It’s funny how ordinary people are prosecuted for trading on inside information and other similar offenses, but when it comes to top dogs at firms like Berkshire…. not so much.
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 nonetheless 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 to acquire Lubrizol, according to people familiar with the matter.
Why would that be shocking?
Let’s remember the early parts of the 08/09 crisis. Berkshire’s Buffett was consulted on TARP:
Buffett, by telephone, was consulted by lawmakers who were in marathon talks on Capitol Hill to forge a deal on the administration’s $700 billion economic bailout plan, according to two sources.
One lawmaker in the negotiations said that the participants called Warren Buffett to get his help in gauging potential market reaction.
Congressional leaders said shortly after midnight Saturday that they had reached a tentative deal. Members of both parties and Treasury Secretary Henry Paulson were aiming to craft final legislation by Sunday evening — in time for the start of financial markets around the world. (Reported September 28th)
Remember Buffett’s Goldman “investment”?
On Tuesday Buffett’s company Berkshire Hathaway (BRK.A) invested $5 billion in Goldman Sachs (GS, Fortune 500). The cash gives one of the last-remaining Wall Street investment banks a much-need boost as credit has tightened. Buffett’s move also helped shore up confidence in financial stocks. (September 24th)
Hmmm… remember the terms of that deal? Buffett bought warrants and preferred. The latter paid a fat 10% dividend – effectively a loan. The former were “free” with the latter, but provided a conversion right at $115. Goldman had the right to call the preferred at a 10% premium, but the warrants? Uh, no.
There wasn’t any inside baseball going on then, was there? Advocacy for TARP with this “back pocket” pretty-much-sure-thing sort of deal already in the bag?
Was this all disclosed? Well, sure. Kinda. But what did Buffett tell Congress?
Billionaire Warren Buffett told congressional negotiators that if they can’t agree on a proposed financial bailout, the nation will face “its biggest financial meltdown in American history,” two sources familiar with the talks said.
Ah, I see. First we make a deal, then we play the Armageddon card with Congress, thereby making our bet “good.”
So what’s different with Sokol?
Well, optics for one. Making a bet and then when it looks to be going bad pulling out the “Armageddon” bazooka apparently didn’t spook anybody (except me, who argued at the time that it was absolutely ridiculous to allow it to happen.)
The story has led to more questions – specifically, Zerohedge is reporting that there may have been similar shenanigans with regard to BYD as occurred with Lubrizol. In the interview Sokol gave on CNBC he specifically referenced that Charlie Munger held a “significant piece” (reported as a 3% stake) in BYD before he had Sokol go look at the company as an investment. Was that disclosed publicly, and was it known to Warren as well?
If there’s more than one instance here – and the allegation is now being made that there is – then there are a whole host of questions that deserve answers.
Then there are the dozens of rumors that were run in 2007 and 2008 that Buffett was going to “buy the world.” These, of course, rocketed stocks. That was allegedly “ok”, because prices went higher. Was anyone trading on those rumors? We’ll never know, but I among a few others reported on the rather smelly optic problems with those “statements.”
Of course Buffett didn’t counsel fixing banks before they blew up, did he? No. Nor has he since. Remember this?
‘Wall Street is going to go where the money is and not worry about consequences,’ Buffett said during a news conference yesterday, a day after his Berkshire Hathaway Inc.’s annual meeting. ‘You’ve got a lot of leeway in running a bank to not tell the truth for quite a while.’
Are they telling the truth now? It certainly appears not. What do you think all the robosigning and perjury are about? Covering up for the failure to comply with black-letter legal requirements originally.
Buffett called non-exchange-traded derivatives “financial weapons of mass destruction” – and then wrote them himself. He also has argued that he shouldn’t have to recognize actual market prices himself when he has clearly-observable prices in the form of actual stock values:
Regulators had questioned whether Berkshire should write down the value of those investments because their stock prices had fallen since Buffett’s company first bought the shares and remained below Berkshire’s cost for more than a year. Berkshire resisted because company officials believe all five stocks will rebound and Berkshire has no immediate plans to sell them at the current lower prices.
Of course you, I, and everyone else have our net portfolio value and thus borrowing capacity and net worth reduced dollar-for-dollar when our stock values decline. Buffett “declines” to recognize that same change. Does he similarly “decline” to recognize stock pricegains? Of course not.
When Mr. Sokol suggested to Mr. Buffett in mid-January that Berkshire buy Lubrizol, he mentioned that he owned shares in the chemicals company.
Mr. Buffett didn’t ask Mr. Sokol when he bought the shares or how much he held at the time. He learned of the details only after Berkshire agreed to buy Lubrizol in mid-March, according to his statement on Wednesday.
That’s curious too.
Janet Tavakoli doesn’t like it one bit:
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.
I haven’t had respect for Berkshire in…. well…. a lot longer than many.
When the Buffett rumors were swirling in 07 and 08 I opined repeatedly that Berkshire had an affirmative obligation to stomp on the people responsible and demand investigation, as its “good name” was being used as a means of market manipulation. Of course they didn’t and the SEC didn’t either – prices were going the “right way” with such nonsense – that is, upward.
I also have opined that the Goldman “investment”, among others, coupled with Buffett’s “advice” to Treasury and Congress stunk to high hell. Talking one’s book is common. Leveraging one’s book with claims of Armageddon if you don’t get official government “protection” for your positions is unseemly – and that’s being kind.
I don’t think there’s anything new here. As to whether it’s criminal, that’s more difficult for me to opine on without knowing more facts. Therefore, I’ll decline that obvious invitation.
But opining on whether I believe the chain of events described stinks is easy – and defensible.
Buffett’s failure to immediately dismiss Sokol with prejudice as soon as he learned of his transaction activity is all the indication that I need to add confirmation that my previously-held views on Buffett remain undisturbed: Berkshire, along with Buffett, are just another example of the corporate and personal “structure” we have built in this country where whatever one can get away with, one does – and it’s all considered “ok” so long as you manage to find some way to justify it and/or don’t wind up in jail.
