The New Robber Barons Page 24
At 6:25 minutes: Buffett claims taxpayers have not bailed out anybody, because tax rates have not gone up (yet), and “tax receipts are way down this year.” Chinese and Japanese buying U.S. government bonds have bailed out financial institutions. Not true unless we default or destructively print inflationary dollars. Tax receipts are down because of unemployment. U.S. taxpayer credit bailed out financial institutions, and we will have to pay back our debts.
Imagine this scenario: Warren grabs my credit card and charges twelve suits. When I object that I don’t want to bail out his wardrobe, he chuckles and says, don’t worry, you haven’t paid anything yet. The bank that issued the credit card bailed out my wardrobe, and it hasn’t even had time to charge you interest on my purchase.
When I protest that I’ll have to eventually pay off both the balance and accrued interest, he tries flattery. You are so productive that by the time you have to pay this off, you’ll have so much more wealth that you won’t even notice these charges. You’ve always been good for it before, and you’ll figure out how to pay!
Don’t fall for it.
Government debt, like your credit card, is a type of money. It must be paid off with our future taxes generated from our production (unless you wish to destroy the economy by printing excess money). The fruits of your labors should be used in the way you see fit.
We must stop subsidizing speculators with cheap funding and tax breaks. We have to hold people accountable for malfeasance, break up large financial institutions, and allow them to fail instead of bailing them out. (Click here for my suggestions.) As for high pay and tax breaks for speculators, even Warren Buffett says: “Hell no!” But he won’t help us make changes. U.S. taxpayers will have to figure it out, or we will pay.
Disclosure: Tavakoli is a Berkshire Hathaway shareholder.
1 Buffett bought $5 billion in Goldman Sachs’s preferred stock paying a 10% annual dividend with warrants to buy $5 billion in common stock at a price of $115 any time before October 1, 2013.
Recapped in BBC’s mp3 podcast of Oct 26, 2009 @7:15 minutes in (Click here to listen):
Evan Davis: When you invested in Goldman Sachs (GS), what gave you the confidence to do that?
Warren Buffett: It was a very scary time…. I did not feel that we would be dumb enough really in a really basically prosperous country to let the misfunction (sic) of the financial engine bring down the country. But there was a time there where you wondered about that.
Evan Davis: I want to be clear here. When you made that investment, was it essentially a bet on GS performance or the performance of the authorities?
Warren Buffett: Both. Both. I mean you had to count…on Washington in effect not becoming so dysfunctional or blind to the problem or whatever it might be that it would let the whole country topple. But you also had to count on the fact that GS itself was basically a sound institution. [JT Note: Thanks to government bailouts, cheap public funding, debt guarantees, new bank holding company status (guarding against a run on Goldman) before switching its status to a protected financial holding company on August 14, 2009, and more.]
Warren Buffett and Charlie Munger: Winning the Class War
September 21, 2010
Fed Economists Gara Afonso and Anna Kovner with MIT finance professor Antoinette Schoar offer new evidence suggesting that although credit terms were tougher for large underperforming banks in the two days after Lehman's bankruptcy, the much-hyped market "freeze" was a myth.
Thomas Paine, one of the Founding Fathers of the United States, urged Colonists not to trust the words of "interested men" tied by money and status to the British government and British royalty: "It is the good fortune of many to live distant from the scene of sorrow; the evil is not sufficiently brought to THEIR doors to make THEM feel the precariousness with which all American property is possessed."
Warren Buffett Jumped the Squid
Today's interested men defend the bailouts and subsequent absence of felony indictments. They include Warren Buffett, Chairman and CEO of Berkshire Hathaway, and Berkshire's Vice-Chairman, Charlie Munger. I wrote a book, Dear Mr. Buffett: What an Investor Learns 1,269 Miles from Wall Street, about the financial crisis contrasting their formerly avowed principles of prudent finance with Wall Street's malfeasance. But they are not regulators, altruists, or elected officials. As officers and major stakeholders of Berkshire Hathaway, their goal is to maximize shareholder value. If the choice is between Berkshire's gain and public interest, public interest loses.
Buffett heaped praise on Berkshire's investments in Goldman Sachs and Wells Fargo (among others), while overlooking problematic activities within these bailed-out financial empires. Warren deserves great credit for donating most of his wealth to charity, but one must deduct serious points because some of "his" wealth was appropriated from unwilling fellow citizens.
Charlie Munger's War
Andrew Frye of Bloomberg News reported Charlie Munger's recent remarks to law students at the University of Michigan. Munger suggests we shouldn't be "bitching about a little bailout;" we should have wondered why the bailout wasn't even bigger. (Click here for video.)
Taxpayers have already been saddled with crushing debt that transferred benefits to those most connected with Washington. Bloomberg News estimates the financial rescue already approaches $12.8 trillion in combined lending, spending, guarantees, and commitments. Taxpayer-subsidized banks that played a key role in getting us into this mess continue to pay their officers handsomely for failure. There were alternatives to Washington's largesse: controlled bankruptcy, conservatorship, and restructuring.
