A Closer Look at the Oracle of Omaha

The Daily Reckoning U.S. Edition

Home . Archives . Unsubscribe

The Daily Reckoning | Saturday, March 31, 2012 Warren Buffett: Putting his money where his mouth isn’t, Readers weigh in on this week’s featured essay, Plus, all this past week’s reckonings, archived for your tax-free reading... --------------------------------------------------------------- America’s Biggest Crisis — 1.6 Million Baby Boomer Americans Suffer From This Each Year Today — for the first time ever — here’s how the SOLUTION could quickly build you a legacy of wealth. This could save lives — make families stronger — and add digits to your bank account. The extreme urgency of what you’re about to see requires you act before midnight Monday, April 9. Click here for all the details. Joel Bowman, checking in today from Buenos Aires... Joel Bowman Did you miss Eric Fry’s epic editorial about the Oracle of Omaha earlier this week? That would be terrible news for you...if, that is, we didn’t republish the most outstanding column of the week in the Weekend Edition. Luckily for you, we do. So here it is... [This column first appeared in these pages on March 29, 2011] The Daily Reckoning Presents Bashing Buffett...Once Again With Feeling Eric Fry “Right now bonds should come with a warning label,” opines Warren Buffett in this year’s letter to Berkshire Hathaway shareholders. That seems like a reasonable idea, but why stop there? Why not slap a warning label on each one of Buffett’s public pronouncements as well? The warning would go something like this: This pronouncement may or may not express my honest opinions, but it will almost certainly advance a hidden political agenda that enables me to gain access to preferential treatment from elected officials and various agencies of the federal government. Buffett knows investing, no doubt about it. He’s an expert’s expert. But Buffett also knows how to make sure the government’s butter lands on at least one side of his bread, if not both. He’s an expert’s expert. Both activities are perfectly legal, but only one of them is perfectly disgusting. “Stop Coddling the Super-Rich,” Buffett pleaded last summer in an infamous op-ed piece for the New York Times. “Our leaders have asked for ‘shared sacrifice.’ But when they did the asking, they spared me. I checked with my mega-rich friends to learn what pain they were expecting. They, too, were left untouched... “Last year,” Buffett continued, “my federal tax bill — the income tax I paid, as well as payroll taxes paid by me and on my behalf — was $6,938,744. That sounds like a lot of money. But what I paid was only 17.4 percent of my taxable income — and that’s actually a lower percentage than was paid by any of the other 20 people in our office. Their tax burdens ranged from 33 percent to 41 percent and averaged 36 percent.” Ah shucks!... Gee whiz!... and Golly gosh! Mr. Buffett must feel just awful about this injustice. If only he had discovered it earlier, he could have paid tens of billions of dollars more in taxes during his lifetime. And, gee willickers, he could have told all his mega-rich friends about his great discovery so that they, too, could have paid tens of billions of dollars more in taxes. Golly gee, isn’t that just the way life is? You always discover the best stuff after it’s too late to do anything about it. It’s just too darn bad that Buffett and his mega-rich friends had already amassed their mega-billions of dollars during the “unfair” tax regime of the last two or three decades before Buffett discovered how unfair it was. But, shucks, you can’t turn back the clock. So despite Buffett’s profound regret, he will simply have to keep all those billions of dollars that the IRS did not permit him to contribute to the US government. Gee whiz...life just ain’t fair sometimes. You try to be magnanimous with the US government and the IRS just won’t let you. Hey, but at least you can publicly proscribe for others the identical high-tax regime that you methodically and assiduously avoided throughout a career spanning several decades. And fortunately for the US government, there is a brand-new generation of folks who aspire to become billionaires like Buffett, or perhaps merely millionaires. And as Buffett astutely observes, it’s not too late to tax them. At this point, a few Dear Readers may be saying to themselves, “Well, okay, but even if Buffett should have said something earlier, at least he said something now... and that means that he would start paying higher taxes now. False. Implementing a higher income tax would barely move the needle on Buffett’s annual tax bill, as the nearby chart illustrates. Buffett paid $6.9 million in taxes on his 2010 personal income of $39.9 million dollars — or 17.4%. But he paid zero personal taxes on his portion — $2.9 billion — of Berkshire Hathaway’s net income. (Of course Berkshire paid corporate tax, but that fact is not germane to the discussion of personal taxes that Buffett addressed in his article last year). In other words, even if you bumped the personal income tax all the way