By Jacob Goldstein
Warren Buffett has this image as a no-nonsense, middle-America value investor.
But these days he's defending Goldman Sachs and Moody's, and pushing to block rules that would require a more cautious approach to the derivatives business. Given his business interests, this is only natural.
"I haven't seen anything in Goldman's behavior that makes it any more subject to criticism than Wall Street generally," Buffett said at a news conference yesterday, the WSJ reports. He explicitly addressed Abacus, the deal at the center of the SEC's lawsuit against Goldman: "I have no problem with that Abacus transaction. If there were other things that were hugely troublesome, I haven't seen them."
During the crisis, Buffett's Berkshire Hathaway loaned money to Goldman; in exchange, Berkshire got warrants entitling it to buy billions of dollars worth of Goldman stock at $115 per share. Goldman shares have fallen sharply in the past few weeks, but they're still trading above $145. So Berkshire is in the money on its warrants. Still, the higher the shares rise, the more Berkshire stands to profit.
Berkshire also owns a large stake in Moody's, one of the big ratings agencies. Buffett said this weekend that the agencies are "incredibly wonderful businesses," and added that their "pricing power is significant." The agencies' business model -- they're paid by people who stand to benefit from a high rating -- has been criticized, particularly given the fact that lots of high-rated securities fell apart during the bust.
Buffett, who has criticized the risk that derivatives can create, has also been pushing to block new rules that would require companies to set aside collateral -- money they might need to pay off existing derivatives contracts.
In his letter to shareholders this year, Buffett explained that Berkshire gets to hold more than $8 billion in "float" from its derivatives business. He added that the company only has to post small amounts of collateral against its derivatives contracts -- allowing it to plow much of the $8 billion into profitable investments. New collateral rules could eat into those profits.