Warren Buffett on The Huffington Post

Dan Dorfman: SEC, NYSE Investigating Buffett's Big Rail Deal

2009-12-07T11:37:31Z

Even though securities industry regulators are on the warpath about what they perceive as illegal stock trading by Wall Street cheats, the practice of trying to make a fast, illegal buck, nonetheless, continues to swell.

What follows is a number of examples, the most noteworthy one centering on the recent big dollars purchase of a company by investment guru Warren Buffett, the world's second richest man with an estimated net wort of $37 billion.

I've learned authoritatively that two of Wall Street's top cops on the securities beat have recently kicked off investigations into one of the year's biggest corporate deals -- the $44 billion or $100-a share acquisition of Burlington Northern Santa Fe, the nation's biggest rail company, by Buffett's Berkshire Hathaway. The two are the Securities & Exchange Commission and the market surveillance division of the New York Stock Exchange, both of which are focusing on the trading in Burlington Northern shares.

The thrust of the probes -- which are not of the companies themselves -- is to determine whether any investors might have been privy to the Buffet-Burlington deal prior to its official announcement on November 3 and then illegally traded on that classified information.

Both the SEC and NYSE declined comment, but two regulatory contacts confirmed the investigations to me.

In addition, I have obtained copies of internal documents that the SEC and the NYSE very recently sent to the brokerage industry in which each requested the names of clients, both here and abroad, who bought or sold Burlington shares on national or foreign exchanges prior to the public disclosure of the deal.

For example, the NYSE, in its query to brokerage firms, is seeking the names of clients who traded in the stock this year between October 2 and November 2. The SEC, on the other hand, has broadened the stock trading period to cover from September 3 through November 10.

Anyone who did buy Burlington's shares in advance of the official disclosure of the transaction made a bundle. For example, Burlington's shares closed the day before the disclosure at $76.07. After Buffet's $100-a share offer a day later, representing a hefty 31% premium, the stock ballooned to a high of $98.89 and is currently trading at $98.66.

Speaking of stock trading investigations, the SEC has launched a bunch of them over roughly the past six weeks, and some as recently within the past week. Again, all the investigations are documented in copies (in my possession) of queries the commission sent to various brokerage firms in search of the names of clients who traded in the assorted securities.

Included are such well-known names as Amazon.com, Morgan Stanley, Citigroup, Black & Decker, Hearst-Argyle Television, Wyeth, MGM Mirage, Hewlett Packard, Cisco Systems and Las Vegas Sands.

Additional SEC stock trading investigations include IMS Health, I2 Technologies, National City Corp., Sovereign Bancorp., Constellation Energy Group., Imclone Systems, AK Steel Holding, Mylan, Affiliated Computer Services, Gildan Activewear, China Marine Food Group, Ltd., Privatebancorp, GTX, Inc., Allied Capital Corp. and American Capital, Ltd.

In a related development, the NYSE has also been investigating trading in the shares of Playboy Enterprises, which has been the subject of a bevy of takeover rumors

Go figure. With government regulators clearly cracking down on illegal trading on inside information, you would think the Wall Street's cheats would take a breather.

Forget it. The sizeable number of SEC stock trading investigations clearly indicates otherwise. It seems to be business as usual for the guys and gals who want to beat the system, even if it means breaking the law and chancing fines, jail time and disgrace if they're caught.

As one regulator put it, "Maybe some people will get the message if they end up in a different abode."

What do you think? E-mail me at Dandordan@aol.com.

Rob Fishman: Prize of the Meritocracy

2009-12-02T16:15:07Z

Goldman Sachs is a meritocracy.

Then they admit it, the booming-but-beleaguered bankers, whose website says it loud and clear. And why not? Everyone in America knows what a meritocracy is. Rule by the worthy, not the rich, regal or related. As at Goldman Sachs, where your "opportunity to contribute…will be directly connected to your ability to excel."

Of course, as Michael Young, author of that obscure classic, The Rise of the Meritocracy, once wrote, "the most influential books are always those that are not read." If from the grave, Young has second-guessed that supposition, he need Google no further than the aforementioned advert. Had Goldman's copywriter read Young, he would have steered far clear of the locution, and in so doing, left the public's worst fears about his employer unconfirmed. But then, his bonus probably dwindled this year to the low six-figures.

Young coined the word "meritocracy" in 1958, in a futuristic story set in 2034. There, "the world beholds for the first time the spectacle of a brilliant class, the five per cent of the nation who know what five per cent means."

A simple formula reigns supreme: IQ + effort = merit. To be merely intelligent or industrious is not enough; only those with both succeed. In the new Age of Meritocracy, "all persons, however humble, know they have had every chance." Your opportunity to contribute, in other words, is directly connected to your ability to excel.