up to 100%, and literally confiscated every cent of Buffett’s direct personal income, the effective tax rate on the totality of his increased wealth in 2010 would have been only 1.4%! So you see how easy it is to be a do-gooding, “fair-share-paying” billionaire? Buffett’s “tax fairness” ideas — focusing as they do on personal income, dividends and capital gains taxes — would leave Buffett, himself, virtually unscathed. That’s because: 1) His personal income represents less than 2% of his annual wealth accumulation; 2) Berkshire Hathaway has never paid a dividend in its history; 3) Buffett, himself, has no intention of generating any capital gains because he has no intention of selling a single share of Berkshire Hathaway. Tellingly, Buffett’s proposals exclude any mention of estate taxes or of disallowing certain deductions for those he calls the “mega- rich.” These exclusions are no accident. When disclosing his multi-billion-dollar gift to the Bill and Melinda Gates foundation in 2006, Buffett established three conditions, the second of which was that the foundation “must continue to satisfy legal requirements qualifying my gift as charitable and not subject to gift or other taxes.” More recently, Buffett defended the tax-deductibility of corporate jets and urged Berkshire Hathaway shareholders at the 2010 shareholder meeting to “follow my tax dodging example.” Unfortunately, dear reader, Buffett’s hypocrisy on this topic does not end there. It merely begins. In fact, the story just goes on and on, ad nauseum. Buffett, the tax crusader, is also Buffett, the IRS litigant. Yes that’s right, just a few months after complaining to the nation that rich folks aren’t paying their fair share of taxes, this particular rich folk filed a lawsuit against the IRS asserting an unfairly large tax bill. “Last November,” Bloomberg News reports, “NetJets, the private-plane company owned by Warren Buffett’s Berkshire Hathaway Inc. (BRK/A), sued the US, saying the federal government had wrongly imposed taxes, interest and penalties totaling more than $642.7 million. “Claiming the federal Internal Revenue Service wrongfully assessed a so-called ticket tax — an excise tax on payments made in exchange for air transportation — to private aircraft owners maintaining their own planes, the Columbus, Ohio-based company demanded refunds and abatements.” A few weeks ago, the federal government countersued — asserting that, not only does the IRS owe no money to NetJets, but also that NetJets owes an additional $366 million in taxes and penalties. Certainly, Warren Buffett has a fiduciary responsibility to NetJets shareholders to advance their interests. So if, in fact, the IRS is trying to take funds from NetJets that it does not legally deserve, so be it. But in light of the fact that Buffett publicly laments his inability to pay more taxes, the do-gooding billionaire would seem to be passing up a golden opportunity. Why not, for example, allow NetJets to battle the IRS, while simultaneously, and very publicly, agreeing to pay the disputed taxes out of his own pocket? If Buffett genuinely wished to hand more money to Uncle Sam, the solution would be relatively simple: “Just write a check and shut up,” as New Jersey Governor, Chris Christie put it succinctly. But don’t hold your breath waiting for Buffett to write any charity checks to the government, or even to write any op-eds about forms of “tax fairness” that would cost him much more per year than the cost of his vacations on Martha’s Vineyard with President Obama. Warren Buffett has not become a latter-day tax crusader so that he can pay his “fair share”; he has become a crusader so that he can continue plundering his unfair share of tax receipts and crony favoritism. By lending his reputation to the “tax fairness” crusade, Buffett legitimizes the progressive/socialist agendas that tickle the fancy of so many political leaders. As a result, Buffett endears himself to those with the power to advance his financial interests. Fanning class warfare is good business, assuming you don’t mind the whole dishonest, hypocritical part of it. This tactic added billions of dollars to his personal wealth during the credit crisis of 2008- 9, while also saving Berkshire Hathaway from a near-certain demise. During the depths of the 2008 Credit Crisis and stock market selloff, “Wall Street was of fire,” recalls Peter Schweizer in his expose, Throw Them All Out. “[But] Buffett was running toward the flames...with the expectation that the fire department (that is, the federal government) was right behind him with buckets of bailout money...Indeed, Buffett needed the bailout...Beyond Goldman Sachs, Buffett was heavily invested in several other banks that were at risk and in need of federal cash. He began immediately to campaign for the $700 billion TARP rescue plan that was being hammered together in Washington.” “As the political debates surrounding the proposed $700 billion Troubled Asset Relief Program (TARP) bailout bill heated up,” recalls blogger, Pat Dollard, “Buffett maintained an appearance of naiveté, an ‘aw