Buffett emulating J.P. Morgan with his efforts to ease crisis

Deseret News (Salt Lake City), Oct 6, 2008 by Steve Lohr New York Times News Service

Their times and personalities are vastly different, of course, but J. Pierpont Morgan's role in the Panic of 1907 has its echo in Warren E. Buffett's actions during the current financial troubles.

"What Buffett is doing is similar in ways to what Morgan did in 1907," said Richard Sylla, an economist and financial historian at the Stern School of Business at New York University. "It's what you might call profitable patriotism."

In the last two weeks alone, Buffett has exercised his influence mainly by investing in embattled blue-chip companies, committing a total of $8 billion to Goldman Sachs and General Electric. He drove hard bargains and invested on favorable terms.

Buffett is also the largest shareholder in Wells Fargo, which last Friday swept in with a $15 billion bid for another banking company, Wachovia, offering seven times what Citigroup did at the start of the week.

Yet even more than money, Buffett brings the reputational capital that comes from being a peerless long-term investor, revered for his acumen and sound judgment.

In 1907, the United States had no central bank. The financial crisis began that year because trust companies handling wills and estates -- firms long synonymous with safe investment -- exploited legal loopholes and became speculators in the stock market. When those investments soured, the collapse of the trusts threatened the financial system.

Morgan stepped in and functioned as America's central bank. The U.S. Treasury handed him $25 million (more than $550 million today). Morgan gathered his fellow financiers at his Manhattan mansion and hammered out a rescue plan. After a few rocky weeks, the panic subsided.

Morgan also used the power of his personality and public statements to try to sway market behavior and psychology.

At a time when government looms so much larger in the economy than it did a century ago, Buffett, unlike Morgan, is not directly involved in the current rescue. Yet Buffett has said that the government has asked for his advice.

On Wednesday, Buffett said on Charlie Rose's PBS talk show that 3 million people could lose their jobs if Congress didn't act. Even if the rescue plan works, Buffett said, he expects a recession.

But in the long run, he told Rose, the U.S. economy has a bright future and is the best in the world because it frees people's potential.

"It's not lost on him that people trust him more than they trust politicians," said Alice Schroeder, a Buffett biographer.

Commenting on CNBC after the House vote on Friday, Buffett said the rescue plan is "no panacea" but would avert a much worse recession.

Robert Bruner, a University of Virginia business professor, said such reassurance helps calm people.

When the situation is dire, he said, "the panic calls for cooler heads than currently prevail, and he's showing leadership and attempting to convey a view of the developments that would be rational and consistent with the facts.

"What he can do is help create an atmosphere around which reasonable people can have a conversation. The people who most need to have a conversation are in the halls of Congress and the corridors of the financial community."