Best of the Week
Most Popular
1. Gold vs Cash in a Financial Crisis - Richard_Mills
2.Current Stock Market Rally Similarities To 1999 - Chris_Vermeulen
3.America See You On The Dark Side Of The Moon - Part2 - James_Quinn
4.Stock Market Trend Forecast Outlook for 2020 - Nadeem_Walayat
5.Who Said Stock Market Traders and Investor are Emotional Right Now? - Chris_Vermeulen
6.Gold Upswing and Lessons from Gold Tops - P_Radomski_CFA
7.Economic Tribulation is Coming, and Here is Why - Michael_Pento
8.What to Expect in Our Next Recession/Depression? - Raymond_Matison
9.The Fed Celebrates While Americans Drown in Financial Despair - John_Mauldin
10.Hi-yo Silver Away! - Richard_Mills
Last 7 days
British Pound GBP Trend Forecast 2020 - 16th Feb 20
SAMSUNG AI Mega-trend Tech Stocks Investing 2020 - 16th Feb 20
Ignore the Polls, the Markets Have Already Told You Who Wins in 2020 - 16th Feb 20
UK Coronavirus COVID-19 Pandemic WARNING! Sheffield, Manchester, Birmingham Outbreaks Probable - 16th Feb 20
iShares Nasdaq Biotechnology ETF IBB AI Mega-trend Tech Stocks Investing 2020 - 15th Feb 20
Gold Stocks Still Stalled - 15th Feb 20
Is The Technology Stocks Sector Setting Up For A Crash? - 15th Feb 20
UK Calm Before Corona Virus Storm - Infections Forecast into End March 2020 - 15th Feb 20
The Growing Weaponization of Space - 14th Feb 20
Will the 2020s Be Good or Bad for the Gold Market? - 14th Feb 20
Predictive Modeling Suggests Gold Price Will Break Above $1650 Within 15~30 Days - 14th Feb 20
UK Coronavirus COVID-19 Infections and Deaths Trend Forecast 2020 - 14th Feb 20
Coronavirus, Powell and Gold - 14th Feb 20
How the Corona Virus is Affecting Global Stock Markets - 14th Feb 20
British Pound GBP Trend and Elliott Wave Analysis - 13th Feb 20
Owning and Driving a Land Rover Discovery Sport in 2020 - 2 YEAR Review - 13th Feb 20
Shipping Rates Plunge, Commodities and Stocks May Follow - 13th Feb 20
Powell says Fed will aggressively use QE to fight next recession - 13th Feb 20
PALLADIUM - THIS Is What a Run on the Bank for Precious Metals Looks Like… - 13th Feb 20
Bitcoin: "Is it too late to get in?" Get Answers Now - 13th Feb 20
China Coronavirus Infections Soar by 1/3rd to 60,000, Deaths Jump to 1,367 - 13th Feb 20
Crude Oil Price Action – Like a Coiled Spring Already? - 13th Feb 20
China Under Reporting Coronavirus COVID-19 Infections, Africa and South America Hidden Outbreaks - 12th Feb 20
Will USD X Decline About to Trigger Precious Metals Rally - 12th Feb 20
Copper Market is a Coiled Spring - 12th Feb 20
Dow Theory Stock Market Warning from the Utilities Index - 12th Feb 20
How to Get Virgin Media Engineers to FIX Hub 3.0 Problems and NOT BS Customers - 12th Feb 20
China Under Reporting Coronavirus COVID-19 Infections by 66% Due to Capacity Constraints - 12th Feb 20
Is Coronavirus the Black Swan That Takes Gold To-Da-Moon? - 12th Feb 20
Stock Market 2020 – A Close Look At What To Expect - 12th Feb 20
IBM AI Mega-trend Tech Stocks Investing 2020 - 11th Feb 20
The US Dollar’s Subtle Message for Gold - 11th Feb 20
What All To Do Before Opening A Bank Account For Your Business - 11th Feb 20
How and When to Enter Day Trades & Swing Trade For Maximum Gains - 11th Feb 20
The Great Stock Market Dichotomy - 11th Feb 20
Stock Market Sector Rotation Should Peak Within 60+ Days – Part II - 11th Feb 20
CoronaVirus Pandemic Stocks Bear Market Risk 2020? - Video - 11th Feb 20
Facebook (FB) AI Mega-trend Tech Stocks Investing 2020 - 10th Feb 20
The US Constitution IS the Crisis - 10th Feb 20
Stock Market Correction Continues - 10th Feb 20
Useful Tips for Becoming a Better Man - 10th Feb 20
Will CoronaVirus Pandemic Trigger a Stocks Bear Market 2020? Part1 - 9th Feb 20
Could Silver Break-out like it did in 2011? - 9th Feb 20
The End of the Global Economy - 9th Feb 20
Fed to Stimulate in Any Crisis; Don’t Let Short-Term Events Bother You - 9th Feb 20

Market Oracle FREE Newsletter

Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

Buffettgate: Berkshire Hathaway's Problem at the Top

Companies / Corporate News Apr 03, 2011 - 08:54 AM GMT

By: Janet_Tavakoli

Companies

Best Financial Markets Analysis ArticleSuppose I took a call from a banker-friend at Citigroup on December 13, 2010, and he informed me that he had just observed other Citi bankers meeting with David Sokol, an executive of Berkshire Hathaway and possible successor to Warren Buffett, the CEO. He discovered Sokol expressed interest in a company called Lubrizol and requested a meeting with the company's president.


Buffett himself made it public that Sokol investigated a Chinese battery and electric car maker, BYD, in which Berkshire made a substantial investment. The shares subsequently soared in value.

