The Buffett Gambit: Buying (Selling) Credibility

In the last two weeks, Warren Buffett has made news by taking multi-billion dollar positions at Goldman Sachs and GE, two companies that would have topped the list of most admired firms a couple of years ago (and perhaps still). The fact that he is getting a good deal from both companies has been well publicized. In effect, both companies have given him a discount on his investment, thus giving him the potential for higher returns in the future. While part of those higher returns can be attributed to the fact that he is providing liquidity in a market where it is in short supply, that alone cannot explain the nature of the deals. After all, Goldman and GE, notwithstanding current financial problems, have recourse to other equity funding. So, why did they choose to deal with Mr. Buffett?

I think the answer lies in the mythology. As investors lose faith in the institutions that they thought were the foundation of US financial markets, from the investment banks to the Fed, Warren Buffett remains one of the few icons with any credibility left in this market. In my view, both Goldman and GE are buying a share of that credibility with these investments. They are, in effect, telling the market to trust them because Buffett is now watching over them. I should also add that I do not begrudge Mr. Buffett trading on his credibility to generate higher returns for Berkshire Hathaway stockholders. He has invested a great deal in his reputation over the last few decades and he is the ultimate capitalist!