Goldman Sachs is by its own and all accounts a textbook meritocracy. Long before C.E.O. Lloyd Blankfein was doing God's work, he was growing up in the projects, and, on a scholarship, attending Harvard at age 16. Silver spoons don't earn gold medals, grit and brains do. If IQ + effort = merit, and IQ + effort = Goldman, then Goldman = merit.

Or in the plain English of Vanity Fair: "Goldman is better." And not because they're plutocrats ("Government Sachs") or oligarchs ("Goldmine Sachs"), but because they're the smartest and savviest. Meritocracy at its apotheosis.

But that's only half the story, half of Michael Young's story. As he writes in a foreword to Rise of the Meritocracy, many readers have "neglected, or not noticed, the fact that the book is satirical." It is not only an argument for meritocracy, but a counterargument against it: "another story, showing how sad, and fragile, a meritocratic society could be." In the language of fifty years later, the story of subprime loans, health care crises, and populist rage.

"If the rich and powerful were encouraged by the general culture to believe that they fully deserved all they had," Young continues, "how arrogant they could become, and, if they were convinced it was all for the common good, how ruthless in pursuing their own advantage."

"I think a strong Goldman Sachs," says Blankfein, "is good for the country."

Whether it's God's work or only Goldman's, it's clearly the province of the meritorious.

Kids these days are told, in the words of one Harvard instructor, that investment banking "is the only valuable way to finish your education. You'll work with the smartest people and the most exciting, high-profile clients." For off-the-charts IQs and outstanding efforts, the destination's no longer NASA; it's Goldman.

And therein lies the same conundrum that Young introduces, in the so-called "Chelsea Manifesto, of"—believe it or not—"2009":

Were we to evaluate people, not only according to their intelligence and their education, their occupation and their power, but according to their kindliness and their courage, their imagination and sensitivity, their sympathy and generosity, there could be no classes. Who would be able to say that the scientist was superior to the porter with admirable qualities as a father, the civil servant with unusual skill at gaining prizes superior to the lorry-driver with unusual skill at growing roses?

Imagine what they'd call the original meritocrat if he wrote that today!

The fear today is that Goldman has lost its lorry-drivers, employing only those adept at gaining superior prizes. As Bethany McLean writes, the Goldman of old, who refused to partake in hostile takeovers, is gone. In its stead is a belief that Goldman "cares about one thing and one thing only: making money for itself."

As one Wall Street executive tells McLean: "Why do you have a business? Because you have a customer. You have to make an appropriate profit. But is it possible that Goldman has changed from a firm that had customers to a company that is just smart as shit and makes a shitload of money?"

More and more these days, we see intellect and ingenuity employed to lucrative ends, IQ + effort = $$$. In this story, Buffett, Blankfein and Bloomberg are not so much antiheroes as provillains, rags-to-riches cases who bear out the meritocracy, and in so doing, reveal its inadequacy.

The problem with Goldman is not false advertising. Like the civil servant, it's an inability to smell the roses.

Goldman Sachs Small Business Program Details: Interview With Dina Powell

2009-11-25T11:27:37Z

The person who will be responsible for running the [Goldman Sachs] initiative day-to-day is Dina Powell, a former State Department official in the Bush administration who worked with Karen Hughes on education and cultural issues. Powell joined Goldman Sachs in 2007, as the global head of corporate engagement..Powell outlined the bank's plans in an interview with Inc.com editor Mike Hofman.

Don McNay: Washington: Totally Disconnected From Main Street

2009-11-23T19:30:25Z

Can you hear me calling you?

-Mike and The
Mechanics

Mark Twain said that when he died he wanted to be in Kentucky because everything happens 20 years later in Kentucky than in the
rest of the world.

I live in Kentucky but I
want to die in Washington. It might be the ticket to immorality. The people running Washington seem to exist in an alternate
universe.

Sunday’s Huffington Post headline read “Sherrod Brown: Obama
Focused on Main Street
but not all his advisers are.”

How long did it take you to figure that one out, Sherrod?

What was the first clue? Double-digit unemployment? Huge
Wall Street bonuses? The fact that no one on Obama’s economic team
has ever worked on Main Street
in his or her entire life?

Operating a business on Main Street is a lot different than lecturing
at the Harvard Economic Club. The team
President Obama surrounded himself with has spent way more time in a faculty
lounge than in the corner barber shop.

In the alternative universe of Washington,
the idea that Senator Brown, a progressive Democrat from Ohio, would criticize Obama’s advisers, is
considered earth-shattering.

Partisanship rules in Washington.
And Democrats and Republicans never
deviate from their talking points.

No one is supposed to think for himself. Even just a little bit, like Brown did.

In the alternative universe of Washington, they don’t really understand that
people on Main Street
are hurting. Not only are they hurting,
they are angry.

Charlie Rose recently hosted Warren Buffett on his show. Buffett is one of the richest guys in the
world, but he thinks he, and other rich people like him, should pay a higher
percentage in taxes.

Buffett noted that “K Street lobbyists” had developed too
much influence in Washington
and the average American was not being heard.

Buffett was a big Obama supporter. But he is also a realistic businessman. He understands that our economic future
depends far more on Main Street
than on Wall Street.

Part of the reason Washington
can be an alternative universe is that it’s a city that tends to be immune to
recessions and depressions.

I was in Washington
recently and a friend told me of his dilemma of trying to buy an affordable home. Washington
has one of the most expensive housing markets in the country. The federal government has not had any
significant layoffs or cutbacks in many years.
They keep on printing money.
There are many others who work for agencies or firms that deal directly
with the government. They are not
feeling the recession, either. It seems
the business of government is always booming.

People in Washington
are not feeling our pain. Or the extreme
pain that their counterparts in state and local governments are about to
feel.

My business is somewhat recession-proof, but I operate just
off Main Street
in Richmond, Kentucky.
Economic despair is all around me.
I have friends, and friends of friends, come to me daily looking for a
job. Not a high-paying career with
possibilities for advancement, benefits and a pension. Just a job.
A paycheck.

I don’t know what to do for them. I don’t have jobs to give them.

We advertised for an entry level position earlier
this year. We were flooded with
applications, including people with advanced degrees and boatloads of experience.

As Sherrod Brown so astutely noted, some of President
Obama’s advisers don’t “get it.”

Those of us on Main
Street knew from Day One they wouldn’t “get it.” Nothing in their background, education or
life experiences prepared them to understand the economic crisis from a Main Street
perspective.

I don’t blame the people Obama appointed. I blame the guy who appointed them.

We don’t get to vote for Secretary of the Treasury or
Chairman of the Federal Reserve Board.

We do get to elect a president. A president I voted for. One who campaigned on “change we can believe
in.

We have not had change on the economic front because Obama
chose his advisers from the same bunch of Wall Street and Washington insiders
that George W. Bush chose from.

Tell me how Timothy Geithner,
Dr. Lawrence Summers and Ben Bernanke are different from Henry Paulson, Alan
Greenspan and the people Bush had around him?

Imagine how different economic policy would be if someone
who understood Main Street
was calling the shots.

We would have the kind of change we really could believe in.
And was promised.

Don McNay,
CLU, ChFC, MSFS, CSSC is one of the world's leading authorities in helping
people deal with “Big Money” issues.McNay is an award
winning, syndicated financial columnist
and Huffington Post Contributor. You can read more
about Don at www.donmcnay.com
McNay founded McNay Settlement
Group, a structured settlement and financial consulting firm, in 1983 and Kentucky Guardianship
Administrators LLC in 2000. You can read more about both at www.mcnay.com
McNay has Master's
Degrees from Vanderbilt and the American
College and is in the
Eastern Kentucky University Hall of Distinguished Alumni.

McNay has written two
books. Most recent is Son of a Son of a Gambler: Winners, Losers
and What to Do When You Win The LotteryMcNay is a lifetime
member of the Million Dollar Round Table and has four professional designations
in the financial services field.

Compared To Buffett, Paulson And Geithner Have Gotten Taxpayers Little Bang For Their Bailout Buck

2009-11-17T11:04:44Z

One of the best ways I've found to evaluate the actions taken by then-Treasury Secretary Hank Paulson in bailing out the nation's failing banks back in 2008 -- and current Treasury Secretary Timothy Geithner's efforts to uphold the validity of those actions -- is to compare them to the actions taken by billionaire Berkshire Hathaway CEO Warren Buffett around the same time.

It's a valuable comparison that hasn't gotten a lot of attention but those who have bothered to have shone an appropriately harsh light. In January of 2008, Mark Pittmaen got economist Joseph Stiglitz on the record, saying, "If Paulson was still an employee of Goldman Sachs and he'd done this deal, he would have been fired." Late last month, MBF Asset Management LLC founder Mark Fisher took it further in Bloomberg, ripping the bailout as the blown "Trillion-Dollar Trade of the Century," saying, "To put this all in perspective, just consider for a minute how in the world Warren Buffett managed to negotiate a better deal with Goldman Sachs Group Inc. than the government did for the taxpayer."