I would have no way of knowing for certain that Sokol would bring the opportunity to Warren Buffett. I would have no way of knowing for sure whether Berkshire Hathaway would invest in Lubrizol. But if I bought shares in Lubrizol the next day, I would expect that the Citi banker would be investigated by the SEC for passing along insider information, and I would be investigated for trading based on insider information.*

Yet David Sokol, who bought shares in Lubrizol the day after his meeting with Citi's bankers, told CNBC he did nothing inappropriate. His actions were absolutely inappropriate -- front-running is an offense for which a banker or investment banker would be fired.

"When bankers from Citigroup Inc. met David Sokol late last year to talk about potential transactions, they thought they were dealing with him as a senior executive of Berkshire Hathaway Inc., according to people familiar with the matter."

"It... came as a shock to the Citigroup bankers when they learned Mr. Sokol bought roughly $240,000 of shares of Lubrizol corp. a day after their meeting, sold them, and then purchased $10 million shares about two months before Berkshire's $9 billion deal unveiled March 14... [T]he shares are valued at nearly $13 million now." [It's unclear if Sokol still owns them.]

Excerpt from: "Mixed Signals Marked Sokol Meeting: Bankers Thought Pitch was for Senior Berkshire Executive, Not High-Powered Individual Investor," by Gina Chon and Serena Ng, Wall Street Journal, April 2, 2011.

Berkshire Hathaway has a bigger problem than Sokol's actions. Its reputation has revolved around the lip-service paid by Warren Buffett to a high standard of corporate governance. His actions and attitude to this matter raise serious questions for the future of Berkshire Hathaway. The moral tone set at the top is now being publicly questioned as well as his seeming support of 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."

Source: Berkshire Hathaway via Business Wire: ","Warren E. Buffett, CEO of Berkshire Hathaway, Announces the Resignation of David L. Sokol March 30, 2011

Why didn't Buffett ask for Sokol's resignation? Sokol's behavior was unethical, and it may even go beyond that. There may be further inquiry to determine the legality of Sokol's purchases.

During an initial meeting with Sokol about Lubrizol, Buffett wrote that Sokol mentioned 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 says he plays bridge around 12 hours per week. The first thing one does is engage in an auction in an attempt to determine the value and number of cards in each suit held by one's partner. Yet Buffett states he did not inquire further about a senior Berkshire Hathaway officer's investment in an acquisition candidate.

In isolation, investors might be willing to overlook this as misplaced loyalty on Warren Buffett's part. But a series of issues have surfaced about Berkshire Hathaway's practices. Most recently, the Securities and Exchange Commission wrestled with Berkshire Hathaway's CFO to make the company take a fourth quarter write-down:

"Despite [the Chief Financial Officer's] objection, the company recorded $938 million in impairment charges in the fourth quarter to reflect declines in shares of Swiss Reinsurance Co., U.S. Bankcorp and pharmaceutical firm Sanofi Aventis S.A."

"Berkshire Wrote Down Stocks After SEC Query," by Erik Holm, Wall Street Journal, March 29, 2011.

The SEC and the financial press may not have noticed that Berkshire Hathaway had the last word:=

"...such losses that are included in earnings are offset by a corresponding credit to other comprehensive income."**

Berkshire Hathaway 10K for year-end 2010 (required SEC filing), Footnote p. 74.

Berkshire Hathaway is a conglomerate, and the nature of accounting for conglomerates is opaque and messy. Warren Buffett's reputation has been crucial to Berkshire Hathaway's perceived value. Investors may now challenge their previous perceptions.

* Even if Berkshire Hathaway decided not to invest, and I sold the shares I bought before the general public became aware of the lack of interest, I could avoid a potential loss if the shares went down in value on the news. Martha Stewart allegedly sold shares ahead of bad news after a tip from her stockbroker and avoided a loss of around $50,000. She went to prison for allegedly not coming clean when questioned by authorities.

** Berkshire claimed its favorite holding period is forever, yet it took billions in losses when it sold it's position in Conoco Phillips, so it doesn't necessarily hold forever. Yet it tried to use this argument to avoid taking unrealized losses on the three stocks. On part of its Wells Fargo and Kraft holdings, it won its argument with the SEC and avoided writedowns on unrealized losses (It also had unrealized gains) on parts of those positions. David Merkel of Aleph Blog notes that comprehensive income factors in changes in unrealized capital gains or losses. If Berkshire Hathaway takes a writedown, it reduces net income, but this does not change the result for comprehensive income, because everything is marked to fair value already. Thus one reconciling net income to comprehensive income pre and post the writedown would notice that the adjustment is different by the amount of the writedown, hence the "corresponding credit to comprehensive income." That's the way the math works; nothing wrong with it.

By Janet Tavakoli

web site: www.tavakolistructuredfinance.com

Janet Tavakoli is the president of Tavakoli Structured Finance, a Chicago-based firm that provides consulting to financial institutions and institutional investors. Ms. Tavakoli has more than 20 years of experience in senior investment banking positions, trading, structuring and marketing structured financial products. She is a former adjunct associate professor of derivatives at the University of Chicago's Graduate School of Business. Author of: Credit Derivatives & Synthetic Structures (1998, 2001), Collateralized Debt Obligations & Structured Finance (2003), Structured Finance & Collateralized Debt Obligations (John Wiley & Sons, September 2008). Tavakoli’s book on the causes of the global financial meltdown and how to fix it is: Dear Mr. Buffett: What an Investor Learns 1,269 Miles from Wall Street (Wiley, 2009).

© 2011 Copyright Janet Tavakoli- All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules