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Warren Buffett's Secret Deal with the Fed

Written By Geoffrey Pike

Posted July 5, 2016

buffettwfcWarren Buffett has long been a fascinating character to me. He is the embodiment of free market capitalism and cronyism at the same time.

Buffett is a capitalist when it comes to making money in sound business ventures. He is a crony when it comes to using his influence to gain advantage through government and central bank actions.

Buffett has no problem making money. He doesn’t apologize for making money, which is a whole lot of it. But then on the other hand, he is often a shill for big government and higher taxes. He says he wants higher taxes on the rich, yet he never voluntarily pays extra.

His father, Howard Buffett, was briefly a congressman in the early 1950s. Howard Buffett was what you might call a libertarian Republican. He believed in free markets and was an advocate for the gold standard. His son, unfortunately, did not inherit his ideology.

So it is not as if Warren Buffett is a complete rags to riches story. When your father is a congressman, you aren’t coming from poverty. It is analogous to Donald Trump’s story. Trump says he started with little, which was about a million dollars.

To most people, a million dollars is a lot of money. But perhaps Trump is correct in relative terms. A million is almost nothing compared to the billions he now has.

This is true for Buffett as well. He didn’t exactly start with nothing. But it is nonetheless impressive that he has turned his investments into tens of billions of dollars. Believe me; you can give a lot of people a million dollars who won’t turn it into billions, let alone several million. Most people would probably find a way to make it go to zero.

Buffett has investment savvy. He also has some great one-liners. Unfortunately, he also has no moral qualms in getting indirect (or even direct) favors from government.

You can really look at this in different ways though. Is Buffett just playing within the rules that have been set? Or is he taking advantage of the rules that he helps promote?

Almost everything in today’s world is regulated by government in some fashion. So we can’t blame people who are just conforming to the rules. If you open up a daycare and fill out all of the necessary government forms and set up your facility to meet the many regulations, then you are just abiding by the government rules. It is a barrier to entry that you have gotten through and you may then benefit from the fact that newcomers will find it difficult to meet the stringent regulations.
But I don’t think this is where Buffett is coming from. The problem is that Buffett is advocating many of these rules that apply to his line of business. We would not be as forgiving of the daycare owner if he were personally lobbying the government for more regulations to make it more difficult for start-ups.

Lobbying the Government

Buffett’s company – Berkshire Hathaway – is lobbying the Federal Reserve to increase its holdings of Wells Fargo. Currently, regulations place a 10% threshold on companies acquiring ownership of a bank. Therefore, Berkshire has to apply for an exception since it has reached this threshold.

As a side note, anyone who thinks the Federal Reserve is a private bank and not part of the government should look at this one more piece of evidence. The Fed certainly supports the major banks, but what private institutions get to regulate investors like this?

Of course, in a true free market, you wouldn’t have such restrictions. It is only because of the central bank, the FDIC, and the major government oversight of the banking system that these rules exist. And if it weren’t for the existence of the central bank and the massive regulation, there would not likely be just a handful of large banks dominating the industry.

Does anyone want to bet that Berkshire doesn’t get approval to acquire more shares of Wells Fargo?

Buffett has been bullish on Wells Fargo (and much of the banking sector) for a long time now. He first invested in it in 1989. He obviously has a massive stake through Berkshire, but he also is reported to own some shares for his own personal portfolio.

If you remember back to the fall of 2008, Buffett invested heavily in some financial stocks after they had plummeted. Almost nobody wanted to touch them at the time. This included Bank of America and Goldman Sachs.

In reality, many of those banking stocks should have gone to zero. It was only because of government/ Fed bailouts that they survived. Even if you believe that depositors should be made whole, it doesn’t mean the shareholders should get a bailout as well. Again, is this another case of Buffett profiting from a crony system, or profiting as a crony?

For all we know, Buffett could have had inside knowledge that the banks were going to get bailed out. Would it surprise anyone if government and/ or Fed officials went to Buffett and encouraged him to “invest” in the banks in order to help save the economy? If so, we can be sure that he was given a wink when wondering if his money would be safe. The system truly is rigged to a large degree.

If Buffett and company are trying to get approval to buy a larger stake in Wells Fargo, should that make us all bullish on Wells Fargo? It certainly implies that Berkshire will increase its holdings, but we can’t be sure.

Also, even though Berkshire may be seeking to buy more shares of the large bank, it doesn’t mean it has to be correct. There may be a small surge in the share price if Berkshire buys a large volume in a short period of time. Still, Berkshire has been wrong before, despite its overall impressive record over the decades.

You don’t have the inside knowledge and connections that someone like Buffett has. Therefore, you shouldn’t even try to guess what he knows and what he doesn’t know. There is not much point now in trying to just copy him.

If you are going to buy Wells Fargo, don’t do it just because Buffett is doing it, although that strategy would have worked well at times in the past.