Throw Them All Out

6. WARREN BUFFETT: BAPTIST AND BOOTLEGGER

IN NINETEENTH-CENTURY AMERICA, as part of the 'blue law' movement that tried to protect the sanctity and sobriety of the Sabbath, there was a concerted effort to ban alcohol sales on Sunday. It was pushed by what can only be described as an odd alliance: Baptists and bootleggers. Baptists pushed publicly for the ban on moral and religious grounds. And the bootleggers? They pushed for the ban privately, lobbying politicians so they could make bigger profits. Stifling legal alcohol purchases for even one day each week meant added profits for their illegal sales. Bans were enacted state by state, and many blue laws still exist (for example, in Arkansas, Indiana, Minnesota, and Mississippi, among others), although restrictions have been lifted steadily in recent years.

In modern-day Washington, there is a new equivalent to that coalition of Baptists and bootleggers. True believers push a cause that calls for a substantial change in government policy. And opportunists support it because they see a chance for healthy profits. In these situations, politicians can enrich their friends and allies, and sometimes themselves, while coming off as earnest 'Baptists' for a worthy cause. Lobbyists, on the other hand, are widely considered bootleggers, no matter how nobly they cloak their arguments. But what if a capitalist could somehow manage to sound like a Baptist?

Consider Warren Buffett. Often seen as a sort of grandfatherly figure who is above the rough and tumble of politics, Buffett seems to be above the folly and excess of finance too. He lives in Omaha, Nebraska, in a house he first purchased in 1958 for $31,000. He uses folksy words and illustrations to make his point. ('You don't know who's swimming naked,' he said during the height of the financial crisis, 'until the tide goes out.') He has uttered populist ideas, such as declaring that billionaires don't pay enough in taxes. The title of an article he wrote for the New York Times captures the tone: 'Stop Coddling Billionaires.' And his value-based investing has made himself and his investors at Berkshire Hathaway very rich.

But the image does not always reflect the reality. Warren Buffett is very much a political entrepreneur, whose best investments are often in powerful political relationships, and who in recent years has used taxpayer money as an important vehicle to even greater wealth and profit. Indeed, the success of some of his biggest bets, and the profitability of some of his largest investments, rely on government largesse and 'coddling' with taxpayer money.

During the financial crisis in the fall of 2008, Buffett became an important symbol on television. He filled the role of fiscal adult, a responsible father figure in the midst of irresponsible Wall Street speculators. While pushing for calm and advocating specific policies in both public and private, however, he was also investing (sometimes quietly) so he could profit once his policy advice was implemented. This put Buffett in the position of being both the Baptist and the bootlegger, praised for his moral character and at the same time enjoying a trip to the bank.

The crisis started in the summer of 2008, when credit became scarce and Fannie Mae and Freddie Mac and several investment houses teetered on the brink of financial collapse. In the words of the Guardian, a London paper, Buffett was 'uncharacteristically quiet through much of the financial crisis.'¹ It was only on September 23 that he became a highly visible player in the drama, when he invested $5 billion in the investment house of Goldman Sachs, which was overleveraged and short of cash. Buffett gave them a much-needed cash infusion, and made a heck of a deal for himself. Berkshire Hathaway received preferred stock with a 10% dividend yield and an attractive option to buy another $5 billion at $115 a share.²

Wall Street was on fire, and Buffett was running toward the flames. But he was doing so with the expectation that the fire department (that is, federal government) was right behind him with buckets of bailout money. As Buffett admitted on CNBC at the time, 'If I didn't think the government was going to act, I wouldn't be doing anything this week.'

Indeed, Buffett needed the bailout. Goldman was not as badly leveraged as some of its competitors, but the crisis was so serious that it was in danger and in need of a government infusion. And beyond Goldman Sachs, Buffett was heavily invested in several other banks that were at risk and in need of federal cash.

He began immediately to campaign for the $700 billion TARP rescue plan that was being hammered together in Washington. The first vote on the funding bill in the House of Representatives failed. But Buffett was in a unique position to help reverse its fate.

