Is Exxon Mobil (XOM) larger than a number of third world nations, at least in economic terms? Is Goldman Sachs (GS) more powerful than most countries? How about Warren Buffett and his Berkshire Hathaway (BRK.A)? And it was a single hedge fund manager, George Soros, that broke the British pound, right?
Whose credit would you prefer, that of the United States of America, headed by Barack Obama, or that of the “nation” of Berkshire Hathaway, headed by Warren Buffett? Monday morning, the bond market said “the latter,” by pricing Berkshire’s bonds at a lower spread than US obligations of similar maturity.
This goes to highlight a trend that I mentioned earlier: the rise of “supranational” investors that are more powerful than whole countries. Berkshire Hathaway has annual sales over $100 billion. Its market cap is closer to $200 billion. With perhaps 300,000 employees (and twice as many shareholders) the Berkshire “nation” is about one tenth of one percent the size of the USA. It typically pays about 1/500th of the taxes of the whole country.
These are numbers that compare favorably to the GDPs of many small third-world countries. And these people are extraordinarily wealthy by global standards; divide the market cap by the number of stockholders, and their holdings of Berkshire stock, and alone they average a third of a million dollars. Which gives them, individually and collectively, a lot more clout than an equivalent number of people elsewhere.
More to the point, this is an unusually like-minded bunch of people. While Mr. Buffett didn’t exactly choose his shareholders, he chose his type of shareholders (mostly long term) by welcoming those, and discouraging others. It’s as if a sovereign of a nation said to people applying for visas, “don’t come here unless you plan to stay for at least five years, if not forever.” Many other large corporations do not try to mold their employees, and especially their shareholders, into something approaching a citizenry.
In terms of quality, as opposed to quantity, the Berkshire “nation” is a more desirable trading partner in many ways than the country it inhabits. The USA is larger in the absolute sense, and has a larger pool of individuals and other resources to draw from. But the quality dispersion in America is also much larger, and there is a sense that the larger, but more fractious, country is more inclined to “drift” than the smaller “nation.” It is a close call, but a reasonable and “neutral” individual (one affiliated with neither, or with both, entities) might feel that Berkshire’s credit is safer than America’s. At any rate, it’s a situation where we (Americans) are glad that they (the Berkshirites) are on our side.
A second supranational case is where George Soros broke the Bank of England in 1992, after seeing an opportunity for his hedge fund to profit from the likely collapse of the pound. Unlike others, who traded in smaller size, Soros did not merely participate in a prospective event. A good case can be made that the size and timing of his bets caused the collapse.
The problem with Soros-style billion-dollar bets is that the loser of such a bet could be a whole country. In the end, it might come down to a modern equivalent of the proverbial David and Goliath battle, which was NOT a duel between two warriors. The challenge, as originally posed by the Philistine Goliath, was that the country, either Israel or Philistia, whose champion lost would become the slave of the victor. David won, and eventually conquered the Philistines, but not until after many more battles
This time around, the US Justice Department has warned the heads of certain large hedge funds, including George Soros, to retain records of their activities in European trading, particularly as it affects the recent Greek crisis. The European financial authorities have issued similar warnings. In essence, these hedge funds have been put on notice that they will be held accountable for their actions as they relate to the fate of a whole country. This is a tacit admission that the larger hedge funds have become supranational entities.
Countries like Malaysia inveigh against “speculators” like Soros. As misplaced as I believe most of the rhetoric to be, I also think that Malaysia has a point vis-a-vis someone like him. The “ordinary” speculator takes his or her chances in the market, and stands to make or lose a “small” amount of money in the global scheme of things. It’s just a living, after all. But Soros (and a few others) are no ordinary operators. They are conducting their business on a scale that could potentially involve whole countries.
Maybe governments do have something to fear from hedge funds, who appear to exercise a check on their power. Or maybe it’s just a case of “shooting the messenger.” After all, it must be embarrassing for a national authority to be less powerful than one of its corporate “nations.”
Disclosure: Author long BRK.A
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