Warren Buffett's reputation as a stickler for good business ethics has put the billionaire in an awkward spot because of an investment in Goldman Sachs Group Inc.
In Sept 2008, at the height of the financial crisis, Berkshire Hathaway Inc. acquired $5 billion of Goldman preferred shares and warrants to purchase an equal amount of common stock. The investment throws off a fat $500 million of dividends a year.
Speaking on CNBC television, Buffett said on March 1 that he would buy the securities again under the same circumstances.
He also praised Goldman chief executive Lloyd Blankfein.
"It's a very, very strong, well-run business," Buffett said. "Goldman Sachs has a very strong market position. Lloyd Blankfein, you cannot find a better manager."
But that was before the U.S. Securities and Exchange Commission's April 16 lawsuit accusing Goldman of civil fraud. Goldman officials told U.S. senators on Tuesday they did not mislead clients.
"Buffett is in a tough spot," said Tim Calkins, a marketing professor at Northwestern University's Kellogg School of Management. "If you really feel something was done wrong and your investment reflects your values, then you have to think about reducing it."
Berkshire declined to comment.
At the company's annual meeting in Omaha, Neb., on May 1, Buffett will field more than five hours of shareholder questions. Goldman is all but certain to come up.
"Buffett is savvy enough to know the environment can change in two seconds and that he need not make sudden, radical decisions," said Eric Dezenhall, a crisis management expert at Dezenhall Resources Ltd in Washington, D.C.
Even before the SEC lawsuit, Goldman was among the least admired U.S. companies amid a perception its business practices contributed to the financial crisis and that it is tone-deaf to calls for change, and that it pay bankers and traders less.
In a Harris Interactive Inc. poll released on April 5, Goldman was the 56th most admired of 60 well-known large U.S. companies. Behind it: Citigroup Inc., Fannie Mae, American International Group Inc. and Freddie Mac. Ranked first: Berkshire.
"Berkshire Hathaway is a powerhouse because it is associated with some great brands such as Coca-Cola, Geico and Procter & Gamble," Calkins said. "The question is, does Goldman fit?"
Buffett has forayed into Wall Street before. In 1987, Berkshire bought $700 million of convertible preferred stock in Salomon Inc. Four years later, Buffett became interim chairman to restore order after a Treasury auction bidding scandal.
On Sept. 4, 1991, Buffett testified before a subcommittee of the House Committee on Energy and Commerce about Salomon. Excerpts got into a movie created by Buffett's daughter Susie and shown to Berkshire shareholders at each annual meeting.
In part, Buffett said the following: "In the end, the spirit about compliance is as important, or more so, than words about compliance.
"I want the right words and I want the full range of internal controls. But I also have asked every Salomon employee to be his or her own compliance officer.
"After they first obey all rules, I then want employees to ask themselves whether they are willing to have any contemplated act appear the next day on the front page of their local paper, to be read by their spouses, children and friends, with the reporting done by an informed and critical reporter.
"If they follow this test, they need not fear my other message to them: Lose money for the firm and I will be understanding. Lose a shred of reputation for the firm and I will be ruthless."
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