Sunday, February 19, 2012

"Warren Buffett: Baptist and Bootlegger" (BRK.B)

We've mentioned Professor Yandle's Baptist's and Bootleggers model a few times.*

I like the author of this piece, Peter Schweizer. His look at the stock trading practices of the Congress led directly to the STOCK Act which is awaiting the President's signature.
That said, Schweitzer is ascribing virtues to Buffett that Buffett never claimed.

Warren is a Riverboat Gambler, a hedge funders hedge funder, the King of Private Equity.
Most folks who were blinded by the folksiness were projecting what they wanted to see onto Buffett and Buffett didn't disabuse them of the notion.

Buffett's public persona serves the same purpose that Senator Sam Ervin's "I'm just a simple country lawyer" schtick did. In Ervin's case it helped him run a President out of office. In Buffett's a better look at dealflow than anyone else on the planet.

If Buffett's current spate of detractors had seen reality a bit clearer they'd have kept in the forefront of their minds the thought: "This guy is an insurance salesman from Omaha, hide the checkbook".

From Reason:
How America’s favorite billionaire plays politics to make money
In 19th-century America, there was a concerted effort to ban alcohol sales on Sunday. “Blue laws,” intended to protect the sanctity and sobriety of the Sabbath, were pushed by what seemed like an odd alliance: Baptists and bootleggers. Baptists backed the ban publicly on moral and religious grounds, while the bootleggers lobbied for the ban privately to boost their own bottom lines. Blocking legal alcohol purchases for even one day each week meant more opportunities for their illegal sales. Bans were enacted state by state, and many blue laws still exist (in Arkansas, Indiana, Minnesota, and Mississippi, for example), although restrictions have been steadily disappearing in recent years. Economist Bruce Yandle immortalized the phrase “Bootleggers and Baptists” in a 1983 Regulation magazine article of the same name, making the point that ostensibly opposing sides will happily collude when it serves their mutual interests.

The old paradox continues in modern-day Washington. Politicians enrich their friends and allies—and sometimes themselves—by coming off as earnest “Baptists” for a worthy cause. Lobbyists for big corporate interests, by contrast, are widely considered bootleggers, no matter how nobly they cloak their arguments. This arrangement has created an opening for a third way: What if a capitalist could somehow manage to sound like a Baptist?

Consider Warren Buffett. Often seen as a grandfatherly figure above the rough-and-tumble of politics, Buffett appears to be immune to the folly and excess of finance as well. He lives in Omaha, Nebraska, in a house he purchased in 1958 for $31,000. He made a fortune for himself and his investors at the business conglomerate Berkshire Hathaway through the humble-sounding approach of value-based investing. He uses folksy expressions: “You don’t know who’s swimming naked,” he said during the height of the financial crisis, “until the tide goes out.” He frequently takes to the nation’s op-ed pages with populist-sounding arguments, such as his August 2010 plea in The New York Times for the government to stop “coddling” the “super-rich” and start raising their taxes. 

Buffett the Bootlegger
But this image does not always reflect reality. Warren Buffett is very much a political entrepreneur; his best  investments are often in political relationships. In recent years, Buffett has used taxpayer money as a vehicle to even greater profit and wealth. Indeed, the success of some of his biggest bets and the profitability of some of his largest investments rely on government largesse and “coddling” with taxpayer money.
During the financial crisis in the fall of 2008, Buffett became an important symbol on television. He filled the role of fiscal adult, a responsible father figure in the midst of irresponsible Wall Street speculators. While pushing for calm and advocating specific market interventions in both public and private, however, he was also investing (sometimes quietly) so he could profit once his policy advice was implemented. This put Buffett in the position of being both Baptist and bootlegger, praised for his moral character while shaking his finger all the way to the bank.

In the summer of 2008, when several investment houses and the government-sponsored mortgage companies  Fannie Mae and Freddie Mac teetered on the brink of financial collapse, Buffett was “uncharacteristically quiet,” as the London Guardian observed. It was only on September 23 that he became a highly visible player in the drama, investing $5 billion in Goldman Sachs, which was overleveraged and short on cash. Buffett’s play gave the investment bank a much-needed cash infusion, making a heck of a deal for himself in return: Berkshire Hathaway received preferred stock with a 10 percent dividend yield and an attractive option to buy another $5 billion in stock at $115 a share.

Wall Street was on fire, and Buffett was running toward the flames. But he was doing so with the expectation that the fire department (that is, the federal government) was right behind him with buckets of bailout money. As he admitted on CNBC at the time, “If I didn’t think the government was going to act, I wouldn’t be doing anything this week.”...MORE
Here's an example of the psychological projection thing from Economic Policy Journal yesterday:
For value investors of a certain age (e.g. mine), discovering that Warren Buffett could be wrong is like suddenly not believing in Father Christmas. This twinkly-eyed, raspy-voiced, avuncular old gentleman almost embodies Clint Eastwood crossed with a Care Bear. And nobody can hold a candle to his long-term investment record.
And yet, the rot set in (at least as far as this writer is concerned) when Buffett went from investing in private non-financial businesses to siding with the establishment, using his institutional heft to win sweetheart deals in dubious banking institutions way beyond the reach of regular Joes.
In other words, somewhere along the line he went from representing the 99% to representing the 1%. And at the first sign of trouble, he simply wraps himself up in the American flag....
June, 2007
Eco-Hypocrisy Corporate Style II
As we look at corporate eco-hypocrisy I am going to refer to a few concepts from economics and the green movement, "Bootleggers and Baptists", rent-seeking and greenwashing.

Bootleggers and Baptists:
"Here is the essence of the theory: durable social regulation evolves when it is demanded by both of two distinctly different groups. “Baptists” point to the moral high ground and give vital and vocal endorsement of laudable public benefits promised by a desired regulation. Baptists flourish when their moral message forms a visible foundation for political action. “Bootleggers” are much less visible but no less vital. Bootleggers, who expect to profit from the very regulatory restrictions desired by Baptists, grease the political machinery with some of their expected proceeds.
They are simply in it for the money."

-From Bootleggers and Baptists in Retrospect by Bruce Yandle (the guy who coined the term).

July 2007
Cap-and-Trade Quote of the Day
February 2009
The continuing relevance of the bootlegger-and-Baptist model

And a few others.
...The economic theory of regulation asks us to consider the political arena as a marketplace where favors are bought and sold. Interest groups that have the most to gain or lose will bid the highest prices for favors.

Politicians dedicated to preserving their jobs, and needing large amounts of campaign funds, auction off the favors. Under this theory, if carbon emissions are to be controlled, the politician will seek the group with the largest economic stake in the outcome (and therefore presumably the most generous with campaign funds) and favor that group.