Three recent incidents have brought Democrat’s favorite money man, Warren Buffett, into the hot seat recently, soiling his wholesome, folksy image.
The first is the Berkshire Hathaway’s Clayton Homes subsidiary being called out for predatory lending. Buffett defended Clayton Homes in a letter to shareholders, rather than answering the accusations directly or describing policy changes that would come.
In the letter he tried to gloss over the company’s misdeeds and went on to describe the business as a charitable giver and a transparent bastion of integrity.
The fact that Warren Buffett won’t even go so far as to say something flavorless like ‘They have made a mistake and will make changes’ is very telling.
The second defamatory incident for Buffett is the revelation of the legal tax loopholes he uses to avoid paying his fair share of taxes. Buffett has advocated higher taxes for high-income earners. The “Buffett Rule” became famous in 2011 when he said that those earning more than $1 million should pay a 30% tax rate. A laudable goal, but it wouldn’t mean much for Buffett, as most of his wealth is not taxable- tied up in Hathaway shares.
Berkshire Hathaway, unlike most companies, legally seeks to minimize its taxes- and it stands out for its $61.8 billion in deferred tax burdens, which Buffett himself describes as being like an interest-free loan from Uncle Sam.
Hathaway does not pay dividends, and Warren Buffett has made note of a key reason shareholders would end up having to pay taxes on dividends. The company has participated in tax inversion acquisitions as well as many asset swaps, which help avoid taxes. As Forbes magazine noted earlier this month, Buffett’s heavy-handed preaching on taxes would best be taken with a grain of salt.
The third and final blow for Buffett is the Wells Fargo scandal. More than two million credit cards and accounts were set up without client consent. After the accounts were opened, the customers were billed on their unauthorized accounts.
Low-level staffers were responsible and did it to reach unrealistic cross-selling quotas set by upper management. Over 2.2% of the bank’s workforce has been terminated for their involvement in the illegal practices that have been going on for at least five years.
Even worse than these fraudulent activities is the fact that this behavior was systemic and well known. It was so commonplace that management ordered the staff to undertake training, wherein they were told it was illegal to open accounts without a customer’s approval.
However, by continuing to demand that unrealistic sales quotas had to be met, employees saw it as a green light to carry on with the misconduct.
Senior management cannot say it didn’t know, as at least one employee told the CEO directly about the problems. Employees who alerted the bank’s internal whistleblower hotline were fired systematically, and their managers were given coaching on how to fabricate reasons for dismissal.
It is illegal in the U.S. to retaliate against whistleblowers- so regulatory problems are only just starting for Wells Fargo.
Berkshire Hathaway is the largest Wells Fargo shareholder, with 9.46% of the total stock. Buffett praised Wells Fargo, calling it an above-average bank in its culture and conduct. He has been repeatedly asked to comment on the scandal but refuses to say anything before November.
Buffett and Berkshire Hathaway are famous for the returns they generate for investors. In the half a century since Warren Buffett took control of the company, Berkshire Hathaway stock has outperformed on the S&P 500 Index by a cool 11.3% each year, despite the fact that the out-performance has dropped off somewhat during the previous decade.
Likewise, Buffett’s antecedently impeccable reputation for highly ethical conduct has been drastically tarnished in recent years. This trend got started in early 2011 when a key lieutenant, David Sokol resigned in shame after being called out for spearheading the Berkshire Hathaway takeover of Lubrizol. In this case, Buffett offered apologies to shareholders and took the blame for the part he played in the indecent.
In the last two years, Buffett has taken three painful strikes to his previously sterling reputation. The case of the predatory lending, bellicose tax practices, and the recent disclosures regarding misconduct at Wells Fargo are all damning. In each instance, Buffett either failed to condemn the wrongdoing or worse- endorsed the indefensible business practices.
As Warren Buffet falls from grace, so too will liberal tax policies which have been championed by the investment tycoon for years. As he and others like him lose their grip on the moral high ground, more and more people will see the light.
Regards,
Ethan Warrick
Editor
Wealth Authority