shucks’ shtick that deferred to the judgment of politicians. ‘I’m not brave enough to try to influence the Congress,’ Buffett told the New York Times. “Behind closed doors, however, Buffett had become a shrewd political entrepreneur,” Dollard continues. “The billionaire exerted his considerable political influence in a private conference call with then-Speaker of the House Nancy Pelosi and House Democrats. During the meeting, Buffett strongly urged Democratic members to pass the $700 billion TARP bill to avert what he warned would otherwise be ‘the biggest financial meltdown in American history.’” “If the bailout went through,” Schweizer correctly observes, “it would be a windfall for Goldman. If it failed, it would be disastrous for Berkshire Hathaway.” Buffett’s “hard work” paid off. “In all, Berkshire Hathaway firms received $95 billion in bailout cash from the Troubled Asset Relief Program (TARP). Berkshire held stock in the Wells Fargo, Bank of America, American Express, and Goldman Sachs, which received not only TARP money but also $130 billion in FDIC backing for their debt. All told, TARP-assisted companies constituted a whopping 30% of its entire company disclosed stock portfolio.” But these billions of dollars represented only the most visible portions of the bailout funds that flowed to Berkshire’s companies. Wells Fargo, for example, received “only” $25 billion of TARP funding, but it also received another $45 billion at the same time from the Federal Reserve’s Term Auction Facility (TAF). Incredibly, Wells Fargo’s borrowings paled alongside those of Goldman Sachs. Throughout the crisis, Goldman gorged itself at every available government trough. The morally challenged investment bank borrowed only $10 billion from the TARP. But at the same time Goldman was griping about “being forced” to take the $10 billion TARP loan, the company was borrowing tens of billions of dollars more from obscure government lending programs with acronyms like: CPFF, PDCF and TSLF. And that’s not all! Amidst much fanfare and self-congratulatory press releases, Goldman repaid its TARP loan in June 2009, but only after securing $25 billion of government capital at a different trough. As we observed in a December 15, 2010 edition of The Daily Reckoning: On June 17, 2009...thanks to some timely, undisclosed assistance from the Federal Reserve, Goldman repaid its $10 billion TARP loan. But just six days before this announcement, Goldman sold $11 billion of mortgage-backed securities (MBS) to the Fed. In other words, Goldman “repaid” the Treasury by secretly selling illiquid assets to the Fed. One month later, Goldman’s CEO Lloyd Blankfein beamed, “We are grateful for the government efforts and are pleased that [the monies we repaid] can be used by the government to revitalize the economy, a priority in which we all have a common stake.” As it turns out, the government continued to “revitalize” that small sliver of the economy known as Goldman Sachs. During the three months following Goldman’s re-payment of its $10 billion TARP loan, the Fed purchased $27 billion of MBS from Goldman. In all, the Fed would purchase more than $100 billion of MBS from Goldman during the 12 months that followed Goldman’s TARP re-payment. Is it any wonder that Buffett’s $5 billion “investment” in Goldman Sachs succeeded so nicely? “Later, astonishingly,” recalls Peter Schweizer, “Buffett would publicly complain about the bailouts in his annual letter to Berkshire investors, claiming that government subsidies put Berkshire at a disadvantage...” “It takes chutzpah to lobby for bailouts,” observes Reuters journalist, Rolfe Winkler, “make trades seeking to profit from them, and then complain that those doing put you at a disadvantage.” Yes indeed, chutzpah and a wee dose of hypocrisy. Please don’t misunderstand us dear reader; the only difference between our hypocrisy and Warren Buffett’s is the number of dollars that flow from it. But that’s a meaningful difference. Our hypocrisy does not divert hundreds of billions of dollar from the government coffers into our pockets, while masquerading as folksy, good old-fashion “fairness.” Let’s start printing those warning labels! Eric Fry for The Daily Reckoning NEW: Have You Heard of the OTHER Government Backed “Pension Program”? It’s official, Social Security is heading for broke! But that doesn’t mean you should miss out on the retirement you deserve... Most Americans know nothing about this, but a small, savvy group of retirees have been collecting from this OTHER Government backed “pension program” since 1972! Now income specialist Jim Nelson shows how you could too in a brand new presentation. Click here to watch it instantly. ALSO THIS WEEK in The Daily Reckoning... Doing What Wall Street Doesn’t By Chris Mayer Gaithersburg, Maryland Most of the time I just go with the flow. I am an easygoing fellow. But every now and then I like to tweak these clowns. I remember I was at a conference in which about a dozen companies presented. After one company’s presentation, I got tired of hearing all the softball questions and the