March 28, 2005
A PERP WALK TO SAVOR:
Investigation of Insurance Puts Buffett in a Spotlight (TIMOTHY L. O'BRIEN, 3/28/05, NY Times)
Over the last four decades, Warren E. Buffett has built Berkshire Hathaway into one of the world's largest and most successful insurers. Along the way, he has navigated the stock market with legendary prowess and offered folksy guidelines for proper corporate governance.Now, with investigators on three continents examining Berkshire affiliates and a deadline looming tomorrow to respond to an Australian regulatory inquiry, Mr. Buffett's company is in the unfamiliar position of having to defend its integrity.
Berkshire insurance affiliates run by Mr. Buffett's most trusted deputies are involved in what investigators describe as possible financial manipulation at insurance giants like the American International Group and the Zurich Financial Services Group. Investigators are examining Berkshire transactions that they say helped lead to the collapse four years ago of an insurance company involved in the biggest financial scandal in Australian history.
Investigators say they have traced many suspect transactions to a Berkshire subsidiary in Dublin, where at least two Berkshire executives who were recently banned from the Australian insurance market for engaging in abusive practices continue to work for the company.
Investigators are trying to determine the extent of Mr. Buffett's knowledge of the deals, which remains unclear.
His image as a guy who's just smarter about picking stocks than the rest of us has always been inexplicable.
MORE:
The Risk Not Taken: Eliot Spitzer is going after the wrong insurance company. (RICHARD DOOLING, 4/03/05, NY Times)
Granted, a Spitzer-Buffett bout might bump Michael Jackson's trial off the top of the news hour for a day or two, and Mr. Spitzer must think big, because he wants to be governor. But now his reach has officially exceeded his grasp. Investigating insurance companies is one thing, but reinsurance companies? What the heck is reinsurance? And isn't questioning Warren Buffett about the reinsurance industry a bit like asking Stephen Hawking about black holes and white dwarfs?Let's go to this newspaper's business section for an explanation of the skullduggery that transpired: "The issues under inquiry are whether reinsurance companies controlled by A.I.G. were treated as separate entities in order to help hide A.I.G.'s exposure to risk; whether reinsurance transactions are tantamount to loans that should have been so listed; whether assets and liabilities were swapped to smooth earnings; and, finally, whether A.I.G. used finite reinsurance to smooth earnings."
Uncross your eyes and note the distinct absence of outrage.
I'm certain that Mr. Buffett understands this finite reinsurance lingo, but I fear for Mr. Spitzer if it comes to a contest of reinsurance wits bandying provisos back and forth. My prediction is that the entire scandal will vanish when the regulators get to Page 782 of the provisions governing the reinsurance contracts, where Paragraph LXIXII(A)(4), Clause (iii), colors the word "risk" a murky shade of gray and renders the entire investigation a publicity stunt within the meaning of Paragraph XXXVI(B)(3), Clause (vii). But by the time that document is parsed, Mr. Spitzer will be in his fifth term as governor and thinking about running for president.
Maybe I'm just a sucker for a demagogue, but I'd rather have Mr. Spitzer start small and initiate a full-scale investigation into how an insurance company in St. Paul can issue a policy promising (with a perfectly straight font face) to pay for direct loss to a building resulting from the eruption of a volcano, and then three paragraphs later state that it will absolutely not pay for water damage from a frozen pipe. Just what sort of industry is it that thrives by taking our premiums and promising to pay us money, but only if we die?
Posted by Orrin Judd at March 28, 2005 1:16 PM
I remember a few years ago when he used his highly touted message to shareholders to rant against the evils of using derivatives and suggested much stronger govt oversight of these activities if not banning them completely. And then reading through his companies financials where they were using derivatives all over the place, leading me to conclude he didn't know what he was talking about.
That said, I'd prefer to see Soros doing the perp walk before Buffet given Soros' impact on the foreign markets.
Posted by: AWW at March 28, 2005 2:05 PMHe was, back when, an extremely good stock-picker, specializing in finding under-valued companies.
But if you grow like Buffett did, you can't keep it up. There just aren't that many undervalued companies, and he has billions of dollars that MUST be invested and MUST grow if the legend of The Miracles of Saint Warren is to flourish.
