Saint Warren Buffett's Relentless Hypocrisy: Tax You, Never Me

Maybe Warren Buffet’s impeccable sense of timing kicked in. Or maybe he got shook up a little when IBM reported another revenue and earnings debacle in October, and in the subsequent swoon of its shares, he lost $1.3 billion. Followed a day later by a $1 billion hit on his position in Coca-Cola when it reported earnings. And all year, he has been getting hammered on his investment in British grocery chain Tesco which has lost nearly half its value, costing him around $750 million.

All this, even while stock markets have been bouncing around record highs.

“I like buying it as it goes down, and the more it goes down, the more I like to buy,” said the master manipulator during one of his hype interviews on his favorite and always helpful promo platform, CNBC, in early October. And true to form, filings revealed on Friday that he bought a few things here and there, such as increasing his stake in GM, and that he sold a few things too. But those were smallish amounts by his standards.

Meanwhile, he is dumping some of his big, highly profitable positions in publicly traded stocks – but not out the front door.

It was skillfully obscured by the ruckus over the tax aspects of these deals: that one of the richest guys in the world, or rather his company, Berkshire Hathaway, would be able to take advantage of a specially created tax loophole that regular folks don’t have access to, a loophole that would save the company billions in taxes.

Last week, it was Berkshire’s complex acquisition of Procter & Gamble’s Duracell unit. Everyone dutifully fell in line, laid out by Buffett, and called it an “acquisition,” though the other and more important half of the transaction was the sale of a huge position of P&G shares.

A “brilliant move,” explained Doug Kass, president of Seabreeze Partners Management.

Instead of paying cash for Duracell, Berkshire will hand over $4.7 billion in P&G shares that it has owned since 2005 when P&G bought Gillette, in which Berkshire had a major equity stake since 1989. As part of the deal, P&G agreed to infuse $1.8 billion in cash into Duracell. And it’s going to be costly for P&G: it would take a charge of 28 cents per share.

OK, so this deal involves a lot of paper shuffling. But in effect, Berkshire is selling $4.7 billion in P&G shares for which, as Reuters reported, it paid $336 million at the time of its investment in Gillette. Normally, an outright sale with capital gains of this magnitude would have triggered a hefty tax bill. By swapping those shares for Duracell, no taxes are due.

And this “brilliant move” wasn’t the first one: At the end of last year, Berkshire announced that it would sell $1.4 billion of its shares in Phillips 66, not for cash but for that company’s pipeline-services business, Phillips Specialty Products.

In March, Berkshire announced that it would sell $1.1 billion of its shares in former media giant Graham Holdings, formerly known as the Washington Post Company. In return, Berkshire would get paid some cash, a Miami TV station, and about $400 million in Berkshire’s own shares that Graham Holdings owns.

Sound a little circuitous? Berkshire started accumulating these shares in 1973 at a cost of about 1% of the selling price, the Washington Post reported. So it would have had to pay a big chunk in taxes on the capital gains if the sale had been done the way that normal investors have to sell and buy stocks.

By bartering these mega-positions of publicly traded shares for a mix of non-publicly traded assets, Buffett’s company dodged an onslaught of federal income taxes. And that’s what the mainstream media focused on. We’re shocked and appalled. How could he!

But these deals did something more important: they allowed Buffett to dump publicly traded shares that are subject to the stock market’s whims that tend to manifest themselves after long rallies in a most unpleasant manner, either individually, as in Tesco’s case, or jointly during a crash or a long bear market – and dump them out the backdoor without spooking the markets that could hit the rest of his holdings.

He did so with impeccable timing as stock market has been bouncing to ever more inexplicable highs. In exchange, he picked up shares of companies that aren’t publicly traded. Berkshire would own them outright. No one else would have any impact on their market value because their wouldn’t be a market value. Stocks could go to heck entirely, but with regards to these companies, Buffett wouldn’t care; their “value” on Berkshire’s books wouldn’t change.

These deals are a way of cutting exposure to the stock market. They’re big bearish bets. And the fact that the media reported them as acquisitions and a billion-dollar taxpayer-funded welfare gift ingeniously obfuscated the reality behind them.

Perhaps Buffett saw something spooky: The shares of Phillips that he sold got caught up in the oil price plunge and have dropped 18% since early September. Read…  How Low Can the Price of Oil Plunge?

David Stockman's Contra Corner is the only place where mainstream delusions and cant about the Warfare State, the Bailout State, Bubble Finance and Beltway Banditry are ripped, refuted and rebuked. Subscribe now to receive David Stockman’s latest posts by email each day as well as his model portfolio, Lee Adler’s Daily Data Dive and David’s personally curated insights and analysis from leading contrarian thinkers.

Get Access