Best of the Week
Most Popular
1. The Trump Stock Market Trap May Be Triggered - Barry_M_Ferguson
2.Why are Central Banks Buying Gold and Dumping Dollars? - Richard_Mills
3.US China War - Thucydides Trap and gold - Richard_Mills
4.Gold Price Trend Forcast to End September 2019 - Nadeem_Walayat
5.Money Saving Kids Gardening Growing Giant Sunflowers Summer Fun - Anika_Walayat
6.US Dollar Breakdown Begins, Gold Price to Bolt Higher - Jim_Willie_CB
7.INTEL (INTC) Stock Investing to Profit From AI Machine Learning Boom - Nadeem_Walayat
8.Will Google AI Kill Us? Man vs Machine Intelligence - N_Walayat
9.US Prepares for Currency War with China - Richard_Mills
10.Gold Price Epochal Breakout Will Not Be Negated by a Correction - Clive Maund
Last 7 days
Is This Time Different? Predictive Power of the Yield Curve and Gold - 19th Aug 19
New Dawn for the iGaming Industry in the United States - 19th Aug 19
Gold Set to Correct but Internals Remain Bullish - 19th Aug 19
Stock Market Correction Continues - 19th Aug 19
The Number One Gold Stock Of 2019 - 19th Aug 19
The State of the Financial Union - 18th Aug 19
The Nuts and Bolts: Yield Inversion Says Recession is Coming But it May take 24 months - 18th Aug 19
Markets August 19 Turn Date is Tomorrow – Are You Ready? - 18th Aug 19
JOHNSON AND JOHNSON - JNJ for Life Extension Pharma Stocks Investing - 17th Aug 19
Negative Bond Market Yields Tell A Story Of Shifting Economic Stock Market Leadership - 17th Aug 19
Is Stock Market About to Crash? Three Charts That Suggest It’s Possible - 17th Aug 19
It’s Time For Colombia To Dump The Peso - 17th Aug 19
Gold & Silver Stand Strong amid Stock Volatility & Falling Rates - 16th Aug 19
Gold Mining Stocks Q2’19 Fundamentals - 16th Aug 19
Silver, Transports, and Dow Jones Index At Targets – What Direct Next? - 16th Aug 19
When the US Bond Market Bubble Blows Up! - 16th Aug 19
Dark days are closing in on Apple - 16th Aug 19
Precious Metals Gone Wild! Reaching Initial Targets – Now What’s Next - 16th Aug 19
US Government Is Beholden To The Fed; And Vice-Versa - 15th Aug 19
GBP vs USD Forex Pair Swings Into Focus Amid Brexit Chaos - 15th Aug 19
US Negative Interest Rates Go Mainstream - With Some Glaring Omissions - 15th Aug 19
GOLD BULL RUN TREND ANALYSIS - 15th Aug 19
US Stock Market Could Fall 12% to 25% - 15th Aug 19
A Level Exam Results School Live Reaction Shock 2019! - 15th Aug 19
It's Time to Get Serious about Silver - 15th Aug 19
The EagleFX Beginners Guide – Financial Markets - 15th Aug 19
Central Banks Move To Keep The Global Markets Party Rolling – Part III - 14th Aug 19
You Have to Buy Bonds Even When Interest Rates Are Low - 14th Aug 19
Gold Near Term Risk is Increasing - 14th Aug 19
Installment Loans vs Personal Bank Loans - 14th Aug 19
ROCHE - RHHBY Life Extension Pharma Stocks Investing - 14th Aug 19
Gold Bulls Must Love the Hong Kong Protests - 14th Aug 19
Gold, Markets and Invasive Species - 14th Aug 19
Cannabis Stocks With Millennial Appeal - 14th Aug 19
August 19 (Crazy Ivan) Stock Market Event Only A Few Days Away - 13th Aug 19
This is the real move in gold and silver… it’s going to be multiyear - 13th Aug 19
Global Central Banks Kick Can Down The Road Again - 13th Aug 19
US Dollar Finally the Achillles Heel - 13th Aug 19
Financial Success Formula Failure - 13th Aug 19
How to Test Your Car Alternator with a Multimeter - 13th Aug 19
London Under Attack! Victoria Embankment Gardens Statues and Monuments - 13th Aug 19
More Stock Market Weakness Ahead - 12th Aug 19
Global Central Banks Move To Keep The Party Rolling Onward - 12th Aug 19
All Eyes On Copper - 12th Aug 19
History of Yield Curve Inversions and Gold - 12th Aug 19
Precious Metals Soar on Falling Yields, Currency Turmoil - 12th Aug 19
Why GraphQL? The Benefits Explained - 12th Aug 19
Is the Stock Market Making a V-shaped Recovery? - 11th Aug 19
Precious Metals and Stocks VIX Are About To Pull A “Crazy Ivan” - 11th Aug 19
Social Media Civil War - 11th Aug 19
Gold and the Bond Yield Continuum - 11th Aug 19
Traders: Which Markets Should You Trade? - 11th Aug 19

Market Oracle FREE Newsletter

The No 1 Gold Stock for 2019

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