Washington's overheated money printing to support the bailouts has the nation in the grips of stranguflation. Lost jobs and reduced salaries combined with rising food and energy prices feel like hyperinflation to those most in need. Meanwhile, deflation has hit middle class investments and pension funds, and uncertainty about the future leaves them vulnerable. Third World America reveals that some former middle class Americans are using credit cards charging high interest rates to buy essential items including food.
Munger conjured the specter of Germany's Weimar Republic in an attempt to justify the bailouts: "We ended up with Adolf Hitler." ZeroHedge, home to finance's mainly masked throw downs, spoke for many (including me), when it retorted that Germany's hyperinflation was born from "wanton money printing" and set the stage for Hitler.
When it comes to bailouts that will hit middle class taxpayers most, Munger has a double standard:
"The 86 year old told the 25 million of Americans who comprise the 16.7% of the underemployed population in the country, to "suck it in and cope." Not only that, but apparently, all those who have been without a job for 99 weeks and more and no longer have recourse to insurance benefits, should "thank God for bank bailouts." Why of course he would say that: after all $26 billion worth of direct BRK investments were the recipient of over $95 billion in bailouts." ZeroHedge, September 20, 2010.
We bailed out banks that were the key architects of much of our national misery and currency destruction. Those living in poverty will have a much more difficult time bettering themselves, as much of the middle class sinks.
Updated Disclosure on September 21, 2010: I currently have no position (long or short) in Berkshire Hathaway.
Buffettgate: An Unenforced Policy Isn’t a Policy
April 6, 2011
Several years ago I had dinner with one of my former managers. His firm had just settled a discrimination lawsuit for $1 million due to the actions of one of his salesmen. Top management blamed my colleague, because he had lost control of the situation.
I remembered the salesman, a loud bully. A group of us would arrive early and read the paper. My first morning, he snatched the Wall Street Journal from my hands and swaggered to his desk. I walked over and pointedly recovered it. This continued until the third morning, when I took back my paper and accidentally spilled his coffee. I apologized. I can be a little clumsy when retrieving my property, and
I was likely to become even more unpredictable. He stopped grabbing my paper after that.
The salesman had tormented a new sales assistant, and this time he went beyond childishness. His least offensive remark to the young man was to regularly call him "Jew boy." The assistant lawyered up, and the result was the lawsuit against the firm.
My colleague felt he was being unjustly blamed. "We have a policy against discrimination," he protested. Yet he had heard the slurs, witnessed the salesman berating the assistant, and had done nothing.
"So you say," I responded. "A piece of paper with words on it doesn't constitute a policy. A policy that isn't enforced isn't a policy; it's a cover story." The sales assistant's lawyers successfully made the same argument.
Berkshire Hathaway's Cover Story
Today's Wall Street Journal noted that Warren Buffett, the CEO of Berkshire Hathaway, had a policy against insider-trading that restricted officers, including David Sokol, from investing in "securities of other public companies in which Berkshire has invested or may in the future invest." The reporters thought the memo might give comfort to those concerned about potential ethical breaches by Berkshire Hathaway's autonomous management.
David Sokol bought shares in Lubrizol the day after meeting with Citigroup bankers to discuss potential acquisition candidates for Berkshire Hathaway. At least that was what the Citi bankers understood to be the purpose of the meeting. Sokol's actions were inappropriate. Front-running is an offense for which a banker or investment banker would be fired. Citi's bankers were shocked when they learned of Sokol's purchases. Moreover, it appears his actions were "expressly prohibited" by Berkshire Hathaway's "policy."
Yet, Buffett seems to support and excuse Sokol's actions: "Neither Dave nor I feel his Lubrizol purchases were in any way unlawful. He has told me that they were not a factor in his decision to resign." Why didn't Buffett make it a factor and ask Sokol to resign?
During an initial meeting with Sokol about Lubrizol, Sokol told Buffett he owned shares in the company, but Buffett didn't ask him for further information including details of the timing, price, and number of shares. Warren Buffett devotes 12 hours a week to playing bridge. After the cards are dealt, players engage in an auction in an attempt to determine the value and number of the cards in each suit held by their partners. Yet Buffett states he did not inquire further about a senior Berkshire Hathaway officer's investment in an acquisition candidate.
Charlie Munger, a member of Berkshire Hathaway's board of directors, called Sokol's purchases, "a glitch." Sokol tried to excuse his own actions by telling CNBC that Munger had bought a 3% stake in Chinese electric car and battery maker BYD, prior to Berkshire's acquiring a large stake in that company. The facts of Munger's purchases (through a fund) were different, and Munger hedged: "I don't want to criticize his comparisons." Perhaps because doing so would highlight that Sokol's behavior was unethical.
Warren Buffett may be more diligent when he plays cards than in enforcing the policies he wrote for Berkshire Hathaway. Principles only matter when they are inconvenient. A policy that isn't enforced isn't a policy. Neither Warren Buffett nor Charlie Munger will publicly consider that there is anything even potentially immoral or unethical about Sokol's behavior. The SEC may find it goes even beyond that, when it completes its inquiry.
