Everything Warren Buffett

MOTLEY FOOL: Interview With Alice Schroeder: Buffett's Cold Shoulder

2009-11-12T06:59:00.002+13:00

By Mac Greer
November 10, 2009

Part one of Alice Schroeder Interview
Part two of Alice Schroeder Interview

Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B) Chairman Warren Buffett gave Alice Schroeder unprecedented access when he tapped her to write his official biography. The Snowball: Warren Buffett and the Business of Life has won critical acclaim and racked up big sales for Schroeder. Last year, Buffett scored sweetheart deals with Goldman Sachs (NYSE: GS) and General Electric (NYSE: GE), and while the book sheds light on Buffett's business virtues and opportunistic investing, it also highlights some of Buffett's business blunders (see Dexter Shoes) and personal failings.

In our third of three installments, my colleague Chris Hill talks with Alice Schroeder about Buffett's smartest and dumbest investments, his impersonal approach to giving, and his not-so-hot reaction to The Snowball.

Buffett's smartest and dumbest investments
Chris Hill: What do you think have been his smartest and dumbest investments?

Alice Schroeder: His smartest investment was actually the creation of Berkshire Hathaway itself. In the book, I detail how he got control of Blue Chip Stamps, Diversified Retailing at Berkshire, and put them together into a vehicle through which he could put capital to work with insurance float. It is a detailed story, but it is a very interesting story because he had this vision of what could be and how he could use insurance float to make investments. He created this great big engine to drive the boat, and that was the smartest thing that I think he ever did.

In terms of mistakes, every insurance company that Berkshire has ever bought has gone into the tank and lost money right after he bought it -- that has been a pattern since the 1960s and I don't know why, but all of them have turned out to become powerful profit centers later, so there is something funny about that. ConocoPhillips (NYSE: COP) was a huge mistake, and it is a little bit inexplicable. USAir [now US Airways Group (NYSE: LCC)], the preferred stock, and then NetJets has been a terrible mistake, and you could see that coming several years ago. He got entranced with the romance of the aviation and the glamour of it, and I think it will probably never earn more than a token return on capital.

Hill: I was born and brought up in Maine, and [I had a] friend growing up [whose] dad had a business called Dexter Shoe, which ended up being acquired by Berkshire Hathaway.

Schroeder: Warren calls that his greatest mistake, and the thing about it is, it was small. I don't think if you make a small investment, and it has a minor financial impact, that it is fair to count it as your greatest mistake, but the reason he says that is twofold.

One, it was basically a total loss, and it is his only real total loss. The other is that he hates having to lay off people. It is very painful for him to have to shut down plants, and with Dexter, they had to move the plants overseas, and … basically the whole town of Dexter, Maine … lost their jobs. That is something that for Warren is really tough.

Hill: Are you a shareholder of Berkshire Hathaway?

Schroeder: When I wrote the book, I never owned the stock. I thought it would be a conflict of interest. After the book was published, Berkshire tanked, and I finally bought it. So I am an owner right now.

Buffett's chilly response
Hill: Now, Buffett gave you unprecedented access for this book. He said you could interview anyone without his interference. He promised not to ask for revisions when the book was done. And the thing I found most astonishing is that he said that if his recollection differed from the recollection of one of your sources, that you should go with the less-flattering view.

But after the book was published, it kind of got awkward between you and Warren Buffett -- and to my knowledge, he hasn't told you why. The book was critically acclaimed, and I think part of the reason for that is because it really does capture the human side of Warren Buffett and his imperfections. Do you think he was expecting a different book?

Schroeder: I think that nobody expects what they are going to see on paper when they hand over to an author the unfettered task or responsibility to write about their life. Everybody has an internal narrative in their head of what their story is, and if they say, "Go write this," and five years later the result comes back, it is going to be shocking to anybody. Authors and their subjects get into this sort of intense dynamic of working together where it is a mutual cooperation toward a common goal. He knew that a truthful book would be the one that served both the reader and his long-term legacy, and that is what he wanted, but Warren is intensely subject to criticism.

He is someone who feels very strongly the flaying of anybody who says anything that feels unkind. He went into this knowing that the book might feel like flagellation, and we had some ... sensitive conversations early on where it was clear that that was going to be the case. I realized fairly early on that there was a chance that after this book was over, that he might never speak to me again because of some things that happened with other journalists, and so I just had to make a choice of what I would do.

I knew that that would happen even though he might even intellectually realize that the book was good, that it might just be so painful for him that he couldn't approach me as the vehicle of that pain, and that is what has happened.

Hill: And you haven't spoken to him since then, have you?

Schroeder: We had one very brief conversation at the shareholder meeting.

Nothing personal
Hill: Now you did mention the billions of dollars he announced he was giving to The Gates Foundation, the foundation set up by friend and Microsoft (Nasdaq: MSFT) chairman Bill Gates. Up until that point, and that was 2006, but up until that point, his giving was pretty spotty. In terms of generosity, you said that Buffett really can't do one-on-one. Can you explain that?

Schroeder: Yeah, I have called him a "telescope philanthropist," which is someone who can give money to all of mankind, sort of from a distance, but it is painful to actually hand over money to someone who is standing right there in front of you.

Hill: So if I needed $10, he wouldn't loan it to me?

Schroeder: He might these days. There was a story someplace -- I think it may have been The New York Times -- about people who are savers and don't like to spend money. The parts of their brain that feel pain, like emotional pain, light up if you are doing a brain scan if they have to spend or give away money. It is painful for them to give away money. That is how Warren is. It is like giving a part of himself. He feels diminished by it. If he has to give it to another person directly, even a member of his family, it is sort of like actually carrying off a piece of his flesh. Whereas giving it to mankind, he feels is giving back to society. He feels that he was lucky, and that it belongs to all mankind. He is more comfortable with abstractions.

Hill: What part of his story has had the most impact on you personally?

Schroeder: On me personally what has been the most important was to understand the value of time -- and this is something that has come from observing him, learning his story and that time compounds. What you do when you are young (and as you use time over your life) can have an exponential effect so that if you are thoughtful about it, you can really have powerful results later, if you want to.

Also, that is a reason to be hopeful, because compounding is something that happens pretty quickly. If you are 50 or 60, it is not too late. He said to me one time, if there is something you really want to do, don't put it off until you are 70 years old. ... Do it now. Don't worry about how much it costs or things like that, because you are going to enjoy it now. You don't even know what your health will be like then.

On the other hand, if you are investing in your education and you are learning, you should do that as early as you possibly can, because then it will have time to compound over the longest period. And that the things you do learn and invest in should be knowledge that is cumulative, so that the knowledge builds on itself. So instead of learning something that might become obsolete tomorrow, like some particular type of software [that no one even uses two years later], choose things that will make you smarter in 10 or 20 years. That lesson is something I use all the time now.

Hill: The book is The Snowball: Warren Buffett and the Business of Life. Alice Schroeder, thank you so much for joining us.

Part one of Alice Schroeder Interview
Part two of Alice Schroeder Interview

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MOTLEY FOOL: Interview With Alice Schroeder: Buffett's Biggest Weakness

2009-11-12T06:46:00.003+13:00

By Mac Greer

November 9, 2009

Part one of Alice Schroeder Interview

Much has been written about the business and investing savvy of Berkshire Hathaway's (NYSE: BRK-A) (NYSE: BRK-B) Warren Buffett. As his legend grew with well-timed purchases in Coca-Cola (NYSE: KO), American Express (NYSE: AXP), and the like, his oft-repeated investing wisdom is starting to make some Fools downright tired of Warren Buffett.

So what about Buffett the person? What's his biggest weakness? Does anyone in his circle openly disagree with him? How does he measure his success? In part two of our three-part series, my colleague Chris Hill talks about Warren's world with Buffett biographer Alice Schroeder, author of The Snowball: Warren Buffett and the Business of Life.

Chris Hill: I think most people who know about Warren Buffett know about him through the context of his investments, but you got a chance to spend a lot of time with him. What is a typical day like for him?

Alice Schroeder: He has a really consistent routine. He comes in in the morning at around 8:30. He reads five newspapers. He reads The Financial Times, The Washington Post, The New York Times, The Wall Street Journal, and The Omaha World Herald. Then he has a stack of reports on his desk from the companies Berkshire owns, and some trade press like American Banker or oil and gas journals, and through the rest of the day, he alternates between flipping through this stuff and then talking on the phone to people either who call him or who he calls. He never calls his managers; they can call him. He is really accessible, but he leaves them alone.

Then he has CNBC on all day long with the crawl, with the sound muted and if he sees his name cross along the bottom and they are talking about him, he will turn the sound on to find out what they are saying. That is his day. He doesn't do meetings -- there are no meetings.

Hill: Is he online at all? Does he use email?

Schroeder: No, no computer, nothing electronic in his office, but his secretary, Debbie Bosanek, does have email, and if you want to reach him, you can reach him through her, and he will dictate a response back. He has a computer at home. He uses IM with his friends. He is online playing bridge all the time, but he is very protective of the efficiency of his time, and that is really what the no-email thing is about.

Hill: Could Warren Buffett have come of age in the information age? Because a lot of what he was doing back in the day was digging through 10-Ks when they were hard for people to get access to, and information was much tougher to come by, but now when information is really easy to come by, do you think he would have been as successful?

Schroeder: I don't think he would have been as successful because the two things that he did don't work today. One is, there was a lot of shoeleather involved. He would do the work that nobody else bothered to do. He would go down to some state insurance department basement and dig through records that no one else was looking for. Now everybody has access to everything, and so the diligent are no longer really rewarded the way they used to be.

The second thing is that Warren was uncommonly good at going around and talking to management and getting them to tell him what their business plans were. That used to be perfectly legal. In fact, the insider trading worlds have evolved, and I wrote a long footnote about it in the book, but he used to basically be able to get and trade on inside information, as did everyone in those days. He was great at finding out if there was a tender offer coming or something like that. You can't do that anymore.

Hill: You have said that everyone in Warren's world is his protector, and if you just look at the annual shareholder's meeting, it is really, it is almost like a coronation on an annual basis. Are there people around Warren Buffett who will openly disagree with him?

Schroeder: Very few. One of the roles that Charlie Munger plays that is really important is he is one of the very few who will tell Warren "no" or "you're wrong." Interestingly, Warren has enlisted all of these women to be recruited as his protectors, but there are one or two -- Carol Loomis is one, his friend who works for Fortune, and Sharon Osberg, his bridge partner -- ... who will really stand up to him. It is tough to be in the position he is in where you are incredibly rich, incredibly famous, and known for your wisdom because people are in awe of you. He said to me one time, "When I was 21 years old, I could have been saying the most brilliant things on earth and nobody would have listened to me. Now, I could say that the moon was made of pink tissue paper and everyone would go, 'Wow, look! It really is.' And they would believe me, because I am Warren Buffett." He said it is the strangest thing.

Hill: What would he say that his biggest weakness is?

Schroeder: His biggest weakness is the flipside of his strength. He is pretty rigid and he doesn't really listen. He has incredibly firm convictions and is often right, to say the least. But when he is headed down a track that doesn't make sense, he tends to not pay attention to contrary information.

Hill: And do you get the sense that he recognizes that about himself?

Schroeder: Oh yeah. Oh, he knows that about himself. Could I just step back there?

Hill: Yeah.

Schroeder: I didn't mention greed as his biggest weakness. (Laughing.) I should have mentioned that he loves money so much that it kind of interfered with his relationships with his family for a long time. He would also be the first to say that.

Hill: So in terms of his relationships with his children, with the people closest in his life, how did greed really impact all of those relationships?

Schroeder: Well, when he was younger, making money was so overwhelmingly important to him that he really did not pay a lot of attention to his family. People told me that Susie, his first wife, was sort of a single mother and they would make jokes about his kids, "Who is that, Warren? That's your son." The family suffered from neglect.

Now he came to realize through some losses. Susie moved to San Francisco. It was touching to listen to him talk about the pain that was caused by his realization of the fact that you can't repair and you can't go backwards in time and fix this. It has been heartening to see him strengthening his relationships with his kids in recent years. That has been really a wonderful thing. He realizes that that neglect has paid a price.

Hill: Buffett told you the big question about how people behave is whether they have an inner scorecard or an outer scorecard, and that it helps if you can be satisfied with an inner scorecard. How much does Buffett care about his outer scorecard? You mentioned he has CNBC on in the background and if his name pops up, suddenly he is turning up the volume to hear what they are saying. How much does he care about what other people think?

Schroeder: In The Snowball, I point out that his father had a 100% inner scorecard about everything. His mother had a 100% outer scorecard about everything. She cared desperately what people thought of the family, of their image. The kids were raised with both of these streams of perception coming in on them. Warren is the product of that. When it comes to investing, business, his principles, his ethics, 100% inner scorecard; he knows what's right. He lives by it. When it comes to how he feels about himself, he is very tender and easily wounded, and other people can make him feel differently. He doesn't have that inner scorecard. And there is a complete separation between the two.

Part one of Alice Schroeder Interview

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BETFAIR BLOG: Take these gems from the Buffett to improve your punting prowess

2009-11-12T06:33:00.002+13:00

Perfect Punter / 11 November 2009

Dave Farrar's mission to hone his punting super-senses continues with a look at the wisdom of business guru Warren Buffett

"One of the traps that we can all fall into as punters is constantly trying to find an outlandish answer to the conundrum of a sporting event, when if you can identify the right kind of blue chip sportsman, then often that is the right course of action. It’s well known, for example, that investment in Roger Federer at Wimbledon was one of the building blocks of Harry Findlay’s punting empire, and knowing that you have class on your side is reassuring and can be profitable."

With fate well and truly put in its place (at least in my fevered imagination) we can move on and try to be everything that the last two weeks haven't. Measured, calm, professional, profitable. Proper gamblers will feature heavily in this weekly rant as we turn into the New Year, but this week we have the chance to learn from the greatest gambler of them all, although he would argue that what he does is as far from punting as you can get.

Before Brian Howard and a naked Paulo Barreto took over my thoughts, I'd become faintly obsessed with Warren Buffett, and delighted that the BBC sent skeletal twerp Evan Davis to interview him. This, if anyone is, has to be a man worth listening to.

If you're wondering why, then one bare fact speaks for itself. An investment of 1,000 dollars in shares of Buffett's company in 1965 would today be worth five million. Astonishing, and yet the way that he accomplished this is remarkably easy to understand, and serves as a lesson to all of us who want to be as good at gambling as we can be. Buffett's philosophies on investment are staggeringly simple, and the nature of the BBC beast is that Davis broke down his life lessons for us in bite size chunks. And they can all teach us something. Here are just three of them and how they may help.

INVEST - DON'T SPECULATE

One of the incredible things about Buffett's fortune is that much of it has been built up in investment in big, well known, companies, rather than 999-1 shots. He remains a significant shareholder, for example, in Coca-Cola, and says that an investment should be just that, and not a gamble. One of the traps that we can all fall into as punters is constantly trying to find an outlandish answer to the conundrum of a sporting event, when if you can identify the right kind of blue chip sportsman, then often that is the right course of action. It's well known, for example, that investment in Roger Federer at Wimbledon was one of the building blocks of Harry Findlay's punting empire, and knowing that you have class on your side is reassuring and can be profitable. It doesn't mean that you should ignore prices completely (we'll come to that later) just that there is room for the odd blue chip in your portfolio. It wouldn't have hurt in recent years to have had Tiger Woods, Federer, Barcelona and Kauto Star on your side and, while we can look beyond that, we shouldn't ever forget it.

YOU DON'T HAVE TO DIVERSIFY

This is the subject on which Buffett's remarks make the most clear thinking sense. Standard betting wisdom often dictates that you shouldn't put all of your eggs in one basket, and yet consider this direct quotation from him: "If you own 50 stocks, can you rank number 50 as high as number one? And can you know it as well?" The answer is plainly "no", and while there's nothing wrong with spreading the risk a little, a clear staking plan is what's needed to make the most of what you really know. And make sure that you DO really know your number one subject, don't just pretend to.

THINK INDEPENDENTLY

Davis hit upon an interesting geographical point with regard to Buffett. The fact that he lives in Omaha, rather than New York City, means that he stays away from fashion, and doesn't have to know about - let alone ignore - trends. Buffett and his co-investor, Charlie Munger, make sure that they come to their own conclusions before even looking at the market, and they do so unaffected by outside influences. This is a major building block for all professional punters, working out their own tissue before deciding what constitutes value. But not all of us do it. The Racing Post is my favourite newspaper, but listening to Buffett made me think that I should work for two hours every day BEFORE I read it. It's impossible not to be swayed by external influences, no matter how independently you try to think. "The market is there to SERVE you, not to INSTRUCT you", says Buffett, and we should all have that phrase stuck on top of the computer screen which we use to place a bet. It's your money, it has to be your judgement that you're backing. And the price, as dictated by your research and analysis, has to be right.

There is so much more to learn from Buffett, and I point you in the direction of Davis's documentary on BBC iPlayer, as well as the many books that he has produced on the subject. This column will return to him, probably more than once, but reading a little more about him, and learning more from him, may just be the most profitable thing that you do this week.

