Is Warren Buffett the Oracle or the consummate insider?
That depends on whom you ask.
Some see him as beloved, especially business news cable anchors and Berkshire Hathaway shareholders, but others view him as vastly overrated and a controversial institutional investor with an unfair advantage over small investors.
The homespun Buffett of legend and lore, claim some critics, racked up a $50 billion fortune on sweetheart deals that hide a lifetime of missteps and shocking inconsistencies.
Buffett’s latest “insider” deal is his trade in embattled Bank of America, which is a classic Buffett “investment.” Berkshire comes first, the US next, investors last.
His $5 billion investment in the bank — expected to announce savage job cuts of up to 40,000 employees, and last week also announced the firing of two powerful executives — raises a deeply troubling question to one analyst.
“Did he have inside information that other investors were not aware off? Did he know that there were going to be these two major announcements [of the job cuts and executive firings] at the time he made his investment?” asked banking analyst Dick Bove of Rochdale Securities. “If he did know, I think it is illegal.”
Bove added: “Those are two very material pieces of information that were not [publicly] disclosed, and he may have had them disclosed [to him].”
“Those are two separate and distinctive transactions,” said BofA spokesman Jerry Dubrowski, referring to BofA’s new cost-efficiency drive (known as Project New BAC) and Buffett’s investment. “And we would not have provided any information to him [Buffett] in advance, nor would we do that for any shareholder.”
Although he has no proof, Bove said it struck him as “awfully coincidental” that Buffett made his Bank of America investment right before the company made the pair of announcements. These are the kind of announcements likely to drive the stock price higher, he said.
Bove is not the only one with questions about Buffett’s Bank of America deal.
“Truly, you can’t even really consider this an investment,” according to a scathing report by Phoenix Capital Research, “since the deal Buffett got (which no one else on the planet would get) was so rigged in his favor that he can’t help but make some money off of it — at least until BAC collapses and is nationalized.”
Of course, Buffett’s stake would be made whole in that scenario too, the report added.
Buffett is regarded as a stupendous investor by many Street pundits because of stellar returns, but ordinary investors emulating him do it at their peril, the critics say.
The Oracle has the inside track, they contend. At the height of the 2008 financial crisis, for instance, Buffett did a deal with Goldman Sachs and General Electric similar to his latest BofA deal — and made out like a bandit on Goldman. But good luck if you are a more pedestrian| investor.
In each case, Buffett picked up preferred shares. BoA’s pay Buffett a 6 percent annual dividend worth $300 million. Buffett also picked up 700 million warrants, which grant him privilege to purchase shares at $7.14. That could be cash in the bank, since the stock could shoot right back up if the bank’s reorganization succeeds.
In the case of Goldman, Buffett collected a nice purse — annual dividends of 10 percent. In March, Goldman repurchased the preferred shares and paid a premium of 10 percent.
For roughly two and a half years of work, Buffett raked in $1.27 billion in dividends, according to estimates. Buffett also reaped $2.43 billion from Goldman warrants and $5.5 billion in early redemption fees
GE didn’t turn out so well for the Oracle of Omaha — it has lost over 35 percent of its value since Buffett’s deal.
Meanwhile, an ordinary investor who bought shares in Goldman at the same time as Buffett’s amazing deal actually 5 percent.
Greg Womack, president of Womack Investment Advisers, said Buffett’s investments in Goldman and Bank of America seemed timed in part to instill confidence in the economy.
However, he’s not convinced that the deals were as astute as some may think.
“The financials have a long, narrow road in front of them,” he said. “The jury is still out on the near-term future for Bank of America, and unless management can turn the ship around soon, Mr. Buffett’s convertible options may soon be out of the money.”
Buffett has his defenders. “Whether you like him or despise him, he is the most successful investor of his generation,” according to Jeff Matthews, author of “Secrets in Plain Sight: Business and Investing Secrets of Warren Buffett.”
“He bought Coke at $6.50 a share — still owns it. He bought [Procter & Gamble] at $7 a share. Owns Washington Post at $6.15 a share. He made a killing on General Foods in the early 1980s. None of those were sweetheart deals.” (Coke was trading last week in the mid-$50s, Washington Post at over $320, and Procter & Gamble in the low $60s.)
Matthews admits that Buffett gets a better deal when he buys a special class of preferred than another investor would.
Still, Matthews does note some inconsistencies in Buffett’s style. He describes the Oracle as “high-minded in his public proclamations on tax policy.” For example, he said Buffett testified before Congress in support of the inheritance tax. However, by giving away all of his Berkshire stock, he will successfully avoid paying one of the biggest inheritance tax bills ever, according to Matthews.
Matthews also notes that Buffett preached how he pays too low a tax rate — lower than his secretary.
“That’s because he gets most of his income in dividends and capital gains,” Matthews said. “He could easily write a check to the Treasury if he felt it was the thing to do.”
Meanwhile, banking analyst Bove says the BofA deal wasn’t “fair” to the average investor. “If the deal was made available to, say, a bunch of pension funds where ordinary people could participate, they would have participated,” Bove said.