Most Popular
1. Banking Crisis is Stocks Bull Market Buying Opportunity - Nadeem_Walayat
2.The Crypto Signal for the Precious Metals Market - P_Radomski_CFA
3. One Possible Outcome to a New World Order - Raymond_Matison
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
5. Apple AAPL Stock Trend and Earnings Analysis - Nadeem_Walayat
6.AI, Stocks, and Gold Stocks – Connected After All - P_Radomski_CFA
7.Stock Market CHEAT SHEET - - Nadeem_Walayat
8.US Debt Ceiling Crisis Smoke and Mirrors Circus - Nadeem_Walayat
9.Silver Price May Explode - Avi_Gilburt
10.More US Banks Could Collapse -- A Lot More- EWI
Last 7 days
Stock Market Volatility (VIX) - 25th Mar 24
Stock Market Investor Sentiment - 25th Mar 24
The Federal Reserve Didn't Do Anything But It Had Plenty to Say - 25th Mar 24
Stock Market Breadth - 24th Mar 24
Stock Market Margin Debt Indicator - 24th Mar 24
It’s Easy to Scream Stocks Bubble! - 24th Mar 24
Stocks: What to Make of All This Insider Selling- 24th Mar 24
Money Supply Continues To Fall, Economy Worsens – Investors Don’t Care - 24th Mar 24
Get an Edge in the Crypto Market with Order Flow - 24th Mar 24
US Presidential Election Cycle and Recessions - 18th Mar 24
US Recession Already Happened in 2022! - 18th Mar 24
AI can now remember everything you say - 18th Mar 24
Bitcoin Crypto Mania 2024 - MicroStrategy MSTR Blow off Top! - 14th Mar 24
Bitcoin Gravy Train Trend Forecast 2024 - 11th Mar 24
Gold and the Long-Term Inflation Cycle - 11th Mar 24
Fed’s Next Intertest Rate Move might not align with popular consensus - 11th Mar 24
Two Reasons The Fed Manipulates Interest Rates - 11th Mar 24
US Dollar Trend 2024 - 9th Mar 2024
The Bond Trade and Interest Rates - 9th Mar 2024
Investors Don’t Believe the Gold Rally, Still Prefer General Stocks - 9th Mar 2024
Paper Gold Vs. Real Gold: It's Important to Know the Difference - 9th Mar 2024
Stocks: What This "Record Extreme" Indicator May Be Signaling - 9th Mar 2024
My 3 Favorite Trade Setups - Elliott Wave Course - 9th Mar 2024
Bitcoin Crypto Bubble Mania! - 4th Mar 2024
US Interest Rates - When WIll the Fed Pivot - 1st Mar 2024
S&P Stock Market Real Earnings Yield - 29th Feb 2024
US Unemployment is a Fake Statistic - 29th Feb 2024
U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - 29th Feb 2024
What a Breakdown in Silver Mining Stocks! What an Opportunity! - 29th Feb 2024
Why AI will Soon become SA - Synthetic Intelligence - The Machine Learning Megatrend - 29th Feb 2024
Keep Calm and Carry on Buying Quantum AI Tech Stocks - 19th Feb 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

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.


© 2005-2022 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