Where Buffett Has His Money Now

Taken collectively, these deals suggest that Buffett has a more aggressive view about the potential exposure the asbestosis claims present than do the foreign insurers who are putting their claims to him. As for the claims themselves, it may be that he has a different read on the actuarial data, or that he thinks the process of tort litigation reform in the United States will produce more modest awards. But this remains speculation, since the internal analysis underlying Buffett’s strategy is tightly guarded. Still, Buffett is careful to limit his exposure when he acquires these claims. In the Equitas transaction, for instance, he provided that claims over $13.9 billion would still have to be covered by Equitas. Thus the transaction was all geared to assuming a specific layer of liability, avoiding an open-ended assumption. Reinsurance transactions of this sort are not easily understood outside the insurance industry. In the modern financial world vast sums in cash and assets change hands in just these sorts of deals, often drawing little attention from the public, the markets, and the regulators. Buffett’s own fortune has been put together in large part on the international reinsurance market. He has not only been one step ahead of the market, but also has been one step ahead of the regulators, because the international reinsurance market is arguably the most weakly policed zone of the global financial markets. While the mainstream press has described the “subprime” market as the singular cause of Wall Street’s current malaise, those in the know recognize that this is only part of the failure of regulation. Creative cash management through reinsurance deals is vastly more consequential and draws far less attention.

In short, these deals are significant because in acquiring the insurance exposure the investor also gains the insurer’s associated assets. This helps explain why, as the collapse of the American financial institutions set in this fall, Buffett was sitting on an enormous pile of cash—estimated at $50 billion or more. He has been accumulating this cash since the fall of 2006—and batting down irritation from Berkshire-Hathaway shareholders over his failure to make investments all the while. Those shareholders who complained are now slowly recognizing their error.

Curiously, one of Buffett’s first plays post-crash has been to acquire $5 billion in stock in Goldman Sachs, with an option to acquire another $5 billion. The investment comes just as the venerable investment firm has achieved unprecedented preeminence on Wall Street. Goldman Sachs’ links to the Bush administration—former executives include Treasury Secretary Henry Paulson, White House chief of staff Josh Bolten, and bailout czar Neel Kashkari, among others—are so extensive that Wall Street reverberates with suggestions that financial regulation is being outsourced to it; hence its current moniker, “Government Sachs.” Buffett rides close to the seat of policy decision-making, always keeping a few steps ahead of the marketplace as a whole, and whispering into the ear not of the lowly regulators, but of those who control them. No investor could ever hope for a more favorable position.

Did Buffett foresee a collapse in time to start assembling a mountain of cash for a big shopping spree as the market bottoms out? In retrospect, that’s exactly how things appear. Notwithstanding an ostentatious “buy” recommendation he delivered in mid-October, Buffett’s own actions suggest that he doesn’t think the market has made its turnaround—not yet, anyway. He did take a $3 billion slice of GE Capital a week after his investment in Goldman, in a move seen as an effort to bolster confidence in the US market. “G.E. is the symbol of American business to the world,” he said. Meanwhile, Buffett is still heavy with cash. When he does start spending it, no one doubts his appetite for shopping. “I can spend money faster than Imelda Marcos when things are right,” he once famously remarked.

[Wednesday, as The Daily Beast featured “Where Buffett Has His Money Now,” was a bad day on the markets for Warren Buffett and Berkshire-Hathaway. The stock’s value fell 12 percent in a single day—and Thursday it was off a further 7.7 percent. What caused the drop? Right now, Buffett’s firm is off 45 percent for the year, which is exactly the fall reflected for the S&P 500, so the drop brings Berkshire-Hathaway’s performance closely into line with that of the bluechips generally, particularly companies such as American Express and Wells Fargo, in which it has substantial holdings. It reflects a sense that the Sage of Omaha is not immune from the woes facing the market generally.]

Scott Horton is a law professor and writer on legal and national security affairs for Harper's Magazine and The American Lawyer, among other publications.