Warren Buffett is highly respected in political circles. During the 2008 presidential campaign he was in the unusual spot of being mentioned as a candidate for Treasury secretary by both John McCain and Barack Obama. Buffett made it clear where his loyalties lay: he had been an early financial supporter of Barack Obama's going back to 2004, when Obama had first run for the U.S. Senate and the two men had met. Each had been impressed, and Buffett said at a fundraiser in Nebraska that the two 'had a lot of time to talk.' In 2008, presidential candidate Obama made it clear that while he got plenty of advice on the campaign trail, 'Warren Buffet is one of those people that I listen to.' Obama added that he was one of his 'economic advisers.'³

Buffett's role was important too in that several senators and representatives were shareholders in Berkshire Hathaway, and they had to know that passing the bailout bill would bring big returns for their Berkshire stock. Senator Ben Nelson of Nebraska, for example, held between $1 million and $6 million in Berkshire stock, by far his largest asset.⁴ Initially resistant to the bailout bill, he ended up voting in favor of it after Buffett bought into Goldman. There were many legitimate reasons to support the bill, and it can hardly be said that Buffet's support was the deciding factor. But his Baptist-bootlegger position was noteworthy for its strength in both directions: a lot of people followed his advice, and he and they made a lot of money by pushing for the bailout.

Throughout the financial crisis and the debate over the stimulus in early 2009, several members of Congress were buying and trading Berkshire stock. Senator Dick Durbin bought Berkshire shares four times in September and October 2008, over a three-week period, up to $130,000 worth. He bought shares during the debate over the bailout, during the vote, and after the vote. Senator Orrin Hatch bought the stock, as did Senator Claire McCaskill, who bought up to half a million dollars' worth just days after the bailout bill was signed. Some also followed Buffett by buying shares in Goldman Sachs after the bailout. Among them were Congressman John Boehner, Senator Jeff Bingaman, and Congressman Vern Buchanan. In other words, the naked self-interest of the lawmakers who shorted the market based on Ben Bernanke's briefings in September 2008 became more twisted in late 2008 and early 2009: Buffet urged passage of the bailout and put his money where his mouth was, and members of Congress listened to him and invested with him.

Early on in the financial crisis, candidate and Senator Barack Obama had been cautious and lukewarm about a possible bailout. But in the days that followed Buffett's multibillion-dollar play for Goldman Sachs, and with a mounting fear of economic collapse, Obama became a powerful champion of the government rescue. As the top Democrat in the country, he had an important vote. The New York Times reported that Senator Obama had 'intensified' his efforts to 'rally support for the $700 billion financial bailout package' after September 28, 2008. The plan was necessary, said Obama, 'to safeguard the economy.'⁵

Publicly, Buffett struck a posture of political disinterest. 'I'm not brave enough to try to influence the Congress,' he told the New York Times.⁶ But his actions directly contradicted his words. Days later, Buffett held a conference call with House Speaker Nancy Pelosi and House Democrats during which he pushed them to pass the bill. We faced 'the biggest financial meltdown in American history,' he warned wavering Democrats.⁷

The stakes were high for Buffett personally. If the bailout went through, it would be a windfall for Goldman. If it failed, it would be disastrous for Berkshire Hathaway. Buffett also had large investment stakes in Wells Fargo and U.S. Bancorp, banks that were suffering in the crisis.

The first vote failed, as Washington faced enormous heat from voters angry about the prospect of bailing out Wall Street. On the eve of a second TARP vote in the House, Buffett moved toward the fire again when he bought a $3 billion stake in corporate giant General Electric. Again, as with Goldman, he was able to negotiate advantageous terms, receiving a 10% dividend on his shares. He could also buy $3 billion in stock at discounted terms if he wanted.⁸ GE was in even worse financial shape than Goldman, thanks to its financial arm, GE Capital. Eventually it would need $140 billion in taxpayer capital to stay afloat.

Buffett is a genius at public relations. He said he had 'confidence in Congress to do the right thing.' He