Flash-foward to this week's issue of Barron's, where we have Jon Najarian laying out the Buffett-versus-bailout comparison in terms of how well everyone did with their 2008 bailout-era investments. As it turns out, to make money, you sort of have to act as if you want to. Buffett, when he decided to invest in Goldman Sachs, chose "to invest $5 billion... through a purchase of perpetual preferred stock," and "got warrants to buy up to $5 billion of Goldman common shares at $115 each, some 8% below where the stock was trading at the time." This was, in Najarian's estimation, "a very public model" of how to structure a bailout investment. But come the middle of October, when "the Wall Street giants had their backs to the wall," Paulson "gave them billions of our taxpayer dollars for a relative pittance."

So. How'd that work out?

Fast-forward to Oct. 21 of this year, and now Paulson's successor at Treasury, Timothy Geithner, is telling us what a great investment the government made in Goldman. His office touts the 23% return on our $5 billion in taxpayer money. Let's compare that with what we might have gotten with terms similar to Buffett's.

Goldman was trading at $115, so a $5 billion stake bought the taxpayers 43 million shares. With the stock subsequently running up to $180, that $5 billion stake would be worth $7.8 billion, a gain of $2.8 billion. But wait, it gets better -- or worse, depending on your view. Given the added kicker of warrants on another $5 billion, 8% under the market, we'd also own warrants for 43 million shares at $105. So we'd have made another $3.2 billion.

Thus, the total gain before dividends would be $6 billion on a $5 billion investment. Last time I checked, that's 120% on our money, versus the 23% that Hank got us.

It's almost as if Paulson and Geithner are more concerned with their once, and future, Wall Street cronies than they are the taxpayers whom they serve. How Geithner can peddle his 23% return as anything other than a massive failure simply staggers the imagination.

[Would you like to follow me on Twitter? Because why not? Also, please send tips to tv@huffingtonpost.com -- learn more about our media monitoring project here.]

Arianna Huffington: Memo to Warren Buffett: Put Down the Pom-Poms and Tell Us the Truth About the Economy

2009-11-16T18:43:08Z

Difficult times need wise men to tell difficult truths.

And, for many years, Warren Buffett, the "Sage of Omaha," has done just that. For example, he was one of the first to sound the alarm about the danger of derivatives, warning in 2003 that they were "financial weapons of mass destruction" that could lead to a "corporate meltdown."

So it was deeply distressing to watch his recent CNBC town hall meeting with a group of Columbia business students, followed the next night by an hour spent talking about the economy with Charlie Rose, and see Buffett joining in the economic victory lap the Obama administration -- and much of the media -- are taking.

"The financial panic is behind us," Buffett told the Columbia crowd. Sure, he conceded, the economy "still is sputtering some," but his tone was overwhelmingly upbeat.

The cheerleading continued with Rose: The economy "will come back, Charlie," said Buffett. "I want to emphasize that." And he did, again and again:

"The American economy will come back."

"Businesses will be formed. Businesses will expand."

"We're not out of the hospital yet. But we will come out of the hospital... It happened in the 19th century, it happened in the 20th century at various times, and we've always come back stronger."

"There will be some lasting impacts of certain types, but in terms of coming out of it, I don't worry."

All this pom-pom shaking would have been okay if it had been accompanied by some ideas -- any ideas -- for what steps need to be taken for "the American economy to come back." The assumption being that it would, somehow, just happen. That the rising tide of unemployment, foreclosures, and bankruptcies drowning so many Americans would, somehow, reverse itself. But the bout of truth-telling we so desperately need was absent.

Instead, Buffett assured Rose "we'll create new jobs" because... well, because we always have. As proof, he pointed to the early 80s recession when unemployment was at 10 percent and people were deeply concerned about America's economic future. "We've created millions and millions and millions of jobs since then," he said. "But, you know, who would have thought when Paul Allen and Bill Gates were in Albuquerque, you know, eating pizza and drinking Coke at 2:00 in the morning, you know, that they were a big part of our future."

This echoed his rah-rah salute to American can-do at Columbia: "The plants haven't gone away. The cornfields haven't gone away. The talent of the American people hasn't gone away."

But all those same things could have been said last October, when Wall Street was melting down. The plants hadn't gone away then, either. The cornfields hadn't gone away. The talent of the American people hadn't gone away. But since it was the banks in crisis, we didn't just offer pep talks and rosy predictions for the future, we convened all night meetings, and brought together big wigs over a weekend and told them not to leave without a solution. And, oh yeah, we ponied up trillions of our taxpayer dollars.

But even with unemployment at a 26-year high of 10.2 percent (which is actually 17.5 percent when you include workers no longer looking for work or only partially employed), we're not seeing anything remotely resembling the urgency and aggressive action we saw when it was the banks that needed saving.

