By Jonathan Stempel and Svea Herbst-Bayliss
OMAHA, Nebraska (Reuters) - Warren Buffett on Sunday intensified his feisty defense of a controversial mortgage transaction marketed by Goldman Sachs Group Inc (GS.N: Quote), saying the investment bank's behavior does not warrant public fury.
Buffett also said he is seeing real signs of improvement in the economy, especially in manufacturing, though it will take another year for a sustainable housing recovery to take hold.
The world's third-richest person spoke at a press conference, a day after his company Berkshire Hathaway Inc (BRKa.N: Quote) (BRKb.N: Quote) held its annual meeting for tens of thousands of shareholders.
Berkshire owns $5 billion of Goldman preferred shares with a hefty 10 percent dividend, and Buffett has become Goldman's most powerful defender since it became the target of a U.S. Securities and Exchange Commission's civil fraud lawsuit.
The April 16 complaint alleged that Goldman hid from clients that securities underlying the mortgage transaction, Abacus, were chosen by Paulson & Co, a hedge fund firm betting they would lose value.
Goldman rejected the allegations, and Paulson was not charged. Buffett on Saturday said he loved the $5 billion investment and defended Goldman's chief, Lloyd Blankfein.
"I don't have a problem with the Abacus transaction at all, and I think I understand it better than most," Buffett said.
Sitting beside Berkshire Vice Chairman Charlie Munger, Buffett said he saw nothing in Goldman's behavior to justify the intense criticism it faces.
"It's very strange to say, at the end of the transaction, that if the other guy is smarter than you, that you have been defrauded," Buffett said.
Buffett also said he had no reason to believe Goldman misled ACA, which helped create Abacus, about Paulson's involvement, and that it should not have mattered to ACA.
"Any bond insurer that is making a decision about what to insure and what to charge for it should not care a whit about who is on the other side of the transaction," he said.
Buffett said Berkshire itself is better off because it regularly enlists investment banks, such as Goldman, including when it was much smaller in the late 1960s and needed capital.
LIGHTER MOOD
Like shareholders, including the many who streamed to Buffett's barber to get a trim, Buffett and Munger appeared more relaxed at this year's events relative to last year, when worries about the economy and swine flu prevailed.
During the press conference, Buffett took a bag of peanut brittle from Munger -- saying "I'll get that Charlie" -- and ostentatiously gnawed it open with his teeth.
Just over an hour earlier, Buffett appeared at the nearby, Berkshire-owned Borsheim's Fine Jewelry, where he played table tennis with Ariel Hsing, 14, the top-ranked U.S. female player under age 20. Buffett unveiled, as a joke, a giant blue paddle to give him a better shot of winning. (Didn't help.) Several Berkshire-themed items at Borsheim's sold out.
At the press conference, Buffett's said Berkshire's manufacturing businesses, including the conglomerate Marmon Holdings Inc and toolmaker Iscar Metalworking Cos, are benefiting from "pretty significant improvement.
He said luxury goods units including Borsheim's and the NetJets Inc plane leasing unit are seeing improved business, albeit from a "very, very low level," while results for housing-sensitive businesses such as Acme Brick Co and the insulation maker Johns Manville remain "very poor".
Yet Buffett cautioned policymakers not to artificially stimulate housing sales and perhaps derail a recovery.
"What would bother me is if we were to overstimulate them, and create a permanent overhang," he said. "I want to have a sustainable recovery, and I don't think you're going to have to wait more than a year for that".
At the press conference, Buffett maintained enthusiasm for Federal Reserve Chairman Ben Bernanke, saying "there's no one in the United States that I know of whom I would rather have running the Fed than Ben Bernanke".
"HIGH-IQ BOOBS"
Buffett has a much longer-term horizon for his largest acquisition, the $26.5 billion February takeover of Burlington Northern Santa Fe Corp.
"The key factor in our railroad investment is whether more people are moving goods 10, 20 or 50 years from now," he said. "The odds of that happening are extremely high".
Buffett and Munger had harsh words for some professions, including accountants and investment bankers, whom they said in part caused the 2008 crisis because they were too greedy and could not stand up to management.
"Everywhere you look this problem has been caused by high-IQ asininity" perpetrated by "high-IQ boobs," Munger said. "People who know the edge of their own competency are safe, and those who don't, aren't".
Munger added: "Investment banking will behave more responsibly if we as citizens force it to behave more responsibly".
And while Berkshire wants to make non-U.S. acquisitions, Buffett admitted its size rules out most countries, where the businesses or financial markets are too small. Berkshire's market value is about $190 billion, Reuters data show.
"Business opportunities, we can stretch out to 30 or 40 countries," Buffett said. "Our problem is finding them."
Reporting by Svea Herbst-Bayliss and Jonathan Stempel; Editing by Bernard Orr
Reuters Canada
