Buffett Says Federal Reserve Is Greatest Hedge Fund in History

Date: Friday, September 20, 2013
Author: Noah Buhayar, Bloomberg

Billionaire investor Warren Buffett compared the U.S. Federal Reserve to a hedge fund because of the central bank’s ability to profit from bond purchases while accumulating a balance sheet of more than $3 trillion.

“The Fed is the greatest hedge fund in history,” Buffett told students yesterday at Georgetown University in Washington. It’s generating “$80 billion or $90 billion a year probably” in revenue for the U.S. government, he said. “And that wasn’t the case a few years back.”

Warren Buffett, chairman and chief executive officer of Berkshire Hathaway Inc., speaks during a conversation with Brian Moynihan, president and chief executive officer of Bank of America Corp., not pictured, at Georgetown University in Washington, D.C., U.S., on Thursday, Sept. 19, 2013. Photographer: Andrew Harrer/Bloomberg

Sept. 19 (Bloomberg) -- Warren Buffett, the billionaire chairman and chief executive officer of Berkshire Hathaway Inc., talks about Federal Reserve policy, the U.S. economy and his investment strategy. He speaks with Brian Moynihan, chief executive officer of Bank of America Corp., at George Washington University in Washington. (Source: Bloomberg)

Sept. 20 (Bloomberg) -- Michael McCarthy, chief market strategist at CMC Markets in Sydney, talks about Federal Reserve monetary policy and its potential impact on global financial markets. He speaks with John Dawson on Bloomberg Television's "On the Move." (Source: Bloomberg)

Sept. 20 (Bloomberg) -- Federal Reserve Bank of St. Louis President James Bullard talks about the economy and the central bank's decision to refrain from reducing its monthly bond buying. He speaks with Sara Eisen and Tom Keene on Bloomberg Television's "Surveillance." (This is an excerpt. Source: Bloomberg)

The central bank has been buying $85 billion of bonds a month to help the U.S. recover as it emerges from the deepest slump since the Great Depression. Chairman Ben S. Bernanke and other Fed policy makers unexpectedly opted this week to sustain that pace of asset purchases instead of tapering it, saying they need to see more signs of lasting improvement in the economy.

The Fed remitted $88.4 billion to the U.S. Treasury Department last year. The payments have ballooned as the central bank built its balance sheet during the past five years.

The Fed “is under no pressure, none whatsoever to have to deleverage,” Buffett said. “So it can pick its time, and if you have somebody wise there -- and I think Bernanke is wise, and I certainly expect his successor to be -- it can be handled. But it is something that’s never quite been done on this scale. It will be interesting to watch.”

Bernanke steered the Fed through the 2008 crisis, and his term ends in January. President Barack Obama hasn’t nominated a successor, who will oversee the policy’s wind-down.

Janet Yellen

Fed Vice Chairman Janet Yellen is Obama’s leading candidate to replace Bernanke after former Treasury Secretary Lawrence Summers withdrew his name from consideration, people familiar with the matter said this week. The president has also said that he’s weighing former Fed Vice Chairman Donald Kohn for the post.

Buffett praised Bernanke for signaling in 2008 that he’d do whatever was needed to stabilize markets and said the next chairman should follow his approach to economic stimulus. Investors expected a taper by Bernanke, who said Sept. 18 that he wants to see further gains in U.S. employment before scaling back the bond purchases.

“He says he’s going to keep doing it until he sees more improvement in the economy, and I think he’s been mildly disappointed -- not hugely disappointed -- in the rate of improvement in the economy in the last few years,” Buffett said. “He’s not pre-judging exactly when it’s going to happen, he’s telling you the conditions under which he’ll change.”

Building Berkshire

Buffett, 83, became the world’s fourth-richest person by building Omaha, Nebraska-based Berkshire Hathaway Inc. (BRK/A) into a $289 billion business. As the company’s chairman, chief executive officer and largest shareholder, he transformed a failing textile maker into a firm operating in industries from insurance to railroads.

The Dodd-Frank Act may limit future leaders from taking the steps that Bernanke and then-Treasury Secretary Henry Paulson did in 2008 to calm markets, Buffett said. The officials injected billions of dollars into insurer American International Group Inc. (AIG) and the largest banks, while backstopping money-market funds as the financial system teetered.

“I worry actually that Congress doesn’t like to give anybody that much authority,” Buffett said. “There will be another panic. Where it comes from, who knows? But when that time comes, the question will be, ‘Are the people who have panicked, who have frozen, who have caused the economic engine to stop, will they believe and come right back and be doing something?’ And I’m not sure whether what’s been enacted is a plus or a minus in that regard.”

First Choice

Buffett stopped short of endorsing Yellen to take over as Fed chairman, during an interview on CNBC prior to the Georgetown event. The billionaire said his top pick for the job is Bernanke, even though he may not want to stay.

“If you’ve got a .400 hitter in the lineup, you don’t take him out,” Buffett told the business news network, referring to a high batting average in baseball. “I don’t have a second choice. I don’t know Janet Yellen at all.”

Buffett, who has committed almost all his wealth to charity, also spoke yesterday about philanthropy during the Georgetown gathering alongside Bank of America Corp. (BAC) CEO Brian T. Moynihan. Even as the billionaire praised the U.S. economic system, he said inequality needs to be addressed.

“We have learned to turn out lots of goods and services, but we haven’t learned as well how to have everybody share in the bounty,” Buffett said. “The obligation of a society as prosperous as ours is to figure out how nobody gets left too far behind.”