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JANET TAVAKOLI: Ralph Cioffi acquitted of fraud charges yesterday - Our conversation in May 2007

2009-11-12T06:26:00.002+13:00

Ralph Cioffi and Matthew Tannin, former hedge fund managers and co-heads of Bear Stearns Asset Management, were acquitted yesterday (November 10) of all six counts in their fraud trial” U.S. v. Cioffi, 08-CR-00415, U.S. District Court for the Eastern District of New York (Brooklyn).

I worked at Bear Stearns in the late 1980s and remembered amiable newcomer Ralph Cioffi to be Bear Stearns’ most talented and successful salesman of mortgage-backed securities. He was usually even tempered, always hard working, and thoughtful. I headed marketing for the quantitative group run by both Stanley Diller, one of the original Wall Street “quants,” and Ed Rappa (now CEO of R.W. Pressprich & Co, Inc.), a managing partner. Ralph was a popular salesman with my colleagues and a heavy user of our quantitative research. In gratitude for analytical work that helped him make sales, Ralph presented our group with an $800 portable bond calculator purchased out of his own pocket. When I was lured away from Bear Stearns by Goldman Sachs, Ralph Cioffi tried to persuade me to stay, matching the offer. Around 20 years had passed and since then we occasionally stayed in touch, but we were not close friends.

Among other hedge funds, Bear Stearns Asset Management (BSAM) managed the Bear Stearns High Grade Structured Credit Strategies fund. By August 2006, the fund had a couple of years of double-digit returns. BSAM launched the Bear Stearns High Grade Structured Credit Strategies Enhanced Leverage fund taking advantage of the first fund’s “success.”

Both funds managed by BSAM included CDO and CDO-squared tranches backed in part by subprime loans and other securitizations (collateralized loan obligations) backed by corporate loans and leveraged corporate loans. In August 2006 when BSAM was setting up the Enhanced Leverage fund, other hedge fund managers (like John Paulson), shorted subprime-backed investments.

Investors in the two funds managed by BSAM had been getting double digit annualized returns on high-grade debt at a time when treasuries were yielding less than 5 percent. In fixed income investments, that usually means investors are taking risk.

Ralph seemed to have similar views to mine on CPDOs, the leveraged product that I had said did not deserve a AAA rating. Ralph told me he thought the AAA rating could “lull the unsophisticated investor to sleep,” and that for the purposes of his hedge funds, if he liked an investment-grade-rated trade he could have the same trade without paying fees and: “easily lever up … fifteen times.” To paraphrase Warren Buffett, if the price of your investments drops, leverage will compound your misery.

On May 9, 2007, Matt Goldstein called and asked me if I had a chance to look at the registration statement for a new initial public stock offering (IPO) called Everquest Financial, Ltd (Everquest). Everquest is a private company formed in September 2006, and the registration statement was a required filing in preparation for its going public. The shares were held by private equity investors, but the IPO would make shares available to the general public.

Everquest was jointly managed by Bear Stearns Asset Management Inc, and Stone Tower Debt Advisors LLC, an affiliate of Stone Tower Capital LLC. I was curious, but I was swamped. I told him no, I was very busy and had not even had a chance to glance at it. He called again asking if I had seen it, and again I said no, “Go away.” The next morning I ignored Matt’s voice mails, but finally took his call the afternoon of Thursday May 10 telling him that I still had not looked at the registration statement and had no plans to do so that day. My first call on the morning of Friday, May 11, 2007, was again from Matt Goldstein. He thought the IPO might be important.

I went to the SEC’s website, and as I scanned the document I thought to myself: Has Bear Stearns Asset Management completely lost its mind? There is a difference between being clever and being intelligent. As I printed out the document to read it more thoroughly, I put aside the rest of my work and said: “Matt, you are right; this is important.” I was surprised to read that funds managed by BSAM invested in the unrated first loss risk (equity) of CDOs. In my view, the underlying assets were neither suitable nor appropriate investments for the retail market. I did not have time for a thorough review, so I picked a CDO investment underwritten by Citigroup in March 2007 bearing in mind that if the Everquest IPO came to market, some of the proceeds would pay down Citigroup’s $200 million credit line. Everquest held the “first loss” risk, usually the riskiest of all of the CDO tranches (unless you do a “constellation” type deal with CDO hawala), and it was obvious to me that even the investors in the supposedly safe AAA tranches were in trouble. Time proved my concerns warranted, since the CDO triggered an event of default in February 2008, at which time Standard & Poor’s downgraded even the original safest AAA tranche to junk.

The equity is the investment with the most leverage, the highest nominal return, and is the most difficult to accurately price. The CDO equity investments were from CDOs underwritten by UBS, Citigroup, Merrill, and other investment banks.

Based on what I read, Everquest’s original assets had significant exposure to subprime mortgage loans, and the document disclosed it, “a substantial majority of the [asset-backed] CDOs in which we hold equity have invested primarily in [residential mortgage-backed securities] backed by collateral pools of subprime residential mortgages.” Based on my rough estimates, it was as high as 40 percent to 50 percent.

I explained my concerns to Matt in a general way. Among other concerns: (1) money from the IPO would pay down Everquest’s $200 million line of credit to Citigroup; (2) the loan helped Everquest buy some of its assets including CDOs and a CDO-squared from two hedge funds managed by BSAM, namely the Bear Stearns High-Grade Structured Credit Strategies Fund that had been founded in 2003 and the Bear Stearns High-Grade Structured Credit Strategies Enhanced Leverage Fund (“Enhanced Leverage Fund”) launched in August 2006; and (3) the assets appeared to include substantial subprime exposure.

Matt Goldstein posted his story on Business Week’s site later that day. Initially it was called: The Everquest IPO: Buyer Beware, but after protests from Bear Stearns Asset Management, Business Week changed the title to Bear Stearns’ Subprime IPO. I hardly think that pleased Bear Stearns more.

Ralph Cioffi contacted me about the Business Week article. He said that dozens of IPOs like Everquest had been done—mostly offshore so as not to deal with the SEC. According to Ralph, BSAM’s hedge funds and Stone Tower’s private equity funds would own about 70 percent of Everquest stock shares (equity), and they had no plans to sell “a single share at the IPO date.” They planned to use the IPO proceeds to pay down the Citigroup credit line and possibly buy out unaffiliated private equity investors.

I responded that verbal assurances that there are no plans to sell a share at the IPO date are meaningless. Publicly traded shares can be sold anytime. But even if the funds kept their controlling shares, it was not good news. Retail investors would have only a minority interest which would be a disadvantage if they had a dispute with the managers.

Ralph claimed that subprime was “actually a very small percent of Everquest’s assets.” He reasoned that on a market value basis the exposure to subprime was actually negative because Everquest hedged its risk. Technically, Ralph might have been correct—but the registration statement for the Everquest IPO itself suggested otherwise: “The hedges will not cover all of our exposure to [securitizations] backed primarily by subprime mortgage loans.”

It is fine to talk about net exposure (left over after you protect yourself with a hedge), but one usually also discusses the gross exposure (of the assets you originally bought). Hedges cost money, so they can reduce returns.

Ralph Cioffi said CDO equity is “freely traded and easily managed.” I countered that CDO equity may be easy for Ralph to value, but investment banks and forensic departments of accounting firms told me they have trouble doing it. I told him that if this were a CDO private placement, it would have to be sold to sophisticated investors and meet suitability requirements, but since it is in a corporation, it can be issued as an initial public offering (IPO) to the general public. It seemed to be a way around SEC regulations for fixed income securities, and it was not suitable for retail investors in my view.

Ralph said he would talk to his lawyers about changing the IPO’s registration statement to add a line about third party valuations. We seemed to be talking at cross purposes, since the registration statement already said that third party valuation would occur at the time of underwriting. The problem with that was that the assumptions for pricing would be provided by a conflicted manager, and assumptions are critical in determining value. Moreover, on an ongoing basis, one had to rely on a conflicted management’s assumptions for pricing.

Ralph did not seem to want to end the discussion, so I asked him if there was something he wanted me to do. He said it would be great if I issued a comment saying I was quoted “out of context,” that my being quoted in Business Week lent credibility to the article and was not helping me, and that I would be “better served” writing my own commentary. I ignored what I perceived to be a thinly veiled threat. I told him that if he wanted me to write a commentary, I would do a thorough job of raising all of the objections I had just raised with him. Ralph seemed unhappy but my thinking he was a hedge fund manager from Night of the Living Dead was the least of his problems.

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THE STAR.COM: Buffett bites off more than Berkshire can chew

2009-11-12T06:22:00.003+13:00

Published On Wed Nov 11 2009

By David Olive Business Columnist

Now, why would a smart guy like Warren Buffett step on his own punch line, as they say of inept public speakers, by making the biggest acquisition of his career at the moment his Berkshire Hathaway Inc. was reporting a spectacular tripling in third-quarter profits?

Okay, acquisition announcements aren’t so easy to time. But announcing the purchase of Burlington Northern Santa Fe Corp. a couple of weeks before or after Berkshire’s third-quarter earnings report would have given the Street time for a thorough analysis of those third-quarter numbers.

Which I expect is what the “Oracle of Omaha” sought to avoid.

Because, you see, in this year’s third quarter, Berkshire generated 93 per cent of its profits from trading in derivatives and credit-default swaps (CDSs).

I hear what you’re saying. When it completes its $26 billion (U.S.) purchase of the 77.4 per cent of BNSF that Berkshire doesn’t already own, Buffett’s sprawling, oddball collection of businesses will employ about 240,000 people.

Yet, in its latest quarter, Berkshire derived almost all its profits from the activities of one man: Warren Edward Buffett.

Berkshire’s pipeline, furniture, bricks, Fruit of the Loom, Benjamin Moore and Dairy Queen businesses do not make bets with high-risk financial instruments. Only the Berkshire CEO, with his sole access to its cash flow, can and does do that.

Yes, this is the same Buffett, now that you ask, lauded for his prescience in having once describing derivatives as “weapons of mass wealth destruction.”

Except that among this decade’s most aggressive punters on high-risk derivatives is a certain revered stockpicker in Nebraska.

That derivatives and CDSs are dangerously volatile has been proven not just by the global financial system, which has nearly choked to death on them.

It’s been shown by the “Sage of Omaha,” who took a $1.3 billion loss on derivatives trading in last year’s third quarter. Early this year Buffett had to admit his stock-picking prowess also had failed him, to the tune of a $1.9 billion loss on ConocoPhillips Co.

Now consider the magnitude of those one-man losses as a portion of Berkshire’s total 2008 profit of $4.9 billion.

Berkshire is not a business. It’s one admittedly bright guy whose occasional personal slips routinely wipe out huge portions of profit.

To question Buffett’s ability to enrich Berkshire investors is to invite scorn, and I have the hate mail to show for it. Never mind that Berkshire’s astronomical book-value gains were piled up in the 1970s-1980s golden era of undervalued stocks.

What matters for latecomers to Berkshire stock is the here and now, which has not been so good. Year-to-date, Berkshire shares are up 6.9 per cent. You would have done better with the S&P 500 index (up 18 per cent) or much more focused conglomerates like 3M Co. (up 35 per cent), Siemens AG (up 22 per cent) or United Technologies Corp. (up 24 per cent).

Or with turnaround stocks Caterpillar Co. (up 33 per cent) or Ford Motor Co. (up 257 per cent). Or by investing not in Berkshire, but its portfolio of publicly traded firms: American Express Co. (up 110 per cent), Coca-Cola Co. (up 24 per cent) or Goldman Sachs Group Inc. (up 102 per cent).

I couldn’t agree more with the Buffett maxim that you don’t want to invest in a business run by somebody who gets out of bed one day and decides to cut costs.

But deep into this horrific recession, Berkshire had cut costs at its 80 or so diverse businesses by about 1 per cent. Only this month did Buffett vow to start doing some serious cost-cutting. “I don’t think Berkshire hit the reset button as hard as other companies” on cost-cutting, hedge fund manager Jeff Matthews, author of Pilgrimage to Warren Buffett’s Omaha, told Bloomberg News last week.

Could it be that Buffett was distracted, watching those derivatives bets like a hawk?

If he was an operating CEO, not a financier, Buffett, 79, would have been scrupulously monitoring his direct reports. Which, belatedly, he’s now trying to do.

In April, Buffett sacked the head of Berkshire’s underperforming 234-unit Helzberg Diamond Shops chain. In August, he eased out Rick Santulli, founder of Berkshire’s Net Jets fractional-jet-ownership business. That shocker, underreported in a Buffett-friendly business media, should have raised anew questions of CEO succession. Santulli has for years been among the handful of likeliest candidates to succeed Buffett.

A cold-eyed look at Berkshire always yields the same impression. Namely, of a conglomerate’s traditional failings: gains in one business wiped out by losses in another. Too many businesses to understand and properly manage. And in this case a controlling shareholder 13 years past most employers’ mandatory retirement age, who can’t quit because no successor could oversee the mad congeries of businesses Buffett has created.

Even he can’t.

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WEST CENTRAL TRIBUNE: BNSF to lay off staff at Willmar depot

2009-11-11T19:38:00.001+13:00

By: Anne Polta, West Central Tribune

WILLMAR — Fifteen to 17 jobs in the Burlington Northern Santa Fe Railway switching yard in Willmar are being eliminated as part of an overall reduction in BNSF’s switching operations.

Employees were notified this week that they are being furloughed.

BNSF hopes to eventually call them back to work, said Steve Forsberg, general director of public affairs for Burlington Northern Santa Fe Railway.

“We just don’t know when that’s going to be,” he said.

The downturn in the economy has resulted in a significant drop in rail traffic volume this year.

Through the third quarter, volume is down 27 percent, Forsberg said.

“All terminals on the network have seen a reduction in the volume that they’re handling,” he said.

As a result, BNSF is moving to control costs and consolidate its switching activity at fewer terminals, primarily in Dilworth, the Northtown yard in Minneapolis and in Sioux City, Iowa.

Forsberg called it “a short-term redeployment of some of the work.”

Willmar will continue to have one person switching traffic in the Willmar rail yard per shift, Forsberg said Tuesday.

Before the downturn in the economy, the Willmar rail yard, which historically has been an important hub, had about 200 workers. The number is now down to about 180, and the furloughs announced this week “will probably reduce that a little bit more,” Forsberg said.

“It is something that has been occurring on an ongoing basis,” Forsberg said of the layoffs. “We have not reduced our capital investment in maintenance on the network this year.”

The decline in rail traffic volume appears to be stabilizing but it’s not clear when any substantial improvement might take place, he said.

With 32,000 route miles, Burlington Northern Santa Fe is the second largest railroad in the United States. It is a major hauler of grain and coal, and also transports cars and consumer goods to hubs such as Chicago, Kansas City and the West Coast.

Earlier this month, Warren Buffett’s Berkshire Hathaway investment group announced a $44 billion cash-and-stock deal to acquire BNSF. The deal is expected to close early next year. It will require shareholder approval and a regulatory review by the Justice Department.

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COLUMBUS BUSINESS JOURNAL: NetJets eyes ‘modest profit’ next year

2009-11-11T07:01:00.001+13:00

Tuesday, November 10, 2009, 12:50pm EST

Business First of Columbus - by Matt Burns

The parent company of NetJets Inc. expects the fractional aircraft business will be mildly profitable in 2010 after losing more than $500 million over the first nine months of this year.

Omaha, Neb.-based Berkshire Hathaway Inc. (NYSE:BRK), which owns the corporate jet operator based at Port Columbus International Airport, said in a regulatory filing this week that NetJets lost $183 million in the third quarter, bringing the subsidiary’s pretax loss through September to $531 million. The red ink came even as Berkshire Hathaway, headed by billionaire Warren Buffett, tripled its third-quarter profit to $3.35 billion.

The recession, which has battered the private aircraft trade, played a role in NetJets absorbing more than $400 million in asset write-downs and downsizings through September, according to the filing. The company in September cut 350 largely administrative jobs, most of them in Ohio, and last week disclosed it will furlough 495 of its 3,200 pilots beginning in January, a move that will push out of work fewer than 100 pilots based at Port Columbus.

On the heels of the furlough announcement, Berkshire Hathaway cautioned in a Securities and Exchange Commission filing that “NetJets owns more planes than is required for its present level of operations and further downsizing costs will be incurred in the fourth quarter.”

Expectations for next year are markedly different.

“Management believes that NetJets is likely to operate at a modest profit in 2010,” the company wrote in the SEC filing.

That projection, however, comes with two caveats: A modest profit, Berkshire Hathaway told investors, is likely “absent any further deterioration in the U.S. economy or negative actions directed at the ownership of private aircraft.”

A profitable 2010 would come after a year of tumult at NetJets, which began in 1964 as the first business jet charter and aircraft management provider. It now sells fractional interests in aircraft to businesses and executives who don’t fly enough to warrant the purchase of an airplane.

NetJets founder and CEO Richard Santulli stepped down without warning in August and was replaced by David Sokol, chairman of Berkshire Hathaway’s MidAmerican Energy Holdings Co. The executive shuffle came days before the company made public its plans to move its headquarters to Columbus from Woodbridge, N.J. The home office shift was another gain for Columbus a year after NetJets outlined plans for a $200 million expansion at the airport expected to add 800 jobs to its Central Ohio payroll of about 2,000.

Weeks later, NetJets disclosed its U.S. work-force reduction plans and put its Columbus expansion program on hold.

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THE JOURNAL OF COMMENRCE: BNSF Chief Waives Compensation Clause

2009-11-11T06:43:00.000+13:00

John D. Boyd | Nov 10, 2009 5:24PM GMT

The Journal of Commerce Online - News Story

Rose won’t be leaving, or get extra money, through Buffett’s friendly takeover

The planned purchased of BNSF Railway by Warren Buffett’s Berkshire Hathaway will not trigger a special compensation package for the railroad’s CEO, who plans to stay aboard and has officially waived his rights to either stock or retirement severance awards in connection with this deal.

Matthew K. Rose, who is chairman and president of the rail firm as well as CEO, had already said that he and other top managers are staying in place at BNSF, and that the Berkshire acquisition will not put in a new team to run the nation’s second-largest railroad. The carrier issued a message to customers as well, reassuring them the current team will remain.

But a BNSF spokesman said Rose gave the company a formal waiver as a way to underscore that he is not getting any extra personal benefit from the deal with Buffett, which takes BNSF private and makes it a Berkshire subsidiary.

A New Orleans city pension fund last week sued both firms over the accord, for having quickly agreed to terms without offering others a chance to bid up BNSF’s share price. Berkshire already owns nearly 23 percent of BNSF and pledged a 30 percent premium to sew up the deal. Debt ratings agencies have also said they may cut Berkshire’s rating because of the additional leverage it may take on to buy BNSF.

Rose’s waiver letter to his company, submitted Nov. 6 and filed three days later with the Securities and Exchange Commission, does not spell out his reasons for taking the action. Spokesman John Ambler said Rose “wanted to make it clear that he is not getting any special compensation” as a result of the acquisition agreement.

BNSF’s stock incentive plan that covers Rose and his retirement benefit agreement have severance and accelerated vesting awards that can be triggered, under certain conditions, if he leaves his job in connection with a change in control of the company.

But in his letter to Roger Nober, BNSF’s executive vice president for law, Rose wrote “I hereby waive my right to receive any compensation or benefits payable under the change in control agreement” of the stock plan, “in the event that I terminate my employment for ‘good reason’ in connection with the transactions contemplated by the merger agreement.”

He also waived his right to compensation or benefits from the pertinent section of his retirement agreement “in the event that I terminate my employment for any reason following the transactions.”

Click here http://www.sec.gov/Archives/edgar/data/934612/000095015709000845/ex10-1.htm to read the entire letter filed with the SEC.

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NEW YORK POST: Kraft-ing a deal

2009-11-11T06:39:00.001+13:00

Cadbury bid puts CEO Rosenfeld's rep on the line

By JOSH KOSMAN

Last Updated: 2:19 AM, November 10, 2009

Posted: 1:38 AM, November 10, 2009

Kraft's CEO and chairman is all in. Irene Rosenfeld, who has been seen by many as a mediocre chief executive, yesterday made her $16.4 billion formal offer for British chocolate maker Cadbury. Her career could hinge on the results of the hostile bid. Rosenfeld took the top spot at the food giant in 2006, promising expansion. At the time, Chairman Louis Camilleri said, "We are confident that Irene will accelerate the execution of Kraft's growth strategy." But, generally, that has not happened, and one major shareholder said it was hard to give Rosenfeld more than a C+ grade. "Some of Kraft's products should be more relevant during the recession," the source said. "If you can't sell Maxwell House and mac and cheese now, then when?" To rectify that, she's been quietly working with Citigroup for more than a year to mount a bid for Cadbury. Merging the two companies would result in significant savings. But Cadbury has already rejected her initial bids as too low, and now her reputation is riding on her ability to close the deal without overpaying. The situation is made more precarious by Kraft's disappointing results. The company last week reported a 5.7 percent decline in quarterly revenues to $9.8 billion, and minimal sales growth. Kraft made its initial cash-and-stock offer for Cadbury in late August. British takeover law required Kraft to make an official bid by yesterday, or walk away from the deal for several months. Cadbury rejected the official offer, which was more than 7 percent below Cadbury's share price, almost immediately. Kraft has 46 days to raise its bid after it posted yesterday's offer. A leading Kraft shareholder pointed out that Kraft's share price is a key barometer of Rosenfeld's performance. Since she was named CEO, Kraft's shares are off 10 percent, which is similar to the overall market. He did give her points for buying a cookie business in China that has given Kraft the ability to sell its products, including Ritz crackers, in Asia. Rosenfeld might have some support in reserve. Six of her nine board members have been named since she became CEO. Also, leading shareholder Warren Buffett seems to be supportive. "I think he's obviously got her ear," the shareholder said. Kraft by making a formal bid yesterday needed fully committed bank financing. The Oreo maker arranged a $9 billion loan, and in doing so, will pay lenders more than $100 million in fees even if it loses, said a source closely following the situation.

Kraft's CEO and chairman is all in.

Irene Rosenfeld, who has been seen by many as a mediocre chief executive, yesterday made her $16.4 billion formal offer for British chocolate maker Cadbury.

Her career could hinge on the results of the hostile bid.

Rosenfeld took the top spot at the food giant in 2006, promising expansion. At the time, Chairman Louis Camilleri said, "We are confident that Irene will accelerate the execution of Kraft's growth strategy."

But, generally, that has not happened, and one major shareholder said it was hard to give Rosenfeld more than a C+ grade.

Kraft chief Irene Rosenfeld (above) is dangling in hostile territory in her careerstaking move to buy UK-based Cadbury.

"Some of Kraft's products should be more relevant during the recession," the source said. "If you can't sell Maxwell House and mac and cheese now, then when?"

To rectify that, she's been quietly working with Citigroup for more than a year to mount a bid for Cadbury. Merging the two companies would result in significant savings.

But Cadbury has already rejected her initial bids as too low, and now her reputation is riding on her ability to close the deal without overpaying.

The situation is made more precarious by Kraft's disappointing results. The company last week reported a 5.7 percent decline in quarterly revenues to $9.8 billion, and minimal sales growth.

Kraft made its initial cash-and-stock offer for Cadbury in late August. British takeover law required Kraft to make an official bid by yesterday, or walk away from the deal for several months.

Cadbury rejected the official offer, which was more than 7 percent below Cadbury's share price, almost immediately.

Kraft has 46 days to raise its bid after it posted yesterday's offer.

A leading Kraft shareholder pointed out that Kraft's share price is a key barometer of Rosenfeld's performance.

Since she was named CEO, Kraft's shares are off 10 percent, which is similar to the overall market.

He did give her points for buying a cookie business in China that has given Kraft the ability to sell its products, including Ritz crackers, in Asia.

Rosenfeld might have some support in reserve.

Six of her nine board members have been named since she became CEO. Also, leading shareholder Warren Buffett seems to be supportive. "I think he's obviously got her ear," the shareholder said.

Kraft by making a formal bid yesterday needed fully committed bank financing. The Oreo maker arranged a $9 billion loan, and in doing so, will pay lenders more than $100 million in fees even if it loses, said a source closely following the situation.

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SACRAMENTO BEE: Water plan's size, pork may sink it

2009-11-11T06:29:00.002+13:00

By Dan Walters

Published: Tuesday, Nov. 10, 2009 - 12:00 am | Page 3A

Maywood is one of California's tiniest and most troubled cities, a plot of scarcely 750 acres southeast of downtown Los Angeles.

Its official population, nearly all Latino, is about 30,000 persons, not counting an untold number of illegal immigrants. Its Police Department has been singled out by the state Department of Justice for brutality.

Maywood's drinking water, supplied by three private companies, "on any given day ... can be shades of brown and emit a foul odor," according to an observer for the Natural Resources Defense Council. Many residents suspect contamination from industrial waste disposal.

Given that, one might justify an $8 million earmark to upgrade Maywood's drinking water supply in the $11.1 billion bond issue that the Legislature approved last week as the centerpiece of its water supply package and that Gov. Arnold Schwarzenegger signed Monday.

Schwarzenegger did not go to Maywood to conduct his bill-signing ceremony, however. Rather, he did it at a dam near Fresno to tout designated financing for highly controversial new reservoirs, saying, "I would not sign it without water storage."

Schwarzenegger's effusive words notwithstanding, there's much to question about the bond issue, beginning with its size. In enacting it, the governor and the Legislature completely ignored state Treasurer Bill Lockyer's warning that the state, by borrowing money for so many purposes, could quickly become overextended.

Debt service, now nearly 7 percent of the state budget, could hit 10 percent by the middle of the next decade, Lockyer said, calling for a multiyear master plan for financing infrastructure rather than the current election-by-election game. Repaying water bonds will cost as much as $800 million a year.

The second big question: Will voters go along with it? Asking visibly angry voters to authorize more borrowing in this very bleak economy is dicey, especially since there's considerable opposition, including some environmental groups and perhaps public employee unions that see less program money available if more is spent on bond service.

The bond's political pork would be ammunition for an opposition campaign. Senate President Pro Tem Darrell Steinberg may have been compelled to remove the $10 million earmark for his pet "unity center" that had nothing to do with water, but the $30 million blanket appropriation for "watershed education facilities" remains, for example.

There's another $250 million to partially pay for removing dams on the Klamath River that have nothing to do with California's water supply - a benefit to PacifiCorp, the dams' operator, which is owned by billionaire Warren Buffett, Schwarzenegger's old pal. And there's another $20 million for "economic development" in Siskiyou County, where the dams are located.

If the bonds are rejected, the entire water package collapses.

This is going to be interesting.

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CNBC: Warren Buffett and the Crisis: 'Brilliant Moves Interspersed with Some Surprising Errors'

2009-11-11T06:18:00.004+13:00

Published: Tuesday, 10 Nov 2009 | 9:51 AM ET

By: Alex Crippen
Executive Producer

Alice Schroeder's authorized biography of Warren Buffett is now available in a trade paperback edition .

In an "updated and condensed" version of The Snowball: Warren Buffett and the Business of Life, Schroeder adds a new 31-page chapter covering events after the hardcover's publication last year.

She details Buffett's reaction to the credit crisis as it peaked in the fall of 2008, Barack Obama's election as President, and Berkshire Hathaway's loss of its coveted triple-A credit rating.

Schroeder candidly describes how Buffett made a "series of characteristic brilliant moves interspersed with some surprising errors."

His deals "would enrich Berkshire shareholders for many years to come." The financial crisis, however, "left Berkshire a weaker company financially" and "undercut Buffett’s reputation as a nearly infallible manager."

With thanks to Bantam and Random House, here is an excerpt from THE CRISIS: The decline of Berkshire Hathaway's stock from Triple-A status, by Alice Schroeder:

As the financial crisis evolved, the lame-duck Bush administration and the new Obama administration followed a consistent course under Federal Reserve Chairman Benjamin Bernanke and Treasury Secretary Timothy Geithner, with the Fed injecting trillions of dollars into the U.S. banking system, trying to forestall deflation—chronic falling prices such as occurred in 1932. The still unfolding crisis revealed its complex brew of causes, including artificially low interest rates, foolish borrowing by businesses and individuals, foolish lending by banks and investors, overreliance by institutions on complex financial instruments, aggressive behavior by derivatives traders, conflicts of interest at the banks being paid as agents to package loans sold to them by originators and resell them to investors, a climate of deregulation, lax oversight and enforcement by regulators, abdication of responsibility by rating agencies, inadequate capitalization of bond insurers, investor indifference—in other words, effects of all the normal dysfunctions that precipitate a bubble.

Of the responsible parties, it was the banks and AIG that earned the public’s greatest ire, while Buffett became the public’s greatest symbol of financial responsibility.

Treasury yields soon reached zero, but the flood of money failed to open the channels of business lending; credit remained virtually nonexistent. Buffett, who was at the time acting as the economy’s greatest cheerleader, lent at interest rates that in some instances bordered on usurious—$150 million of twelve percent notes in Sealed Air; $300 million of Harley-Davidson debt for a fifteen percent interest rate; $300 million of ten-percent contingent convertible senior notes from USG; $250 million of Tiffany bonds at ten percent; and a $2.7 billion, twelve-percent perpetual convertible stake in Swiss Re that would give Berkshire a thirty-percent ownership in the insurance giant.

This latter move baffled insurance industry insiders, including Swiss Re employees. Swiss Re was General Re’s biggest competitor; observers concluded that, on any terms, the investment to prop up Swiss Re made no sense because of its negative long-term strategic consequences to Berkshire—unless Buffett ultimately meant to take over Swiss Re and merge it with General Re. In the past, however, Buffett had made opportunistic insurance investments that worked against Berkshire’s long-term interests. Challenged on this, he would respond, “If we don’t do it, somebody else will.” Thus it was equally likely that there was no strategy whatsoever behind the deal besides extracting some fast cash from the pockets of the Swiss.

Slideshow: Berkshire Hathaway's Biggest Holdings

Throughout, Buffett became an even more frequent presence on CNBC and other networks. He filled the role of America’s statesman and father figure during the financial crisis, but he had also fallen into the trap of competing for attention instead of trusting that his sterling record would bring it to him. “Dignity, Warren, dignity,” counseled one of his friends—but Buffett had never wanted to be dignified; he had never minded looking silly if it would get people to pay attention to him. He was a performer and a showman, and now he feared the show might end. He would keep on giving as many performances as possible while there was time. And indeed, his profile grew and grew in proportion to how often he appeared on the magic medium of television.

All this was not only personally effective—Buffett was his own best publicist—but also understandable for someone his age, until his marathon performances on CNBC resulted in some serious gaffes: criticizing newly elected President Obama’s performance, giving advice to the White House (the Shoe Button Complex, something that Buffett had heretofore spent a lifetime avoiding), and a claim that he, like everyone else, had thought housing prices could only go up—an absurdity that raised eyebrows.

When Berkshire finally reported its 2008 earnings, the consequences of some of Buffett’s earlier decisions became even clearer. The insurance businesses had suffered large losses from that year’s unusually active hurricane season. “Last year was a bad year for a float business,” Munger would later say at the shareholder meeting, citing GEICO and the energy and utility

businesses as bright spots. Although Buffett referred to Berkshire’s “Gibraltar-like” balance sheet, the erosion in its financial strength was unmistakable. Because of Berkshire’s heavy insurance exposure and its concentration in financial stocks such as American Express, Wells Fargo, and U.S. Bancorp, its book value was down by 9.6 percent—only the second decrease in its history (and the largest). Berkshire had recorded $14.6 billion of accounting losses on its derivative contracts. While many of these losses would probably be reversed in the long run, they had a significant impact on the balance sheet. Nearly all of the decline was due to bets on financial assets that were market-dependent.

Even so, the decrease in Berkshire’s book value was insignificant compared to major banks and nonbank lenders, which were technically insolvent or close to it, and receiving hundreds of billions in government aid. Buffett had steered Berkshire to a stellar performance, by that measure. All the work of many years had culminated in this moment: Berkshire standing alone after other businesses crumbled around it.

You would not know this by reading some of the commentary on Buffett. One of his challenges at this late stage of his long career was that he tended to be measured by some observers and journalists against a standard of perfection, as if he had to be infallible to be any good at all. Bloggers and financial writers went wild writing about Buffett’s derivatives exposure. Buffett went on the counterattack. That year’s shareholder letter contained a lengthy explanation of his reasoning for selling the equity-index puts. Yet by some calculations, under various scenarios Berkshire could indeed lose billions at the expiration dates of these contracts, which were not as well priced as Buffett had apparently thought when he entered into them. Ultimately, the concentration of financial assets and their effect on Berkshire’s value was significant enough that first Fitch Ratings, then Moody’s, downgraded the credit ratings of Berkshire and its subsidiaries (such as National Indemnity and MidAmerican) by one notch, from AAA or the equivalent.

The top rating had given Berkshire a lower cost of funding and significant advantages in its insurance business, which made it attractive to sellers of businesses. Buffett had displayed quiet satisfaction when Berkshire’s two largest insurance competitors lost their triple-A ratings, and had at times said privately that the one thing he would never do was jeopardize Berkshire’s triple-A, which he considered one of its most precious assets. In his shareholder letters, he liked to comment that Berkshire was one of only “seven,” or whatever the dwindling number was, of the remaining triple-A companies. He considered it unlikely that this rating, once lost, would be reinstated.

Now Berkshire had suffered that blow, which it probably could have avoided by raising (expensive) equity capital, something Buffett chose not to do. At the 2009 shareholder meeting, he downplayed the consequences. He said the derivatives did not impinge on capital and that a triple-A rating only conveyed “bragging rights.” “We’re still a triple-A in my mind,” he said. It was actually possible that Berkshire—in its uniqueness—could get the rating reinstated, but if so, it would be expensive even if Berkshire did not have to raise capital: It would have to reduce its exposures to insurance and equity market risk as a percentage of book value. Buffett probably would choose not to pay that price because its benefit was limited; no other financial institution remained with a triple-A rating.

Thus, the real meaning of the downgrade, in a larger context, was that the crisis had unveiled the true risk inherent in the global financial system—and the rating agencies had responded by increasing the capital threshold for a triple-A rating to a level that meant even the soundest institution found it financially unattractive to qualify.

Buffett also revealed at the 2009 shareholder meeting that to reduce Berkshire’s derivative risk, he had renegotiated two of the equity-index put contracts, shortening the terms by eight years in order to lower the price at which Berkshire would have to pay out losses. By then, the values of Wells Fargo, U.S. Bancorp, and American Express had begun to recover, but Wells and U.S. Bancorp had cut their dividends, which would also affect Berkshire’s future earnings. Buffett predicted that Wells Fargo would not have to issue stock, a prediction that was almost immediately contradicted when Wells Fargo did just that. He scored better a few weeks later when Berkshire’s SEC filings revealed that he had been buying American Express while the stock was on its back.

Thus, during the financial crisis, Buffett made a series of characteristic brilliant moves interspersed with some surprising errors. Above all, he stood pat on existing investments while adding cleverly structured new deals, deals that for the most part were not available to ordinary investors. These opportunities came to Berkshire because of its ready cash and underlying financial strength, and because of Buffett’s willingness to rent his well-earned reputation and provide quick, trustworthy handshake dealmaking.

The actions he had taken with deals struck in 2008 and 2009, in accordance with his saying “Cash combined with courage in a crisis is priceless,” would enrich Berkshire shareholders for many years to come. At the same time, the crisis—which admittedly had so many episodes of heart-stopping disintegration into near economic collapse that in some ways it eclipsed the events leading to the Great Depression—left Berkshire a weaker company financially. It undercut Buffett’s reputation as a nearly infallible manager, and cost the company its top financial rating.

The 2009 shareholder meeting would prove to be both a celebration of Berkshire’s success and a chance for Buffett to defend himself. He had changed the meeting format so that half the questions would concern Berkshire and would be submitted through a panel of journalists: Carol Loomis, Becky Quick of CNBC, and Andrew Ross Sorkin of the New York Times. A torrent of five thousand questions poured in, many of them tough-minded queries from people who wanted answers but who had not, in the past, been willing to wait hours for a position at the microphone while others asked Buffett about his personal relationship with Jesus Christ and what books he and Munger had read lately.

The new format and the unsteady economy attracted what was said to be a record thirty-five thousand people in attendance despite Berkshire’s stock price, which hovered at $90,000 per share. Buffett, who never said anything spontaneous, always seemed to have an answer prepared for every question that could be anticipated. The main difference in 2009 was that shareholders were asking truly challenging questions, rather than flattering him with their gratitude for being able to stand in his presence and receive his wisdom. At his most impressive he rattled off statistics and explained economics with a clarity that people were not hearing from anyone else. But his answers on other questions were more awkward. Buffett liked to deal with confrontation indirectly. Put on the spot, he behaved as he did in private, avoiding direct answers to some questions and meting out unpleasant information through hints and sometimes by omission.

Challenged on his decision not to sell financial stocks in the spring of 2008, he said he only sold when a company’s competitive advantage disappeared, he lost faith in management, or he needed cash. He was cutting a fine distinction in trying to separate his criteria for selling stocks when companies’ circumstances were changing materially all the time, versus selling whole businesses, which happened only when they became economically unviable or had persistent labor problems. With newspapers folding in cities all over the United States, he also went so far as to raise the possibility of eventually shuttering the Buffalo News, but said that as long as the News made a little money and had no labor problems, he and Munger would “keep it going.”

Buffett was questioned sharply about why he did not sell Moody’s when its business model was fundamentally compromised after the rating agencies were implicated in causing the financial crisis. He said he thought the odds were that Moody’s was still a good business, and that he did not think conflict of interest—rating agencies are paid by the entities they rate—was “the major cause” of the problem. (Another conflict of interest, not mentioned, was Berkshire’s twenty-percent ownership of Moody’s when Moody’s rated Berkshire.) Many in the audience had spent years listening to Charlie Munger’s often repeated saying, “whose bread I eat, his song I sing,” and understood that Buffett was rationalizing as he always did in pursuit of a profit or when he felt backed into a corner—or both.

When Buffett was asked how the four investment managers he had chosen as possible replacements performed during the 2008 market crash, and whether they were still on the list of candidates, he said they “didn’t cover themselves with glory,” then commented that neither did most investment managers during this period. Buffett did not respond to how these managers did relative to the market or to their relevant benchmarks. He left a vague impression that the list of candidates might change, over time.

What was certain, whichever candidates were chosen, was that the stock market would eventually recover. More important were Berkshire’s businesses. Most were among the best in their respective industries. Buffett had built a conglomerate of stable businesses that were likely to be profitable for a long time. Still, the events of 2008 had certainly convinced many shareholders that Berkshire was not a company that could be run by a ham sandwich after Buffett was gone.

At the meeting they grilled Buffett about the question of succession with new intensity. The next CEO’s challenges would be keeping Berkshire’s managers happy, managing the company’s franchise and risks, and investing the cash flow the businesses threw off. Buffett insisted that all the candidates were internal.

He said that running a major operating business was the best qualification for the CEO job. He next talked about what he actually did as CEO, which did not involve anything remotely resembling running an operating business (nor had Buffett ever run an operating business; nor could he have, had he been forced to do so). He stated that the operating managers had experience allocating capital—perhaps a necessary rationalization, although nobody truly allocated capital at Berkshire other than Buffett, particularly not in financial services, the heart of the company and the site of Berkshire’s recent woes.

The answer revealed that Buffett was publicly introducing a rationale to pave the way for someone like David Sokol, the presumed front-runner who ran MidAmerican Energy. Buffett was also using a selection process that in some ways mirrored his two disastrous experiences at Coca-Cola, one that could someday put the board in an awkward spot.

To be sure, Buffett had already divided executive authority in a way that many outside candidates would not find comfortable—with his son Howie succeeding him as chairman, and Bill Gates taking on the role of de facto lead board member as representative of Berkshire’s largest future shareholder, the Bill and Melinda Gates Foundation. This meant that, for better or worse, Berkshire probably would always be run in an unusual manner by unusual people.

The unusual company that Buffett—or Sokol, or possibly even a committee—would be running was stable and successful, and had, because of the financial crisis, gained relative advantage over its rivals in many of the businesses in which it operated, even though as of spring 2009 its results and financial condition also reflected the weakened economy.

As for the future, Buffett said retailing, especially of luxury products, might not recover for years. Companies like Borsheim’s and NetJets were going to struggle. He said little more about NetJets; the sparsely populated aisles at Borsheim’s on Sunday after the meeting spoke for themselves. On a brighter note, he said that new household formation was the key to recovery of housing related sales, with 1.3 million new households formed in the United States every year.

He spoke optimistically of the long-term future of the U.S. economy, which had survived two world wars, many panics and depressions, the resignation of a president in disgrace, and civil unrest. At various times, he had discussed what he expected to be inevitable inflation and the declining value of the dollar. Yet it was the “unleashed potential” of the human race that caused economies to grow over time, he said; in other words, productivity. The world’s system to increase productivity works naturally and has been working for a long time. Munger waxed enthusiastic over Berkshire’s investment in BYD, a Chinese maker of electric cars. We are about to harness the power of the sun, he said, and use more electric energy to preserve hydrocarbon energy for chemicals that are more important. The main technical problem of mankind is about to be fixed, he opined. Then he and Munger headed off to meet with the international shareholders, and Buffett and Astrid attended another round of parties on Saturday night.

Within days, Buffett would begin planning the 2010 meeting—when he would be almost eighty. He couldn’t believe he would be eighty. Every year he attacked the meeting planning as though this year would be his ultimate statement—his greatest show on earth. In 2009, he had shown off an electric car. He would have to find some way to top that in 2010.

Meanwhile, to his slight chagrin, Borsheim’s had missed out on one sale in 2009. (Every sale mattered to Buffett.) At 3:00 p.m. during the shareholder meeting, “Alex from Boston” asked Buffett what individuals could do to help the economy. Buffett said, first, to spend money, then repeated that new household formation would be helpful to the economy. With that, “Alex from Boston,” who was Buffett’s grandnephew Alex Buffett Rozek, asked his girlfriend Mimi Krueger to marry him. Mimi, stunned to be asked in front of thousands of people, said yes, and Alex gave her his grandmother Doris’s sapphire-and-diamond ring, which Warren had given his sister for her seventy-fifth birthday.

Buffett the showman had always wanted to have a wedding at the Berkshire shareholder meeting, but had never quite managed to pull that off. He would settle for an engagement instead.

Current stock prices:

Berkshire Class A: [BRK.A 102300.00 -300.2031 (-0.29%) ]

Berkshire Class B: [BRK.B 3410.00 -15.00 (-0.44%) ]

Sealed Air: [SEE 21.80 -0.08 (-0.37%) ]

Harley-Davidson: [HOG 26.39 -0.68 (-2.51%) ]

USG: [USG 13.88 -0.42 (-2.94%) ]

Tiffany: [TIF 42.45 -0.31 (-0.72%) ]

Swiss Re: [SWCEY 47.05 -0.80 (-1.67%) ]

American Express: [AXP 38.982 -0.068 (-0.17%) ]

Wells Fargo: [WFC 28.12 -0.28 (-0.99%) ]

US Bancorp: [USB 24.23 -0.28 (-1.14%) ]

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REUTERS: BYD Electronic shares fall after charger recall

2009-11-10T18:07:00.001+13:00

* Shares drop more than 4 pct over Nokia recall of chargers

* Could tarnish BYD Electronic's reputation - Credit Suisse (Updates share price, adds broker's comment)

HONG KONG, Nov 10 (Reuters) - Shares in BYD Electronic (0285.HK), the battery making arm of BYD Co (1211.HK), fell more than 4 percent on Tuesday after Nokia (NOK1V.HE) said it would replace 14 million cellphone chargers made by the Chinese company.

The stock fell 4.4 percent to a low of HK$6.70 shortly after the market opened, underperforming a 1.3 percent gain by the benchmark Hang Seng Index .HSI.

Nokia said BYD would cover the costs of recalling the chargers, which it says could give users an electric shock. [ID:nL9382553]

Credit Suisse downgraded the stock to "underperform" from "neutral".

Although the recall would have a limited financial impact on BYD Electronic, it would cast doubt on the company's reputation and ability to manufacture phone chargers, it said in a research report.

The charger business is estimated to contribute only about 5-6 percent to the company's top line this year.

The stock has risen 62 percent since the start of October, significantly outperforming the market and its rivals.

"We believe such a gain is unwarranted and that investors should use this opportunity to take profit," Credit Suisse said.

Shares of BYD Co, which have soared more than eightfold since it said billionaire investor Warren Buffet would buy a stake in the company, were unaffected by the latest news, up 1.2 percent in early trade in Hong Kong. (Reporting by Alison Leung; Editing by Chris Lewis)

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CNBC: CNBC PRESENTS A SPECIAL TOWN HALL EVENT: "WARREN BUFFETT AND BILL GATES: KEEPING AMERICA GREAT" ON NOVEMBER 12TH AT 9PM ET/PT

2009-11-10T18:01:00.002+13:00

Posted By:Beth Goldman

Topics:Squawk Box

Warren Buffett and Bill Gates, Two of the Most Successful Men in Business, Take Questions From The Next Generation of Business Leaders

Moderated by CNBC's Becky Quick From Columbia Business School in New York City

ENGLEWOOD CLIFFS, N.J., November 9, 2009- They are American icons, Champions of Capitalism and the embodiment of the American Dream. Two self-made billionaires – one redefined an industry and the other the modern investor.

On Thursday, November 12th at 9PM ET/PT, from Columbia Business School in New York City, CNBC brings together two of the most successful men in business – Warren Buffett, Chairman and CEO of Berkshire Hathaway (and Columbia Business School alumnus), and Bill Gates, Chairman Microsoft Corp. and Co-chair of the Bill and Melinda Gates Foundation – for a special town hall event. Columbia Business School's best and brightest minds have a chance to ask whatever they'd like of the two greatest capitalists of our generation.

CNBC's "Warren Buffett and Bill Gates: Keeping America Great," moderated by CNBC's Becky Quick, will broadcast globally across the CNBC network.*

In a rare and exclusive television event, Buffett and Gates share their secrets of success and guide the next generation of business leaders on the future of Wall Street. The billionaire-philanthropists take questions from Columbia Business School's students on today's hottest topics including the economy, America's status as a financial superpower, the future of capitalism, the state of the American Dream and corporate social responsibility.

"I've enjoyed my past visits to Columbia, but know this one will be particularly fun as Warren and I get to spend time at his Alma Mater with students from the Business School," said Bill Gates.

"One of Columbia Business School's greatest strengths is the power of the innovative ideas that come from faculty, students and alumni," said Glenn Hubbard, Dean of Columbia Business School. "We're delighted to welcome Warren Buffet MS '51 back to campus and, with Bill Gates, to engage in a thoughtful discussion with our students across a range of topics."

"America is at an inflection point and it is our responsibility as the leader in business news to educate and teach the next generation," said Susan Krakower, Senior Vice President, Strategic Programming and Development, CNBC. "And, what better way to do this than bringing two of the greatest capitalists together in one room to share their secrets for keeping America great."

CNBC's Becky Quick is co-anchor of "Squawk Box," (M-F, 6 -9 a.m. ET) CNBC's signature morning program.

CNBC's "Warren Buffett and Bill Gates: Keeping America Great" airs on Thursday, November 12th at 9PM ET and 12AM ET on CNBC. The special town hall event will repeat on Sunday, November 15th at 10PM ET on CNBC.

**You will find this event on Everything Warren Buffett shortly after it happens.

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FINANCIAL POST: Kraft needs more lolly

2009-11-10T17:56:00.000+13:00

Rob Cox, Breakingviews.com Published: Monday, November 09, 2009

Alessia Pierdomenico/Reuters Cadbury's chocolate bars are seen in a shop in London. Kraft Foods Inc said it had made a US$16.7-billion bid for Britain's Cadbury but was rebuffed

Kraft would like to start an insurrection among Cadbury shareholders. The U.S. food group wants the British confectioner's owners to nudge management into discussions over its £10-billion (US$16-billion) takeover bid. But to tip the balance decidedly in favour of its unsolicited -- and now formal -- approach it needs something else: more money.

The good news for Cadbury shareholders is that Kraft's decision to make its offer official on Monday suggests there's more money to be had. After all, Kraft chief executive Irene Rosenfeld would not have convinced her board to enter a formal UK takeover process -- including signing expensive commitment letters from nine banks -- if she weren't prepared to do more to win her quarry.

It may seem surprising that Kraft did not pitch something sweeter than its original proposal in its new hostile approach. After all, the company has had more than two months to test the waters. The original, informal offer valued Cadbury at 745p, a price that Cadbury shares quickly surpassed. The subsequent decline in Kraft's stock makes the consideration -- 300p in cash and the remainder in equity -- worth about 712p today -- less than before, as Cadbury was quick to point out.

Yet there's still time for Rosenfeld to up the price -- as investors appear to expect, with Cadbury's shares closing 7% above the bid price on Monday. Under UK takeover code rules, Kraft can still raise its offer. Doing so right away, in the absence of any obvious competition for Cadbury from Nestlé, Unilever or Hershey, would have amounted to negotiating against itself. That said, amending the terms to at least meet the value of the original offer tabled on Labor Day might have made Kraft appear less cheap.

Rosenfeld, though, faces a challenge in balancing her desire for growth with concerns among shareholders like Warren Buffett about overpaying. Kraft's most recent set of results showed a low-growth conglomerate in need of a sugar fix. Yet absent greater synergies from a Cadbury deal, Kraft can't raise its bid by much without destroying value or losing its investment-grade debt rating.

What it can do, however, is begin a war of attrition. Even a low-ball bid forces Cadbury shareholders to consider what it would take for them to sell. It also brings hot money into the mix in the form of merger arbitrageurs. Their concern is less whether Cadbury is worth 800p or 900p than whether it can be sold for a premium to what they paid.

Kraft has sounded the trumpet with its formal bid. It will take more than battle cries, however, to bring victory.

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RTT NEWS: Berkshire Hathaway To Dispose Holdings In Union Pacific, Norfolk Southern

2009-11-10T17:51:00.001+13:00

(RTTNews) - Matt Rose, Chairman, President and Chief Executive Officer of
Burlington Northern Santa Fe Corp. (BNI: News ), said that Warren Buffett's Berkshire Hathaway Inc. (BRKa: News , BRKb) will be disposing holdings in Union Pacific Corp. (UNP: News ) and Norfolk Southern Corp. (NSC: News ).

Berkshire Hathaway will be selling the stakes in the two railroad companies between now and the transaction date, Rose said in a conference call hosted last week concerning the proposed acquisition of BNSF by Berkshire Hathaway. The transcript of the call was filed with the U.S. Securities and Exchange Commission today.

Last week, Berkshire Hathaway agreed to acquire the remaining 77.4% of outstanding shares of BNSF it did not own, in a $100 per share cash and stock transaction, which would be the largest acquisition in its history.

The proposed BNSF-Berkshire Hathaway transaction, which requires approval by holders of two-thirds of BNSF shares, and customary closing conditions, including a review by Department of Justice, is expected to close in the first quarter of 2010.

According to another regulatory filing, Berkshire Hathaway held 9.55 million shares of Union Pacific and 1.93 million shares of Norfolk Southern as of June 30, 2009.

UNP closed Monday's trading session at $62.38, while NSC closed at $51.95. BNI closed the day's session at $97.60. BRKa closed the regular session at $102,600.20.

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