Warren Buffett’s Fall From Grace

The article criticizes Buffett because he<p>1) criticized derivatives and now holds "$63B" of them<p>2) is lobbying congress to "rid the bill of its ‘retrospective effect’ clause" that might effect his financials<p>3) backs GS/Blankfein and says they did nothing wrong<p>While at first blush they should raise questions I don't think the author makes any substantive claims against Buffett's reputation.<p>1) He criticized derivatives because the way their reporting effects earnings and because their profits are partially based on the other side's credit worthyness. I believe a large portion of the derivatives he owns are put options he has sold on equity indices. So he's not exposed to credit worthyness of counterparties because he's already been paid. I'm not sure but probably the derivatives he criticized as too complex and potentially destructive were things like CDOs/CLOs and other financial engineering products. I think Buffett understands put options very well, so that statement doesn't apply here.<p>2) He's not opposed to having derivatives accounted for differently, only differently in retrospect as well. I think its reasonable to say "I like the new set of rules, but please don't penalize me for acting in accordance with the rules in the past."<p>3) He does have investments in GS and this probably does effect his judgement, but the author doesn't really try to prove GS did anything wrong, so his backing of them can't really be said to be wrong (yet, though I don't think it will prove to be wrong).

This is a downright shoddy article.<p>a) An explanation of the derivatives Buffett holds, and the reasons for holding them is provided in his 2008 shareholders letter:<p><a href="http://www.berkshirehathaway.com/letters/2008ltr.pdf" rel="nofollow">http://www.berkshirehathaway.com/letters/2008ltr.pdf</a><p>It should also be noted that he exited a large number of derivatives contracts that he inherited with General Re prior to the GFC as he felt unable to manage or understand them.<p>b) Buffett is arguing against retrospective changes WRT derivatives accounting. There's nothing wrong with objecting when people are discussing a retrospective change to the rules that you were operating within.<p>c) As far as I can tell, the author would pillory anyone who doesn't attack Goldman Sachs. Buffett is entitled to his opinion.

Buffet falls from grace every few years. But this is not a good article. The problem with derivatives and retrospective changes is that this messes with agreements that have already been made. Not only is that not right but it may have consequences that are unforseen. Berkshire and others are correct to insist that they have rights here that should be protected.<p>I understand that the US Constitution is truly on the way out but it did have this bit : "No State shall ... pass any Bill of Attainder, ex post facto Law, or Law impairing the Obligation of Contracts..."<p>I'm pretty sure that used to be taken to mean the federal government wouldn't do it either, but then that can't be reconciled with minimum wage laws either.<p>Maybe that's all uncertain but I'm confident the article is relatively thoughtless.

"But the fact remains that if clients knew that the portfolio had been largely designed by Paulson, they would not have bought. Because Paulson had, months before the Goldman deal, created two funds specifically aimed at shorting the subprime market."<p>Sadly that is probably not true. Every person buying a synthetic CDO knew that on the other end of the wager was someone (usually a hedge fund manager) holding the opposite bet (a credit default swap). Every synthetic CDO was a zero sum wager, and the people buying it knew that.<p>(I'm pretty sure that all of the CDOs at issue in this case were synthetics, though it doesn't matter too much to the person buying them. There's effectively no difference between a synthetic and a non-synthetic.)<p>At the time Paulson wasn't any different than any other hedge fund manager, insofar as any synthetic CDO purchaser knew. The people taking they long end of the subprime market at that point were still under the impression that the ratings agencies were at least reasonably close to accurate.<p>Effectively what the wager came down to was Paulson saying "the rating agencies are wildly incorrect" and his counterparties saying "no they're not".

I think this article is a little propagandaish for hn. It really feels like a giant misrepresentation of the truth.<p>Berkshire was not hiding the fact they owned these derivatives. Buffett has talked about thm many times and defends purchasing this specific set of derivatives as having been "mispriced at inception" which I think is the most basic plan of all investing, right. Buy low, sell high.<p>As to the lobbying of congress, I would do the same thing, and you would too. When the derivitives contracts were drawn up Berkshire offered both a collatoralized and uncollatoralized option for the contract. The other parties would have paid a higher premium to Berkshire for the collatoralized contract, so they selected to forgo collatoral. Now, after the fact congress is going to step in and demand the contract have collatoral?<p>If I borrow money unsecured, I'm going to pay a higher interest rate. It would be extremely crappy to come in half way through the loan and demand that I put my house up ad collatoral. Now I have all the risk, and didn't even get to benefit from the lower I intrest rate at inception.<p>THAT'S what he's lobbying against.<p>And ontop of all of that, Buffett has said that if congress does include retroactive collatoralization, he will just pay it and his business will still be fine. So where's the fall from grace?<p><a href="http://www.bloomberg.com/apps/news?pid=10000103&#38;sid=aZcI_iSCOUWM" rel="nofollow">http://www.bloomberg.com/apps/news?pid=10000103&#38;sid=aZcI...</a>

In fact, Buffett thrives with investments in companies that have "fallen from grace." I don't think he is afraid of that stigma.

One of the best lines in the AMC series Mad Men is when the senior partner, Bert Cooper, says to Don Draper "Philanthropy is the gateway to power".