Buffet defends Goldman Sachs role in short-sale of subprime mortgage securities against lawsuit by SEC

OMAHA, Nebraska (Reuters) – Warren Buffett on Sunday intensified his feisty defense of a controversial mortgage transaction marketed by Goldman Sachs Group Inc (GS.N), 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) (BRKb.N) 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.