Instead of Buffett raising his prophetic voice to sound the alarm as he'd done in the past, and as we desperately need him to do again, he's sounding a trumpet blast: "behold and rejoice."

And the best the White House can muster is a summit on joblessness -- to be held next month. What's the rush, right? The plants are still there -- and so are the cornfields.

Despite Buffett's acknowledgment that "we've got 60 million people living in households where the top income is $21,000 or less," it looks as if, at least for the moment, he's out of the truth telling business.

Last night, an investment banker friend told me "Buffett is talking his book" -- Wall Street-speak for making an argument that, if accepted by the market, would also make you money. I actually think it's more likely that Buffett who, after all, has already pledged his fortune to the Gates Foundation for charity, believes that by talking the economy up he can actually have a tangible impact.

But the real economy doesn't need upbeat rhetoric. It needs serious action.

For a snapshot of what kind of action, check out Nouriel Roubini's latest post. It's a dose of bracing truth-telling -- and the perfect counterweight to Buffett's cheerleading. Roubini puts forth more truth in less than 600 words than Buffett managed in a full hour on Charlie Rose and a full hour at the Columbia town hall.

"There's really just one hope for our leaders to turn things around," writes Roubini, "a bold prescription that increases the fiscal stimulus with another round of labor-intensive, shovel-ready infrastructure projects, helps fiscally strapped state and local governments and provides a temporary tax credit to the private sector to hire more workers."

Without such action, says Roubini, "we can expect weak recovery of consumption and economic growth; larger budget deficits; greater delinquencies in residential and commercial real estate and greater fall in home and commercial real estate prices; greater losses for banks and financial institutions on residential and commercial real estate mortgages, and in credit cards, auto loans and student loans and thus a greater rate of failures of banks; and greater protectionist pressures."

The Wall Street economy and the Real Economy both went down together. But the one that caused the plunge has gotten the lion's share of government attention and money -- while the other one has continued to plummet. And since it's tragically clear which economy has Larry Summers' and Tim Geithner's attention, we are in even more urgent need of truth tellers to point out the grave human consequences of the White House's lackadaisical response.

Consequences like the 35.8 people million who used food stamps in July -- up almost 7 million from the same time last year.

Or the 17 million American households that have had difficulty putting enough food on the table during the last year -- an increase of 4 million from last year.

Or the 1.3 million unemployed female heads of household who, according to the Center for American Progress, are unemployed.

Or the 42-percent rise in homeless schoolchildren in Las Vegas -- the result of Nevada's highest-in-the-country foreclosure rate.

I'd love to go to Vegas with Warren Buffett -- but not to hit the tables or catch a show. I want to take him to Whitney Elementary School, which I saw profiled on Saturday on CNN, right after watching Buffett on my Tivo'd Charlie Rose.

As reported by CNN correspondent Dan Simon, the school's supply closets are no longer filled with pens or paper, but with food and clothing: "This school has so many homeless people that it felt it had to take the initiative to make sure that its students are fed and have clothes on their back."

I'm sure, given Buffett's legendary compassion, that what would happen in Vegas would most definitely not stay in Vegas -- but would instead become a much-needed counter-narrative to the official spin.

The media spotlight needs to move off Wall Street and the green shoots sprouting across the Dow's ticker and onto ways to turn the real economy around. It's not going to happen by clicking our heels together three times and saying "The American economy will come back... The American economy will come back... The American economy will come back."

We need Warren Buffett to put down his pom-poms and tell the president -- and the American people -- the truth about the economy.

Alice Schroeder: Buffett, Bonuses and Executive Greed

2009-11-16T16:41:50Z

Warren Buffett decries executive greed yet invested in Goldman Sachs, the symbol of Wall Street bonus excess, and says he has no problem paying people huge amounts of money if they're worth it. Is he being hypocritical with these contradictions, or is there a larger point?

In the past Buffett has been influential on pay, especially with legislators. In the battle over stock option accounting, he played an instrumental role in the decision to recognize employee stock option costs as an accounting expense. His arguments against high executive compensation haven't been well received on Wall Street or in Corporate America, though, in part because he's a multi-billionaire who only pays himself $100,000 a year.

Buffett's opinions on compensation started to form early. When he set up his investing partnership in 1956, he took on the unlimited obligation to earn any investor losses back before he got paid, and decided to forego his cut of profits unless his investors earned more than the risk-free government bond rate.

Given this concept of managers' high duty of stewardship toward their financiers, it's not surprising that Buffett has always opposed bonuses that are paid robotically. He sees reward as being paired with risk, and believes employees should behave like owners.

