Like every super success story, 79-year-old Warren Buffett has his detractors. At the moment, they include a number of angry staffers at the Securities and Exchange Commission, who, I'm reliably told, are steaming at the Oracle of Omaha, and saying so in strong, unmistakable terms in conversations with some of their legal and law enforcement contacts.
The reason: Buffett's unqualified support of Goldman Sachs and its CEO, Lloyd Blankfein, in the face of the SEC's April 16 lawsuit charging the investment banking biggie with fraud. Federal investigators are also conducting a probe.
"Why is Buffet siding with the bad guys [Goldman] and looking down at the good guys [the SEC)?" one of the commission's enforcement attorneys asked one of his regulatory contacts.
At Berkshire Hathaway's recent annual meeting, Buffett, its CEO, belittled the SEC'S action, arguing that Goldman didn't engage in improper activity and shouldn't be blamed for losses suffered by its clients. What's more, Buffett, whose firm holds $5 billion of Goldman's preferred shares, also said he fully supported Blankfein.
In contrast, one veteran SEC enforcement attorney, I hear from a legal source with close ties to the agency, heatedly took sharp issue with Buffet't's views, telling a securities lawyer in the Midwest that the SEC feels it has a solid case it can win. "A more relevant issue," the enforcement attorney told his contact, "is whether Buffett would visit Blankfein if he winds up in the slammer."
Those are tough, biting words, but whether they're realistic is another matter. The SEC's unhappiness with Buffett aside, some people I spoke to on Wall Street ridiculed the idea of the Goldman Chief winding up in the clink because they largely believe the SEC is pitching a weak case. Some, in fact, think it may be a laughable case. As one Goldman analyst put it, reacting to the commission's law suit, "I think the SEC may be watching too much Law and Order."
Officially the SEC won't say a word, just its usual "no comment." It's as mum as a mummy on the matter.
Jacob Frenkel, a former federal prosecutor and SEC enforcement lawyer, shares the condemnation of the SEC's suit, characterizing it to me as "a bunch of garbage." It's just a narrow sliver, a creation of one particular offering within the subprime mortgage market, says Frenkel, who predicts the federal investigation file will close with no action. The notion of a criminal case is ludicrous, he observes, because it's not even clear the allegations rise to the level of civil culpability.
Goldman, as he sees it, still has a stellar reputation industry-wide. Further, he contends, anyone who owns a stock (in this case Buffett) has every right to defend the company.
At the heart of the matter are the SEC's allegations that Goldman committed fraud in its 2007 sale of subprime mortgages, which were packaged in a collateralized debt obligation (CDO). The suit contends that Goldman permitted a hedge fund, Paulson & Co., to help choose the securities for the CDO and failed to tell investors who bought it that Paulson was actually shorting the CDO (a bet its price would fall). The suit further alleges that Paulson paid Goldman about $15 million for structuring and marketing the deal.
Goldman has described the SEC charges as completely unfounded and said it would fight them.
There's talk that the commission might seek to oust Blankfein as part of an enforcement action, but Goldman has refused to comment on such conjecture. Shortly after the announcement of the SEC suit, a number of market pros I spoke to felt Blankstein was on his way out. Now though, some, perhaps after digging more deeply into the facts, are beginning to have second thoughts.
Another former SEC enforcement attorney, Tom Von Stein, ridicules the notion that the commission is on weak ground. Buffett has a lot of credibility, but the SEC is very cautious and it has to go through all sorts of internal hoops to get approval to bring a case, he says. Given the fact "it ain't easy to get approval," he adds, "it strikes me the SEC's case against Goldman is probably a strong one." Further, he says, based on what he's read and heard, "it sounds to me like they have a good case. The securities laws," he went on, "are very clear; You can't mislead people, omit information or lie."
Von Stein also points out that Buffett is not an uninterested party; it's hard for him not to be affected by his personal interests.
On the other hand, he doesn't think much of the Justice Department's involvement in the case, observing "politically, they have to say something on this matter."
In a previous piece I did on the SEC-Goldman battle a couple of weeks ago, I noted that Von Stein had taken pot shots at former President Clinton, who had injected his two cents in the matter. Clinton had publicly stated that he wasn't at all sure Goldman had violated the law, leading Von Stein to conclude that "Clinton will eat his words".
Taking note of Berkshire Hathaway's ownership of Goldman's shares, Peter Morici, a Professor of Economics at the University of Maryland, and a frequent commentator on Wall Street goings-on, believes Buffett should be ignored on the subject of Goldman. The market is taking him too seriously on this matter, he says. Since Buffet is a stockholder, he's got to shore up the firm's defense because he has to answer to B-H shareholders. And if he doesn't defend Goldman, Morici observes, he could conceivably face law suits. In the final analysis, observes Morici, it's not what Buffett says publicly that counts, but what happens in the courtroom. One other thought he had: "It will be difficult for the government to nail Goldman in court."
Frenkel, currently an attorney at Shulman, Rogers in Potomac, Md., shares the view of many market pros and securities attorneys that the SEC case will never get to court, that there will be a conventional settlement with Goldman not admitting to allegations and being slapped with a fine. "As a matter of law, Goldman should win in a court battle, but it would be a calculated risk for it to go to trial before a lay jury of 12 people in New York who may have preconceived notions about Goldman Sachs."
Some Wall Street estimates figure a settlement could run in the neighborhood of $700 million.
I would have liked to tell you what Blankfein and Buffett think about all of this? But no luck. Alas, both declined to respond to requests to present their points of view.
What do you think? E-mail me at Dandordan@aol.com