In a sense, whether or not Goldman Sachs ultimately loses its SEC case, settles, or faces criminal charges is irrelevant. The bigger question is how the allegations of impropriety might affect its reputation. In financial services, a firm's image is everything. A company's clients rely on its expertise and integrity. The recent allegations, along with witch trial-like Senate hearing last week, attempted to bring that latter characteristic into question. Will customers begin to question whether they can trust the investment banking goliath? Not if Warren Buffett's opinion means anything.
What Buffett Said
This weekend, at the site of his company Berkshire Hathaway's shareholders meeting, Goldman was an important topic. After all, the company is a major investor in the bank, with a $5 billion stake. In fact, as Buffett recently mentioned that his company makes $15 every second from Goldman, thanks to its 10% interest coupon payment that the bank agreed to during the financial crisis to avoid failure.
Buffett talked about his belief that Goldman did nothing wrong in an interview today on CNBC (see end of post). When asked about the SEC charges, he says:
Well, from everything I've seen of the ABACUS transaction, which is the one that the SEC put out the complaint on, I do not see a problem with that transaction. We're a bond insurer, ACA was a bond insurer, MBIA, FGIC, AMBAC, and all those companies started out insuring municipal bonds, and then the profit margins got squeezed on municipal bonds and they started drifting over and insuring other instruments, structured deals and so on. And ACA had probably dozens of people analyzing bonds. Many of the reports don't even explain that they were a bond insurer, but that was their job. Their job was to look at credits and stick a proper premium on if they wanted to insure them. If they didn't know what the proper premium was, they should have skipped insuring them. Almost all of the bond insurers got in trouble during that period, because they drifted over into areas that they really weren't that good.
It's pretty clear that Buffett believes that deal's collateral manager ACA should have known what they were getting into in this transaction. The interviewer, Becky Quick, followed up to specifically ask him about the fraud allegations, which claim that ACA and investors should have been told that hedge fund manager John Paulson would be shorting the transaction and helped choose the collateral. Buffett replied by using an example of some municipal bonds that his company insured without being told who was on the other side of the transaction:
We didn't care. Our job was to decide whether to insure the bonds. I never asked who was on the other side of the transaction. Obviously, somebody's on the other side of the transaction. But if Ben Bernanke was on the other side of the transaction, I still would have insured the bonds. It was my job to figure out what I wanted to insure. There's always someone on the other side of the transaction. John Paulson could have been on the other side of that transaction, and we still would have insured those bonds. On the other hand, if the premium was wrong, we wouldn't have insured the bonds. So, a bond insurer runs the risk of loss when they insure bonds. It shouldn't make any difference to them who owns them, who's hedging them, who's shorting them. They should decide what the risk is and charge an appropriate premium. And ACA charged the wrong premium.
Buffett continued to talk in the first person here, so this sounds specifically related to insurers, but the same logic could be applied to investors. Buffett's point is that these transactions always have a party on the other side and a sophisticated market participant shouldn't care who that is or the motive. So long as the investor and insurer have the information to analyze the transaction, it's their job to decide whether to buy or insure it.
Quick also asked Buffett about the Senate hearing, to which he essentially replied that he's been working with Goldman for 44 years, and never believed it was their responsibility to only sell him securities that they believed would perform well. He said that was not Goldman's responsibility -- unless explicitly hired for investment advisory (which they weren't), they were just marker makers.
Why Buffett's Opinion Matters
Of course, Buffett is biased. After all, he has 5 billion reasons to hope that Goldman gets past this rough spot. But Buffett is also generally perceived as a pretty straight shooter. As you watch the video, it becomes clear that he isn't speaking as a shareholder of Goldman Sachs, but as a customer. And not just any customer -- one of the most well-known investors in the world. Few people in the world of finance command as much respect as Buffett. His opinion matters.
And if Buffett's mindset reflects that of a prototypical investor, then his view should also mirror that of most other players in the market. If he believes Goldman did nothing wrong, the other sophisticated investors with whom Goldman works will likely agree. They're the bank's client base. Some auto mechanic living in Mansfield, Ohio who happened to catch some of last week's Senate hearing and thinks that Goldman Sachs is the devil won't affect the company's business. The market participants on Wall Street and beyond will. And they largely believe -- as Buffett does -- that Goldman did nothing wrong.
For this reason, barring any incredible new smoking gun that the government may be concealing, Goldman should be fine in the long-run. This episode will make for an ugly blemish on the firm's image outside business and high finance. It even resulted in a little dive in its stock price. But it won't change the perception of market insiders -- and they're Goldman's source of income, not the populists wielding pitchforks.
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