Warren Buffett and the Boys of Wall Street
May 9, 2011
One of my long-time New York friends said: "If you have three people working in a McDonald's there will be politics and grandstanding. Wall Street isn't much different." There's more fame, and the fortune is much greater, but he's on to something.
One of the reasons Warren Buffett has cultivated an image of trustworthiness is because his public persona seemed to be above it. Some contrast from my personal experiences may illustrate the point.
A Question of Character
A top hedge fund manager's emails were made public as the result of discovery in a lawsuit. He derided the CEO of an insurance company using profane imagery and referred to the Canadian CEO, who was born in India, as a "schwarze," a pejorative term for people of African heritage. In a Reuters article, I was quoted as saying the language speaks to character. The hedge fund manager emailed me to insult mine for speaking up (not to express regret for his choice of words revealed by Reuters). Perhaps he feels the best defense is a lame offense.
When performing due diligence, investors consider capacity, capital, and character. The hedge fund manager may underestimate how offensive his language appears to many people, including me. He may also disregard the multi-national and multi-racial make-up of the families of investors and colleagues.
People are sometimes unfairly judged by their age, race, birthplace, gender, height, deformities, or handicaps. Those are factors that are completely beyond their control. Yet, I got the impression the hedge fund manager felt it was unfair for anyone to judge him for words that were completely within his control.
"What Motivates You?"
Late last year, another "top" hedge fund manager (with a mixed track record), I'll call him the Yeti, said he'd like to talk to me about an idea he had that I should start a fund of funds. I found this a bit odd. I'd explained to him that I've publicly stated for years that I believe fund of funds managers add zero or negative value. Those that invested clients' funds with Madoff are a recent example. If I were going that route, I'd start a fund. Nonetheless, he thought it worth discussing, so I met with him in his New York offices.
I was feeling particularly good that morning, and it showed. My mood seemed to annoy him. He asked a smarmy and chilling question: "What motivates you, Janet, is it sex?'' I should add that he's married and cultivates a press image as a family man. He's also more than ten years my junior. He explained that I could hire only female employees, and then he'd introduce me to some people; I'd make a large fortune. He continued with his supposed motivation: "money makes sex a lot easier to get."
"It's dangerous to use one to try to get the other," I responded. (Depending on the circumstances, it can also be illegal.)
What was the purpose of that meeting? Apparently, the Yeti was hoping to be educated as to why money cannot buy a better personality.
Not long after that, I publicly and separately disagreed with the Yeti on a business issue. He complained via email that our relationship was over. But there was no "relationship," and nothing wholesome would develop from his "ideas." Meanwhile the financial press profiles the Yeti as a role model, which is an abominable snow job.
Buffett's Gentle Treatment by the Financial Press
It's easy to like Warren Buffett; he's a relief in comparison. No financier has as long a track record or has garnered so much good press for so long as Warren Buffett, the CEO and largest shareholder of Berkshire Hathaway. His language and business demeanor has been exemplary, and his public statements against malfeasance and hubris have been a welcome oasis in a business riddled with multi-decade frauds and scandals. He's been the rock star of the financial world.
It's as if there was a pact among the financial press to overlook foibles as long as no scandal could be directly tied to Warren Buffett's actions. Suddenly that's changed.
Bloomberg's Jonathan Weil reminded the financial community that the press has given Warren Buffett very gentle treatment in past scandals. Buffett stayed mum during the financial crisis as Moody's (Berkshire owned around 19% of the stock at the end of 2007) handed out "AAA" ratings on junk bonds. He headed Coca-Cola's audit committee, and the SEC issued a cease and desist order against the company for misleading earnings statements in the 1990's. Warren Buffett knew about contracts between Berkshire's GenRe unit and American International Group Inc. for which GenRe paid a $92 million fine and four executives were sentenced to prison. The SEC claimed Berkshire and its audit firm, Deloitte, violated the SEC's auditor independence rules when one of Deloitte's advising partners traded in and out of Berkshire's stock; Berkshire concluded Deloitte was independent anyway, and the SEC didn't object.
It's noteworthy that none of the financial journalists with the most access to Buffett raised the issue that Buffett himself appears to have violated Berkshire's disclosure policies as stated in a recent Berkshire Hathaway audit report on David Sokol's violation of Berkshire's insider trading policies. The "duty of candor" the non-independent audit committee applied to Sokol, a former executive, should also apply to Warren Buffett.
If It Isn't "Unlawful," Why Did Buffett Give the SEC "Very Damning Evidence?"
In a March 30 press release, Buffett announced David Sokol's resignation and praised his track record. At Berkshire Hathaway's April 29 annual meeting, he told of how Sokol turned down $12.5 million in incentive pay several years ago. Buffett didn't mention that Sokol was Chairman of MidAmerican when plaintiffs in a lawsuit questioned Sokol's calculations. A judge ruled there was a "breach of obligation" and awarded $32 million plus stock in a project company in damages.