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Chadwick: Whom Do You Trust – Warren Buffett or The Federal Government?

Listening to Warren Buffett as he discussed Goldman Sachs on Squawk Box yesterday morning, I was struck by both his eminent business sense as well as his common sense. His assessment of the securities firm and its CEO, Lloyd Blankfein, was reasoned, and was based on his many years of dealing with the company as well as his own immensely sound and proven business acumen.

Mr. Buffett understands risk and how markets work.

He knows that in the world of buying and selling complex financial instruments, responsibility is a two way street.

Caveat emptor.

The buyers of the instruments at issue were not naïve individuals, unfamiliar with the vicissitudes of the market; rather, they were sophisticated investors, looking for a risky investment with a kick. Mr. Buffett admitted to making mistakes of his own, to failing to see the bubble in the residential real estate market. It was reassuring to hear him make that admission.

Daniel Sparks, former partner and head of the Mortgages Department at the Goldman Sachs Group, Joshua Birnbaum, former managing director of the structured products group trading for The Goldman Sachs Group, Michael Swenson, managing director of structured products group trading for The Goldman Sachs Group and Fabrice Tourre, executive director of the structured products group trading for The Goldman Sachs Group are sworn in while testifying before the Senate Homeland Security and Governmental Af
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Daniel Sparks, former partner and head of the Mortgages Department at the Goldman Sachs Group, Joshua Birnbaum, former managing director of the structured products group trading for The Goldman Sachs Group, Michael Swenson, managing director of structured products group trading for The Goldman Sachs Group and Fabrice Tourre, executive director of the structured products group trading for The Goldman Sachs Group are sworn in while testifying before the Senate Homeland Security and Governmental Af

What a far cry his interview was from the experience last week of listening to the many U.S. Senators (on both sides of the aisle) grilling Goldman Sachs employees.

It was plainly evident that none of the Senators comprehended the financial instruments at stake.

Rather they were grasping at headlines – grandstanding, haranguing and trying to intimidate – force feeding isolated words and phrases to make theatre and to obfuscate their own enormous culpability in the real estate bubble and its subsequent bursting.

Unlike Mr. Buffet who readily confessed that he isn’t right all the time, not a single Senator admitted to pressuring the banks to relax mortgage lending standards. Nor did any of them mention Fannie Mae and Freddie Mac, for which they have oversight and which have been so preposterously mismanaged.

The Federal Government is powerful, more powerful than any corporation in this country. If it wants, it can destroy a company, because it has infinite staying power and no profit motive. That is precisely what it did to Drexel Burnham, to Arthur Andersen, to Lehman Brothers. It can create an environment that makes it expedient for customers to abandon a company and for employees to jump ship. And in that way it can bring down any company if it so chooses.

Rather than admit their own involvement in the global financial crisis, Congress and the White House appear bent on finding scapegoats. Wall Street is an easy target, and the most profitable of the Wall Street firms is the easiest and most expedient target. And Congress, given its miserably poor standing in the polls, is hoping that by vilifying the private sector they will find redemption.

That will not work.

Financial reform is needed. The citizens of this country would be well served by thoughtful and reasoned legislation that would mitigate the risk associated with rampant leveraging. If Congress really wants redemption, let it admit its own errors and work together with the private sector in the best interests of the people it is supposed to serve.

November cannot come too soon.

Update: Many of you have responded to my blog, asking how much Goldman Sachs stock I own, or if I own any. I own no stock in the company. I apologize for not making that disclosure in my original posting.

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Patricia W. Chadwick has had more than 35 years of investment experience. She is the founder and president of Ravengate Partners LLC, a consulting firm that provides advice on financial markets and global economics.