It was not until Buffett became a board member at Salomon, Inc. that his unconventional views on compensation set off a firestorm within the organization he was overseeing. Buffett voted against bonuses as a member of Salomon's compensation committee; later, as Interim Chairman, he cut bonuses at a crucial time when the firm was recovering from its near-death experience after the Treasury-auction scandal. Employees fled en masse into the welcoming arms of more generous investment banks.

Ironically, Buffett was willing to grant huge paydays to Salomon's traders if they made profits for the firm. He thought of them - but not the investment bankers or other employees -- as taking risk alongside the shareholders in the casino of Wall Street. This attitude flew in the face of Wall Street's bonus culture, in which employees have historically received most of their pay in bonuses that vary but are always significant regardless of how the shareholders fare.

This system's roots lie in the investment banks' origins as partnerships that distributed profits to the partners every year. Originally, the firms' need for working capital and the social dynamic among the partners kept bonus pay in check. Over time, though, as the banks became publicly owned, the pay system evolved into a share-the-spoils mentality in which even poor performers got bonus checks. When an employee gets a $300,000 bonus as a "message" that they are at risk of being fired, something is out of whack.

Buffett's willingness to invest in Goldman Sachs, the emblem of this system of Wall Street greed run amok, doesn't mean he's suddenly had a change of heart. Buffett is a pragmatist when it comes to money. Having rationalized the Goldman investment, he bysteps the pay issue by citing the free market and saying that government interference in setting pay is problematic, which is a separate question.

Wall Street pay is a notable issue for Buffett to duck considering that he has been all over the media lately tackling his role as America's business statesman with unusual vigor. If he wanted to be a leading voice on executive compensation, one of the critical issues of our time, a good place to start is with his own company.

The incentive pay systems for Berkshire Hathaway employees are rigorously thought out, with heavy involvement by Buffett, to reward behavior that will enrich shareholders. The details, though, are not disclosed. I wish Buffett would share some specifics about how he pays his employees because they're an excellent example for other companies to follow.

His views on compensation would also be better accepted in board rooms and trading floors if he paid himself a more realistic salary and incentive than the flat $100,000 a year. Yes, I know, he doesn't need the money, but CEOs are paid for the value of their time, not their financial needs. His choice to pay himself so little has a showy quality that executives in the C-suite find irritating. It undercuts his influence with them.

Along these same lines, Buffett makes most of Berkshire's managers set their own pay, and, shamed by his paltry $100,000, most ask for far less than they could receive elsewhere. Buffett sometimes brags about the fact that these people work for him so cheap, but a CEO who recruits people to work for him for less than they are worth because he's so charismatic is not an example of governance that corporate boards should be emulating.

Much of this is part of Buffett's personal quirkiness, and he's been able to justify it because he's Buffett and his personality is what's made him a success. As part of his legacy, however, Buffett genuinely wants this quirky company he runs called Berkshire Hathaway to become a model for other companies. It could be, if he seized the opportunity that's before him. Berkshire Hathaway could set a powerful example by revising its compensation system. Buffett is such an important voice in the business world that, single-handedly, he could influence the way Corporate America is paid.

Bill Gates: Steve Jobs Is 'Fantastic,' 'Saved The Company' (VIDEO)

2009-11-13T15:06:08Z

During CNBC's TV special featuring Warren Buffett and Bill Gates, Microsoft's Gates had warm words for Apple CEO Steve Jobs.

According to CNBC, a Columbia Executive Business School student asked this question:

If you could just comment and tell us what your thoughts are on the job Steve Jobs has done as the CEO of Apple? (Audience laughs as Gates smiles.)

Gates' response, CNBC reports:

GATES: Well, he's done a fantastic job. Apple is in a bit of a different business where they make hardware and software together. But when Steve was coming back to Apple, which was actually through an acquisition of NeXT that he ran, Apple was in very tough shape.

In fact, most likely it wasn't going to survive. And he brought in a team, he brought in inspiration about great products and design that's made Apple back into being an incredible force in doing good things. And it's great to have competitors like that. We write software for Apple, Microsoft does. They compete with Apple. But he, of all the leaders in the industry that I've worked with, he showed more inspiration and he saved the company.

Watch Gates' answer in the video clip below.

WATCH:

Warren Buffet Tells Columbia Business Students: "The Financial Panic Is Over" (VIDEO)

2009-11-13T08:00:27Z

Warren Buffett and Bill Gates spoke to a group of Columbia students on Thursday for a CNBC town hall and question-and-answer session. The business giants discussed topics ranging from capitalism and the state of the economy to Goldman Sachs, Apple, and Google, and they were decidedly positive in their outlooks.

When asked whether at any point over the last year they'd doubted capitalism and the American "way of life," both expressed confidence in the system. "This country works," Buffett told the audience. "We have two hundred years of proof, and it's going to continue to work."