overly promotional CEO fielding them. Listening to him, you’d think his company were the greatest thing since sliced bread, instead of a flimsy money loser. So I got in the queue to ask a question. Finally, I got the chance to ask the obvious: “This may seem like a simple question, but I hope to get a serious response... Why doesn’t your company make any money?” Hitler’s Blackberry By Dan Denning Melbourne, Australia Poor old Ben Bernanke has a deflation phobia. He sees it everywhere the way the kid in The Sixth Sense saw dead people. And Bernanke is equally terrified of falling stock prices (and their effect on consumer confidence). Falling stock prices are what some people call deflation, or asset price deflation. Bernanke, the governor of the US Federal Reserve, believes the Fed made the Depression a Great Depression by raising interest rates too soon during the US recovery. He won’t make that mistake again! He will simply not allow stocks to fall. There’s No Such Thing as Too Much Liberty By Jeffrey Tucker Auburn, Alabama Some great books are products of lifetimes of research, reflection and discipline. Others are written during moments of passionate discovery, with prose that shines forth like the sun when new understanding first brings the world into focus. The Market for Liberty is that second type of classic. Written by Morris and Linda Tannehill after intensive study of the writings of Ayn Rand and Murray Rothbard, it has the pace, energy and rigor you would expect from an evening’s discussion with these two giants. Warren Buffett Scorns Gold. Bad Move! By Addison Wiggin Baltimore, Maryland Warren Buffett doesn’t like gold. In this year’s annual letter to Berkshire Hathaway shareholders, Warren Buffett scorned gold as an asset that is “forever unproductive.” And he’s right about that. But investors don’t buy gold because they hope it will produce something. They buy gold because they know that no one can produce it. EXPOSED: The Real Reason Iran Wants the Bomb The secretive Pentagon and “Know Nothing” White House wants this issue to go away. WHY? Because what I’m about to tell you could be lethal enough to at least DOUBLE the price of oil in 2012... Bunker down against soaring energy costs with ONE “safe haven” financial plan that could protect you and pay impressive gains... Click here to watch the video now. The Weekly Endnote... And finally this week, a few reader emails on Mr. Eric Fry’s Buffett bashing editorial escapades... First up, this one from Reckoner D. Olsen... I really appreciate your calling Mr. Buffett on his massive hypocrisy regarding taxes that EVERYONE ELSE should pay while whining sanctimoniously about how HE should be paying more. Well, Mr. Buffett, get out your checkbook. The IRS accepts donations, or didn’t you know that? I did not know about his lobbying for bailouts, but it doesn’t surprise me. He probably regards it to be his fiduciary duty to get whatever money is going by for his shareholders, no matter the source of the funds (as long as it is nominally legal). And there is an argument for that. If he stopped there, he would still be part of the financial prostitute class but no worse than that. BUT, when he uses his bully pulpit to assert that I and lots of other people should pay more taxes, and that I don’t have the right to pass on what I have earned and paid taxes on to my heirs, well, for years I have been wanting to tell him to mind his own business. Despite his folksy manner and lack of a luxury lifestyle, in his own way Mr. Buffett is as much of a narcissist and filled with as much hubris as any other rich person. It’s time people realized that and quit respecting him so much. He may deserve it for his investing prowess but he does not deserve respect for his character. And this, from a Reckoner who, we can only assume, stumbled on our fringy little website by mistake... You wrote: ... But that’s a meaningful difference. Our hypocrisy does not divert hundreds of billions of dollar from the government coffers into our pockets, while masquerading as folksy, good old-fashion “fairness.” $5 billion is a far sight from the 100s of billions of dollars that you infer as a direct transfer to Buffet. Really, get serious and look what tax rate Romney also pays — less than 15% — i.e. less than a steno working for him would pay! Do you really think that is progressive taxation policy? Thanks to George W. and especially Reagan, the ultra-wealthy in the USA are not paying their fair share of personal taxes. When they liquidate themselves or sell off assets, capital gains and estate taxes will eventually be collected, so don’t mix apples with lemons. Don’t give me the song and dance that they are the job creators because everything points to the untruth of this reasoning. They are the ones moving their money to generate more money but not real jobs in the USA. They are the ones closing US manufacturing and sending the jobs offshore. They are the ones using every loophole available and sending assets to tax-free islands and principalities. Small and medium sized companies are the job creators