He hob-nobs with Bill Gates, and has worshipful crowds hanging on his every word, and so he can't admit that Berkshire has become just another investment outfit, and will probably not beat the market in the future...
Posted by: John Weidner at March 28, 2005 2:13 PMWell, he was an extremely good stock-picker, specializing in finding under-valued companies.
But if you grow like Buffett did, you can't keep it up. There just aren't that many undervalued companies, and he has billions of dollars that MUST be invested and MUST grow if the legend of The Miracles of Saint Warren is to flourish.
He hob-nobs with Bill Gates, and has worshipful crowds hanging on his every word, and so he can't admit that Berkshire has become just another investment outfit, and will probably not beat the market in the future...
Posted by: John Weidner at March 28, 2005 2:19 PMHe recognized that as a result of Coolidge Prosperity spooking American business owners, he could buy cash at a discount.
Nobody else did, at least nobody did to the same extent. That did make him smarter than everybody else.
Posted by: Harry Eagar at March 28, 2005 2:36 PMWhen I go to lunch today, I'll check to see if they've raised the price of burgers at the local Dairy Queen in order to cover Buffet's pending legal fees...
Posted by: John at March 28, 2005 2:50 PM"Coolidge Prosperity"
How 20th Century. Well, at least no mention of Herbert Hoover, which is an improvement of sorts. In a similar vein, for the rest of this century we can derisively refer to the "Clinton Foreign Policy", right?
Posted by: Raoul Ortega at March 28, 2005 3:08 PMBah. The man's a genius.
This is nothing but a speed-bump.
Posted by: Ali Choudhury at March 28, 2005 3:36 PMThese were reinsurance deals designed to pump up the reserves of the ceding (AIG, others) companies. These are inherently funny money deals, but they have been structured and used in various ways for years. As the reinsurer, Buffett no doubt made a very nice profit; the question is how much of it he will get to keep after the dust settles, a calculation he probably made up front. Nothing new here except the publicity, or, to put it another way, nothing lost save honor.
Posted by: Dan at March 28, 2005 4:04 PMRobert Musil (who appears to be posting again, by the way) had a good one a while back on Buffett as dirigiste : Mr. Market: Moats and Castles
Posted by: joe shropshire at March 28, 2005 5:55 PMI really do not suspect Buffet of any obvious illegality. He made money the old fashioned way. he got control of a financial institution and used its assets as leverage for an acquisition binge.
That said what has really annoyed me about him is his claim to be a value investor, a disciple of Ben Graham. His most spectacular plays were buying classic growth stocks, like Coca-Cola and Gillete, and holding on.
Soros is a different story.
Posted by: Robert Schwartz at March 28, 2005 10:44 PMPeople would be hailing "the Sage of Omaha" once again, had he sold his re-insurance stocks some months after 9/11.
Given the shenanigans practically inherent in the derivatives market (just today there was a piece in the Journal about a small Italian bank wooed heavily by BofA to buy some - now they are suing after suffering almost immediate losses), it was only a matter of time before something blew up in his face.
Posted by: jim hamlen at March 28, 2005 11:36 PMRobert: The real kick on BH is that, for the last 20 years or so, Buffet's real wins have been on special deals not available to the general public. Mostly he was selling takeover insurance (e.g., Gillette and Coke) or rehabilitation (e.g., Solomon).
Posted by: David Cohen at March 28, 2005 11:38 PM"His most spectacular plays were buying classic growth stocks, like Coca-Cola and Gillete, and holding on."
"for the last 20 years or so, Buffet's real wins have been on special deals not available to the general public"
Maybe Buffet hasn't always fit the pigeonhole he's been put into, but that's not his job. He's been intelligent enough to find good opportunities (whether or not they fit the value label or were widely available to others), and he's been patient and confident enough to wait for them to pay off.
The best sign that the internet bubble was finally peaking was when Barrons had a cover story about how Buffet just didn't "get" the "new" economy.
Posted by: Ann at March 29, 2005 5:35 PMI don't think Buffet even understands the business of his buddy Bill Gates, or that of the Intel's, Cisco's and Oracles of the world.
Posted by: Anil Maliyekkel at March 29, 2005 10:56 PMHe says he doesn't and that's why he didn't invest in them.
He really does seem kinda smarter than average.
Posted by: Harry Eagar at March 31, 2005 9:31 PM