What Is Buffett’s Motivation?

In signing up Wednesday as gubernatorial candidate Arnold Schwarzenegger’s chief economics advisor, Warren E. Buffett prompted the proverbial Hollywood question:

What’s his motivation?

Buffett himself isn’t talking, but there’s no shortage of conjecture. Some observers say the world’s second-richest man just wants to save California. Others say he must see a potential to profit.

Schwarzenegger, in announcing that Buffett would lead his economics and financial team, said he looked to Buffett to assemble a group of experts who would map out a plan for California’s economy.

Presumably that would include proposals for a long-term fix of the state’s dire budget situation. The Legislature and Gov. Gray Davis have agreed on a plan that plugs much of this year’s massive $38-billion shortfall with borrowed money and leaves an $8-billion hole for next spring.

Wall Street has roundly savaged the budget deal as a farce, and a recipe for financial ruin in the long run.

Yet so far, Schwarzenegger -- the front-runner in the recall election to oust Davis -- has offered no specifics on the budget. By contrast, two rival GOP candidates, Bill Simon Jr. and state Sen. Tom McClintock, have presented some ideas involving spending cuts.

In their statements Wednesday, it was Buffett, not Schwarzenegger, who referred to California’s situation as a crisis: “It is critical to the rest of the nation that California’s economic crisis be solved,” he said.

Some longtime Buffett watchers said his choice of words may explain why he opted to get involved.

“He must think the situation is grave enough to be worth his time,” said Roger Lowenstein, author of “Buffett: The Making of an American Capitalist,” published in 1995.

Grave enough, in other words, not just to endanger the health of California’s economy, but perhaps that of the nation overall, some say. That would constitute a threat to the financial well-being of billionaires as well as busboys.

Buffett is, of course, considered one of the greatest investors of the last century. He also is revered for being plain-spoken and humble, two traits hardly in oversupply on Wall Street.

But it’s also true that Buffett hasn’t built his $30-billion-plus fortune by being excessively generous -- least of all with those who have been on the other side of the table in transactions.

A recent case in point: Buffett’s investment company, Berkshire Hathaway Inc., this year snapped up manufactured-housing maker Clayton Homes Inc. for what some Clayton investors charged was an unfairly low price.

“It was classic Buffett,” said Robert Rodriguez, a principal at L.A.-based money manager First Pacific Advisors, one of the shareholders that opposed the offer. The billionaire, Rodriguez said, chose the highest-quality company in the industry, set a bargain price and wouldn’t budge from it.

That shrewd eye for the bottom line, along with the fact that the 72-year-old Buffett has kept a relatively low profile politically, has even some of his great admirers wondering whether there’s a profit motive underlying his decision to join Schwarzenegger’s campaign.

But Michael Holland, a New York money manager who worked with Buffett in the early 1990s, said the sage investor must know that he is embarking on a personally hazardous course should Schwarzenegger win the election.

All that ails California can’t be cured without some extremely difficult choices in terms of taxes and spending, which means potentially vicious political battles would loom over any plans a Buffett-led team might propose. Already, Republican conservatives have attacked Buffett, a Democrat, for being far too liberal in his views on taxes and social programs.

“Buffett doesn’t need this,” Holland said. So the decision to join Schwarzenegger is a statement “about the importance of what this [solving California’s woes] is all about” for the nation as a whole, Holland said.

This isn’t the first time Buffett has inserted himself into financial crises.

In 1991, when brokerage Salomon Bros. became embroiled in a bid-rigging scandal in the Treasury bond market, Buffett rescued the venerable firm by briefly stepping in as chairman. But he was acting in his own interest: He had a substantial stock holding in Salomon.

In 1998, when gigantic hedge fund Long Term Capital Management was on the brink of a collapse that officials thought could rock the global financial system, Buffett surfaced with a private bid to buy the hemorrhaging portfolio and recapitalize it with funds from Berkshire’s insurance units, plus contributions from financial giants American International Group and Goldman Sachs & Co.

The offer was rejected in favor of a rescue organized by the Federal Reserve Bank of New York involving a group of big banks.

Some financial experts maintain that the Buffett offer would have been preferable because it would have avoided the precedent of a government-sponsored bailout. But again, Buffett wasn’t playing the role of altruist: He figured he could make money on the hedge fund portfolio if he paid a low enough price.

Is there a potential payoff for Buffett’s portfolio in jumping into California’s fiscal mess?

Money manager Rodriguez said it’s conceivable that Buffett, by gaining deeper insight into the state’s financial situation, could better “assess the probabilities” of a substantial return from buying the state’s bonds, which now pay above-average interest rates because many other investors are shunning them.

But Rodriguez said it’s just as likely, or perhaps more so, that Buffett also is at a stage in his life where the rescue of the nation’s largest and most economically important state could bring him satisfaction far beyond any material payoff.

California, Rodriguez said, “is on a path that leads to a cliff.” Investors and banks still are lending the state money, but that could end, as it did for New York City in the mid-1970s.

“The budget deal postpones the day of reckoning, but I believe there will be one,” Rodriguez said.

Felix Rohatyn, a veteran Wall Street financier, friend of Buffett and the leader of the agency that brought New York back from fiscal insolvency in the late 1970s, said he is “quite certain that Warren believes this situation is serious” in California.

“Warren can bring integrity to the process” of identifying the hard choices the state must make, Rohatyn said. Buffett also would bring a sense of fairness toward all of the parties involved -- including labor unions, taxpayers, companies and the underprivileged, Rohatyn said.

“There isn’t a single thing I knew how to do [in rescuing New York City] that Warren Buffett isn’t able to do better,” he said.