Gates said the United States is still a great place for innovation and science, and he said that while he expected that "we're going to tune our system of capitalism," overall the structure of the American free market system is strong:

"There are definitely some lessons, but the fundamentals of the system, a marketplace driven system where we invest in education, in a great infrastructure for the long term, that's continued."

Buffett conceded that the "economy was sputtering, still is sputtering some," but he indicated that there is great opportunity for growth within the country, and counseled investors to look inward before going overseas. He also addressed the challenge of regulatory reform:

"Going forward, it's a very tricky thing to figure out how to present excessive leverage, how to prevent off balance sheet arrangements from getting in trouble, or for just having people at the top of major institutions that run risks that they shouldn't be running. We're wrestling with that right now."

The students applauded and clapped in unanimity after each of Buffett's punch lines- all variations on: "Right now, I would pay $100,000 for 10 percent of the future earnings of any of you. So, if anyone wants to see me after this is over ..."

WATCH:

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Alice Schroeder: Warren Buffett and the Business of Life: Part 3 of 7

2009-11-11T18:40:59Z

READ PART ONE HERE
READ PART TWO HERE

Buffett had long preferred to find a great company and own the stock as long as possible. Investors who had watched him over the years had become so accustomed to certain Buffettisms--holding stocks for the equivalent of an investing lifetime, not selling businesses that Berkshire acquired, investing as though there were only twenty punches on your scorecard--that they believed Buffett's investing style was to buy and hold forever.

Buffett had indeed learned through experience that "when in doubt keep holding"; he said, "I've made most of my money sitting on my ass." He never sold failing businesses unless their economics turned from simply bad to parasitic, for personal reasons: He liked the people, the managers, the business, the simplicity of fewer decisions, and the reputation for loyalty.

Yet during his early, hungry years, he had not hesitated to sell one stock for another when a better opportunity came along. During the 1960s bubble, he moved money into staid AT&T, then shut down his investing partnership completely to protect his partners (and himself) from financial harm. During the 1987 bubble, with no partnership to liquidate and so much capital it had become a struggle to manage, he dumped many stocks in favor of bonds and pared the portfolio--but kept what he called the Inevitables (GEICO, Cap Cities, and the Washington Post). Still, by selling stocks, he had at least partly protected his shareholders from the second major market crash of his lifetime.10

In the 1990s, more passivity crept into his investing style. By then, Berkshire had far more money than it could use. During the Internet bubble, rather than sell overvalued stocks such as Coca-Cola (another of his Inevitables), Buffett diluted the risk from these stocks to Berkshire's balance sheet by acquiring General Re.

With hindsight, he did say his failure to unload some of those stocks was a mistake. He explained that his role as a board member had gotten in the way of his selling Coca-Cola. Buffett finally stepped down from the board in February 2006, avoiding another referendum on his independence as a board member. Privately, Munger complained that Buffett should have resigned from the Coca-Cola board earlier so that they could have sold the stock. Selling would have pushed down the price, but not by as much as it eventually declined.

"I always used to tell Gates that a ham sandwich could run Coca-Cola. And it was a damn good thing, too, because we had a period there a couple of years ago where, if it hadn't been that great of a business, it might not have survived."

The company--and its stock--did rebound. By 2008, most of its business problems had been largely resolved, and CEO Neville Isdell, who announced his retirement in 2007, had settled the Justice Department investigation and closed a $200 million racial discrimination lawsuit. The new CEO, Muhtar Kent, had led the company's successful push into non-cola drinks, where Coca-Cola had been lagging and was strategically off course.

Still, as of early 2008, Coca-Cola's stock price, at $58, was fifty-six percent above its lowest price, but did not approach its pre-bubble high of more than $87 per share, and couldn't justify Berkshire's having held the stock for a decade. And it would soon turn out that Coca-Cola's stock price was tracking the overall stock market, which would be revealed as part of another speculative bubble, this one buoyed by the ebullient "consumer economy" and driven by cheap credit. Although average wages in the United States had risen only 0.6 percent a year since 1998 and consumer confidence had been declining steadily, GDP had risen 2.6 percent a year. This was an artificial increase--boosted by an $8.6 trillion increase in personal indebtedness and an almost $20 trillion increase in household net worth--that came from rising real estate values and the stock market. In essence, consumer debt had inflated the economy beyond its real size. This economic "growth" was simply borrowed from the future, and would have to be paid back with interest.

Copyright © 2009 by Alice Schroeder. Excerpted by permission of Bantam, a division of Random House, Inc. All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.

Eric Schurenberg: Are We in Another Bubble?

