Best of the Week
Most Popular
1. Stock Markets and the History Chart of the End of the World (With Presidential Cycles) - 28th Aug 20
2.Google, Apple, Amazon, Facebook... AI Tech Stocks Buying Levels and Valuations Q3 2020 - 31st Aug 20
3.The Inflation Mega-trend is Going Hyper! - 11th Sep 20
4.Is this the End of Capitalism? - 13th Sep 20
5.What's Driving Gold, Silver and What's Next? - 3rd Sep 20
6.QE4EVER! - 9th Sep 20
7.Gold Price Trend Forecast Analysis - Part1 - 7th Sep 20
8.The Fed May “Cause” The Next Stock Market Crash - 3rd Sep 20
9.Bitcoin Price Crash - You Will be Suprised What Happens Next - 7th Sep 20
10.NVIDIA Stock Price Soars on RTX 3000 Cornering the GPU Market for next 2 years! - 3rd Sep 20
Last 7 days
The End of the World History Stock Market Chart : Big Pattern = Big Move - 26th Jan 21
Stock Market Recent Sector Triggers Suggest Stocks May Enter Rally Phase - 26th Jan 21
3 Top-Performing Tech Stocks for 2021 - 26th Jan 21
5 Tips to Manage Your Debt - 26th Jan 21
Stock Market Intermediate Trend Intact - 25th Jan 21
Precious Metals Could Decline Before their Next Attempt to Rally - 25th Jan 21
Great Ways of Choosing Good CMMS Software for a Business - 25th Jan 21
The Dark Forces behind American Insurrectionists - 25th Jan 21
Economic Stimulus Doesn’t Always Stimulate – Pushing On A String - 25th Jan 21
Can Karcher K7 Pressure Washer Clean a Weed Infested Driveway? Extreme Power Test - 25th Jan 21
Lockdown Sea Shanty Craze - "Drunken Sailor" on the Pirate Falls Crazy Boat Ride - 25th Jan 21
Intel Empire Fights Back with Rocket and Alder Lake! - 24th Jan 21
4 Reasons for Coronavirus 2021 Hope - 24th Jan 21
Apple M1 Chip Another Nail in Intel's Coffin - Top AI Tech Stocks 2021 - 24th Jan 21
Stock Market: Why You Should Prepare for a Jump in Volatility - 24th Jan 21
What’s next for Bitcoin Price – $56k or $16k? - 24th Jan 21
How Does Credit Repair Work? - 24th Jan 21
Silver Price 2021 Roadmap - 22nd Jan 21
Why Biden Wants to Win the Fight for $15 Federal Minimum Wage - 22nd Jan 21
Here’s Why Gold Recently Moved Up - 22nd Jan 21
US Dollar Decline creates New Sector Opportunities to Trade - 22nd Jan 21
Sandisk Extreme Micro SDXC Memory Card Read Write Speed Test Actual vs Sales Pitch - 22nd Jan 21
NHS Recommends Oximeter Oxygen Sensor Monitors for Everyone 10 Months Late! - 22nd Jan 21
DoorDash Has All the Makings of the “Next Amazon” - 22nd Jan 21
How to Survive a Silver-Gold Sucker Punch - 22nd Jan 21
2021: The Year of the Gripping Hand - 22nd Jan 21
Technology Minerals appoints ex-BP Petrochemicals CEO as Advisor - 22nd Jan 21
Gold Price Drops Amid Stimulus and Poor Data - 21st Jan 21
Protecting the Vulnerable 2021 - 21st Jan 21
How To Play The Next Stage Of The Marijuana Boom - 21st Jan 21
UK Schools Lockdown 2021 Covid Education Crisis - Home Learning Routine - 21st Jan 21
General Artificial Intelligence Was BORN in 2020! GPT-3, Deep Mind - 20th Jan 21
Bitcoin Price Crash: FCA Warning Was a Slap in the Face. But Not the Cause - 20th Jan 21
US Coronavirus Pandemic 2021 - We’re Going to Need More Than a Vaccine - 20th Jan 21
The Biggest Biotech Story Of 2021? - 20th Jan 21
Biden Bailout, Democrat Takeover to Drive Americans into Gold - 20th Jan 21
Pandemic 2020 Is Gone! Will 2021 Be Better for Gold? - 20th Jan 21
Trump and Coronavirus Pandemic Final US Catastrophe 2021 - 19th Jan 21
How To Find Market Momentum Trades for Explosive Gains - 19th Jan 21
Cryptos: 5 Simple Strategies to Catch the Next Opportunity - 19th Jan 21
Who Will NEXT Be Removed from the Internet? - 19th Jan 21
This Small Company Could Revolutionize The Trillion-Dollar Drug Sector - 19th Jan 21
Gold/SPX Ratio and the Gold Stock Case - 18th Jan 21
More Stock Market Speculative Signs, Energy Rebound, Commodities Breakout - 18th Jan 21
Higher Yields Hit Gold Price, But for How Long? - 18th Jan 21
Some Basic Facts About Forex Trading - 18th Jan 21
Custom Build PC 2021 - Ryzen 5950x, RTX 3080, 64gb DDR4 Specs - Scan Computers 3SX Order Day 11 - 17th Jan 21
UK Car MOT Covid-19 Lockdown Extension 2021 - 17th Jan 21
Why Nvidia Is My “Slam Dunk” Stock Investment for the Decade - 16th Jan 21
Three Financial Markets Price Drivers in a Globalized World - 16th Jan 21
Sheffield Turns Coronavirus Tide, Covid-19 Infections Half Rest of England, implies Fast Pandemic Recovery - 16th Jan 21

Market Oracle FREE Newsletter

FIRST ACCESS to Nadeem Walayat’s Analysis 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