Financial Digression
One of the fun things about being a Berkshire Hathaway shareholder (NYSE:BRK.A) is receiving the annual report, which I just received last week. Unlike other annual reports that are rich in smarm, platitudes and slick layout, and short on real information, the BRK annual report is written in large part by Warren Buffett himself, in first person. He recounts, with humor and apparent candor, the operating results and significant occurrences of Berkshire’s far-flung empire, and often it’s larded with pithy commentary like the following.
Investors should understand that in all types of financial institutions, rapid growth sometimes masks major underlying problems (and occasionally fraud). The real test of the earning power of a derivatives operation is what it achieves after operating for an extended period in a no-growth mode. You only learn who has been swimming naked when the tide goes out.
While this enjoyment doesn’t completely ameliorate the $6,000 drop in share price over the last few weeks, it’s still refreshing. The media has Warren on the griddle a bit lately. He’s being called to testify in Eliot Spitzer’s investigation of insurance giant AIG. A few years ago, a Berkshire subsidiary and AIG did a transaction that AIG then proceeded to record on its books in a misleading and perhaps fraudulent manner. Buffett is being called as a witness, not a target of the investigation, but there are questions about whether the Berkshire unit knew beforehand of AIG’s fraudulent intent, and tailored the transaction to accommodate it. And, there is a question about how much Buffett knew about it at the time.
Part of the interest this case has generated occurs because, in his speaking and writing, Buffett has been an unwelcome scold regarding shoddy and deceptive accounting practices, advocating, for instance, that stock options be expensed by companies that grant them as compensation, long before the SEC reluctantly agreed last year. So, there’s a little shadenfreude in seeing him be made to squirm a little.
Berkshire is a former textile company that Buffett has turned into a holding company, and it owns myriad businesses in diverse markets: GEICO Insurance, Shaw carpets, Dairy Queen, See’s Candies, just to name a few. Being a shareholder is tantamount to investing in a mutual fund managed by Warren Buffett. So, my sentiment as well as my economic self-interest wants to believe that Buffett was oblivious to the minutae of the AIG business. Buffett’s MO is to purchase a company that has strong fundamentals and competent managers and then let them run it. His “Owner’s Manual” for Berkshire shareholders says:
Charlie (Munger) and I are the managing partners of Berkshire. But we subcontract all of the heavy lifting in this business to the managers of our subsidiaries. In fact, we delegate almost to the point of abdication…Charlie and I mainly attend to capital allocation and the care and feeding of our key managers. Most of these managers are happiest when they are left alone to run their businesses, and that is customarily just how we leave them.
However, since, in my view, Eliot Spitzer has basically been the country’s justice department for the last five years, if I weren’t a BRK shareholder, I’d probably be going, “Aha!” like a lot of other folks are, happy to see another corporate miscreant being brought to heel. In this instance, though, I’m hoping Warren Buffett’s reputation and cachet remains intact.
I mean, the Pope can die and it only affects my life to the extent that I worry if the Final Four games will be pre-empted. When Warren Buffett dies, I’ll be anxiously scanning the color of the smoke exhalations over Omaha.