and they are the ones who should be getting the tax advantages that the billionaires are harvesting from their obedient Republican lap-dogs. You seem to conveniently forget that the TARP and the whole financial mess that Obama has been saddled with was the direct result of Republican ultra-right ideology, Reagan, George W. and Greenspan inspired deregulation and mismanagement of the financial institutions. The worst deficits in recent memory have been under the attempts to promote a “small-government” agenda by implementing a “starving the beast” ideology as espoused by Republican Presidents, especially when they also controlled Congress. Sincerely Your friendly, concerned and affected neighbour DR: Ah, the “fair share” argument. It’s one that always leaves us to wonder, what is one’s “fair share” of another person’s property? Moreover, who decides it? And who is tasked with enforcing it? The side of the euphemistically-named “Internal Revenue Service” building in Washington, DC is emblazoned with the words of Associate Justice of the Supreme Court, Oliver Wendell Holmes, Jr.: Taxes are what we pay for a civilized society. Of course, that depends on how you define “civilized society.” If you mean society where theft is legalized and institutionalized and where the loot flows to those writing the laws, then yes, Holmes is correct. We see it somewhat differently: Civilized society is what we pay for taxes. Of course, there’s no building on which someone might hang that message...and that is precisely the point. And finally this, from Reckoner Pete M. ... Eric Fry’s editorial on Buffet was incredibly adroit. Buffet should be utterly ashamed of his contrite, schoolboy tactics while at the same time, lining his pockets with gains from profits made using the public purse. Buffet belongs in the same category as those other immoral snake oil peddlers whose only interest is there own while pretending to be, as Mr. Fry so aptly states just a “folksy” one of the gang, your next door neighbor, ready to assist you when the chips are down. Is giving money to a charity a way for guilt ridden billionaires to continue on their path of immoral (at best) behavior? --- As always, we welcome your thoughts on the matter. Feel free to take the Buffett-Tax debate to the comments section under Eric’s column, here. Anything else, email us at the address below and... ..enjoy your weekend. Cheers, Joel Bowman Managing Editor The Daily Reckoning ------------------------------------------------------- Here at The Daily Reckoning, we value your questions and comments. If you would like to send us a few thoughts of your own, please address them to your managing editor at joel@dailyreckoning.com How to Engender the Return of a Bull Market How Austerity Hinders an Economic Recovery Opposing Trends in Debt and GDP Growth Can “Fracking” Rescue America’s Energy Outlook? EU Finance Ministers to Double Bailout Fund Data Show the US Recovery Isn’t Strong The Daily Reckoning: Now in its 11th year, The Daily Reckoning is the flagship e-letter of Baltimore-based financial research firm and publishing group Agora Financial, a subsidiary of Agora Inc. The Daily Reckoning provides over half a million subscribers with literary economic perspective, global market analysis, and contrarian investment ideas. Published daily in six countries and three languages, each issue delivers a feature-length article by a senior member of our team and a guest essay from one of many leading thinkers and nationally acclaimed columnists. Cast of Characters: Bill Bonner Founder Addison Wiggin Publisher Eric Fry Editorial Director Joel Bowman Managing Editor The Mogambo Guru Editor Rocky Vega Editor Additional articles and commentary from The Daily Reckoning on: Twitter Facebook DR iPhone APP To end your Daily Reckoning e-mail subscription and associated external offers sent from Daily Reckoning, cancel your free subscription. If you are you having trouble receiving your Daily Reckoning subscription, you can ensure its arrival in your mailbox by whitelisting the Daily Reckoning. © 2010-2012 Agora Financial, LLC. All Rights Reserved. Protected by copyright laws of the United States and international treaties. This newsletter may only be used pursuant to the subscription agreement and any reproduction, copying, or redistribution (electronic or otherwise, including on the World Wide Web), in whole or in part, is strictly prohibited without the express written permission of Agora Financial, LLC. 808 Saint Paul Street, Baltimore MD 21202. Nothing in this e-mail should be considered personalized investment advice. A lthough our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investment advice.We expressly forbid our writers from having a financial interest in any security they personally recommend to our readers. All of our employees and agents must wait 24 hours after on-line publication or 72 hours after the mailing of a printed-only publication prior to following an initial recommendation.Any investments recommended in this letter should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.