One of the pillars of President Obama’s State of the Union address was the invocation of Warren Buffett as a voice of reason crying out in the wilderness of tax insanity. Obama echoed Buffett in saying that no billionaire should pay a lower tax rate than a secretary and demanded that a form of the “Buffett Rule” be passed by Congress that raises the tax rate to at least 30 percent on anyone earning more than $1 million a year.
Buffett has been riding waves of popular admiration for years, but his current incarnation as Wall Street man of the people has catapulted him even further into the heroic stratosphere. Yet there is something odd about the president of the United States holding him up as an icon of the better angels of Wall Street, because on Wall Street, Buffett’s reputation is not that of a straightforward, honest man of Omaha calling it as he sees it and doing the right thing in matters financial and communal. It is rather of a wily and extremely tough investor who uses both his outsized reputation and his billions of Berkshire Hathaway money to strike deals that no individual or indeed institution could ever hope to emulate.
Among the many faithful who own Berkshire stock or who gather in Omaha for a few days every year for its annual meeting, among those who have listened to Buffett’s pithy sayings on investing, invoking the value style originally promulgated by Benjamin Graham and David Dodd, Buffett is the sage who only buys what he understands and appreciates true value. His philanthropic largesse has added to his luster. And he seemed ever more prescient in the aftermath of the 2008 financial crisis, given that he had long expressed scorn and distrust for derivatives and for the elaborate financial engineering—and chicanery—that those derivatives enabled.
Yet, peel away those layers of “aw shucks” charm and folksy wisdom, and you are left with Buffett the investor who has time and again profited not from simple buying low and selling high, but from privileged deals that allow him to buy much lower and sell much higher than anyone else. He does not play on the same field as the rest of us, whether that us is a day trader in Dubuque with a Schwab account, or a state pension fund with billions, or even a financial firm conducting tens of thousands of transactions on behalf of its clients.
Take two recent high-profile investments made by Berkshire, a $5 billion investment in 2008 in an ailing Goldman Sachs, and a $5 billion investment a few months ago in an imploding Bank of America. In each case, Buffett invested billions of dollars in companies that were seeing a sharp decrease in their publicly traded shares. And in each case, he didn’t buy the shares at market value but rather a combination of warrants and preferred shares yielding a substantially higher dividend. In short, his injection of capital was the classic sweetheart deal, and in the case of the Bank of America investment, Buffett received such privileged terms because the bank desperately needed the stamp of approval that Buffett’s reputation provided. From a Wall Street perspective, Buffett got privileged, and not level-playing-field, access as a payoff for his imprimatur. He was essentially paid for marketing and life-support.
The disconnect between Buffett’s image and Buffett’s reality has always amused and annoyed Wall Street players. They have and still do admire him for his acumen and access, but they also disdain what they see as his folksy image masking his robber-baron mentality. In that sense, he is an odd hero for the Obama administration to invoke. He is used as a symbol of the honorable billionaire who is willing to pay his fair share and then some, and held up against the nameless, faceless ranks of Wall Street who are not. But using Buffett as a positive representative of Wall Street is a bit like using George Soros: both are billionaires; both have made a fortune in financial markets; both have used the system to their advantage, and neither truly represents the ethos of Wall Street.
The disconnect between Buffett’s image and Buffett’s reality has always amused and annoyed Wall Street players.
Buffett is neither as folksy as he appears nor as simple in his philosophy as he claims. He has been a brilliant investor. But that does not mean that he is a suitable poster boy for “good Wall Street” versus “bad Wall Street.” His call for a tax code that demands the wealthy pay more for the public good may be laudable; I agree emphatically. Why shouldn’t those with more pay more? They will still have more left than most will ever earn.
Many on Wall Street, of course, vehemently disagree, and see such calls as an unfair and scurrilous attack on the wealthy, who already fund a large portion of public spending. But the lionizing of Buffett is especially galling to those inside the financial world, because it smacks of hypocrisy. Buffett from their perspective is guilty of cake eating: he does whatever it takes to make a profit, and then presents himself as above the fray and holier than those in the East Coast trenches.
Of course, for political theater, it may not matter. Buffett is a billionaire; he believes that the rich don’t pay their fair share; and he is famous and admired. So why shouldn’t Obama wrap him a warm embrace? It is hard to argue with the utility, but this is one case where the eye-rolling on Wall Street may say something legit: Buffett may be a man of the people at heart, but his deals reflect that not a whit. He is as enmeshed in a privileged world of private deals and special terms as any so-called fat cat who disagrees about the tax code, and he does not decry that system.
It isn’t the inequities of the tax code that imperil economic stability: It’s a too-tight nexus of money and opaque, illiquid markets dominated by a few players with massive capital at their disposal, combined with a globalized world of finance that no government can effectively monitor. Buffett is at the center of that system, and rather than calling for its renovation, he champions tax reform. The latter is laudable and vital, but in the absence of the former, it will matter only as good politics—and leave a central challenge of our world unaddressed and untouched.