes most press accounts haven't properly explained ACA's business model.
Mr. Buffett also said the fact that Paulson & Co., the New York hedge fund that worked with Goldman and ACA to structure the Abacus deal, was on the other side of the Abacus deal was irrelevant. "It doesn't make any difference whether it was Paulson on the other side of the deal or whether Goldman was on the other side of the deal or whether Berkshire was on the other side of the deal," he said.
Berkshire Vice Chairman Charlie Munger, who told The Wall Street Journal last month that Goldman was engaged in "socially undesirable" activities, told shareholders that he would have voted against SEC prosecution.
But Mr. Munger indicated he believes Goldman may have come closer to the edge of suspect behavior than Mr. Buffett does. "I think it was a closer case than you do," he told Mr. Buffett during an exchange.
Mr. Buffett said the charges against Goldman have hurt the bank's reputation. "There's no question that the allegation alone causes the company to lose reputation," he said. "The press of the past few weeks hurt the company and hurt morale."
But he said that the charges need to be proven if they are to have a lasting impact on Goldman. "I don't believe that the allegation of something falls within the category of losing reputation," he said. "If something is proven then you have to look at it."
Paul Howard, an independent insurance analyst who tracks Berkshire, said the defense of Goldman wasn't surprising. "Buffett shows his loyalty to those who have helped him over the years," said Mr. Howard.
In a twist, Mr. Buffett said the SEC charges against Goldman have helped Berkshire Hathaway. He noted that Goldman could redeem Berkshire's $5 billion investment at any time, and that Goldman has an economic incentive to do so. The reason: Goldman is paying a 10% rate on the investment, coming to $500 million a year, or, as Mr. Buffett said at the meeting, $15 a second.
He held up a hand and counted up the profit to illustrate the point.
"Tick, tick, tick," said Mr. Buffett. "Goldman would love to get rid of that."
But Goldman likely believes that having Mr. Buffett as an investor can help its reputation. "Recent developments have probably delayed the calling of our preferred," said Mr. Buffett, who guzzled Coke and munched on See's Candies throughout the meeting.
Mr. Buffett has also been taking some heat for a push he has made on Capitol Hill for exemptions for several large derivatives deals his firm has made in recent year. A bill before Congress could force Berkshire to post billions in collateral for the deals. In the past, Berkshire hasn't been required to put up much cash—if any—to back its derivatives transactions.
Mr. Buffett said he's confident that his firm would likely not be required to post collateral on existing derivative contracts under the financial-overhaul bill currently before the Congress.
Mr. Buffett said he doesn't see any consequences "unless there's some sweeping requirement that all companies have to post collateral" on old contracts. Berkshire had lobbied to have such a provision added to the overhaul bill to clarify the requirements under the proposed law.
Still, if required to put up such collateral, Berkshire would do so, he said.
Berkshire has never paid dividends and Mr. Buffett is famous for shunning them. At the shareholder's meeting, he didn't explicitly say anything about a dividend nor did he utter the actual word. However, he said the company is now so large and generates so much cash that it might struggle to find investments that are both big enough and offer enough return.
"I think we can go out further than I thought 30 years ago," Buffett said. "But there is a limit. There will come a time when we cannot intelligently use 100% of the capital we've developed internally. Whatever is in the best interests of the shareholders will be done at this point."
"I don't think he said anything that people weren't already thinking," said Jeff Matthews, the founder of hedge fund Ram Partners and author of "Pilgramage to Warren Buffett's Omaha." "Still, it was a little more specific and a little more emphasis than people are used to hearing."
Mr. Howard, the insurance analyst, said Buffett was "leaving the option open for the future, probably after his death."
SOURCE: WALL STREET JOURNAL ONLINE
