The Warren Buffett Factor

Sunday, September 28, 2008 4:33 AM

I am uncomfortable around folksy people who also happen to be successful. I assume it is an act and that they are hiding something, that their "folksyness" is a cover for something, either fake sprezzatura or some level of dishonesty. There is no one more successful in monetary terms than Warren Buffett, and he is the folksyist fellow around. No nonsense, down to earth, the epitome of non-flash. So I’m uncomfortable. 

There is an official bio of him which has just come out, entitled The Snowball. It was reviewed over this weekend in the Financial Times by one Richard Lambert, who is the director-general of the Confederation of  British Industry. We know that Buffett last week placed a $5 billion bet on "Goldmine" Sachs and that this weekend the leaders in Congress telephoned Buffett to receive his advice on the multi-billion dollar bailout of Wall Street. They took his advice. 

Buffett endorses the prime-the-pump-to-the-max Paulson plan. Paulson has a Harvard MBA (1970), worked briefly in the Nixon Administration as an assistant to John Ehrlichman (1972-73), before going to work for "Goldmine" Sachs in 1974. He was chairman and CEO of "Goldmine" in 2006, at which point he became the Secretary of the U.S. Treasury. Paulson has a brilliant track record on and off Wall Street and appears to be honest and "for real", at least by today's standards.

Take note of the closing paragraphs of Lambert's review of the Buffett bio in the FT Weekend Edition:

As far back as 2002, he [Buffett] said that derivatives were “toxic” and potential “time bombs”. Munger [Buffett's long-time partner], less elegantly, added: “To say derivative accounting in America is a sewer is an insult to sewage.”

The biography is right up to date – it covers the Bear Stearns collapse – and Buffett’s thoughts about what is happening in the markets now are worth quoting at length.

“It could all end on a dime if they flooded the system with enough liquidity”, he tells [Nancy] Schroeder [the official biorgrapher], “but there are consequences to doing that. If dramatic enough, the consequences would be the immediate expectation of huge inflation. A lot of things would happen that you might not like.

“The economy is definitely tanking. It’s not my game, but if I had to bet one way or another – everyone else says a recession will be short and shallow, but I would say long and deep.” Coming from someone with his track record, this is not a comfortable thought.”

Buffett's $5 billion bet is based on "flooding the system with liquidity" which would end the crisis "on a dime". That is the essence of the Paulson plan. It may work. It may not. It is a "Hail Mary" pass. It may avert a Depression, but, according to Buffett, it will trigger a long and deep recession due to runaway inflation. Buffett has made his calculations. In any event, the punchbowl is back on the table.