2009-11-11T10:12:56Z

Nouriel Roubini, aka Dr. Doom, put himself back in the headlines last week by predicting the next great financial crisis. Roubini, as you know, became a household name for seeing just how severe the financial crisis would be, at a time when most economists were confident it would be confined to housing. While he believes we're finally pulling out of it, he says the next Big One will strike in six to 12 months.

What's worrying Roubini is an investment bet called the carry trade-made possible by the weak dollar and near zero interest rates in the U.S. In the carry trade, speculators borrow in the U.S. at ultra low rates and invest elsewhere-in emerging-market stocks and bonds, gold, oil, euros, whatever. As long as the dollar stays weak and U.S. rates low, it's a way of minting money, and every hedge fund and Wall Street trading desk in the world is doing it, according to Roubini.

The problem is, the dollar can't fall to zero. And U.S. rates won't stay low forever . When that trade reverses, panicky speculators trying to get out of the assets they bought with borrowed money will create what Roubini calls "the biggest co-ordinated asset bust ever."

Now, I actually don't want to get into whether Roubini is right. Felix Salmon, Reuters' economics uberblogger, believes him. David Rosenberg, the bearish economist at Canadian money manager Gluskin Sheff, has his own debt-driven doomsday scenario, which as of Monday now features a 13% unemployment rate in 2010. And after a 60% rally in the market over the past eight months, it's sensible to be worried that the markets have gotten ahead of the economy.

On the other hand, as Larry Swedroe points out in his CBS MoneyWatch.com blog, Warren Buffett just bought Burlington Northern railroad-not the action of a man worried that the carry trade is about to hogtie the economy. Do you want to bet against Buffett? And James Paulsen, the optimistic chief investment strategist of Wells Capital, t hinks all this anxiety is typical at the start of a sustained bull market.

As often happens in a volatile market, then, you're now torn between two highly plausible, totally contradictory views of the future. The key question is, what should you do about it-or about any extreme market forecast. And I'd answer this way.

You have to remind yourself that the future is unknowable. Roubini is a smart guy, but he's also what decision experts are coming to call a "hedgehog," after Berkeley professor Philip Tetlock's great research on predictions, Expert Political Judgment. Hedgehogs are forecasters who tend to see the world through a single, unique lens (in Roubini's case, a persistently pessimistic one). When hedgehogs are right, they're spectacularly right. But they rarely foresee turning points.

Think about where you'd want your money if Roubini is right. In the unwinding of the massive dollar short sales, Treasuries and cash equivalent investments like bank accounts would be the only safe places.

Then, as you should do before you take anyone's investment advice, ask, "What if he's wrong?" In this case, if you put all your money into low yielding Treasuries and cash, you'd earn next to nothing in yield and you could miss an ongoing bull market in stocks. Bull markets don't come along all the time, and if you miss them, you miss the whole reason for owning stocks.

So, in the end, you have to hedge your bets. Keep enough money invested safely in money funds or the bank, along with a healthy dose of Treasuries: You want to make sure you can survive a Roubini-esque meltdown. If he really has you worried, put more into Treasuries and less into stocks than you ordinarily would.

Yes, we all wish we had listened to Roubini two years ago-just like we wish we had listened to Paulsen and Buffett in March. But you can't time the market, and you can't capture the profits of the past. Hedging your bets isn't the world's most exciting answer, but it's the only one that makes sense in an uncertain world.

Continue reading on CBS MoneyWatch.com:

Photo courtesy of Flickr user Esthr, C.C. 2.0

Warren Buffett's Biggest Weakness: Interview With Alice Schroeder, Buffett Biographer

2009-11-10T11:02:17Z

o 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.

Kraft, Cadbury Deal: Cadbury Rejects Kraft Bid

2009-11-09T11:28:28Z

LONDON — British candy maker Cadbury PLC rejected a renewed 9.8 billion pound ($16.4 billion) hostile bid from Kraft Foods Inc. on Monday after the U.S. company refused to sweeten a previous offer.

Kraft's decision to keep the terms of its previously rebuffed cash-and-stock approach effectively means a lower offer for investors in London-based Cadbury because of a shift in the share prices of both companies.

Buffett's Firm Berkshire Hathaway Sees Profits Triple

2009-11-08T11:29:24Z

Berkshire Hathaway said its net profit was $3.2bn (£1.9bn) in the three months to September, compared to $1.1bn in the same period last year.

Alice Schroeder: Warren Buffett and the Business of Life: Part 2 of 7

2009-11-05T15:44:28Z

READ PART ONE HERE

With the stock market so expensive, for the past several years Buffett had continued to buy mostly whole businesses. Berkshire bought Iscar, a highly automated Israeli maker of metal cutting tools, in its first acquisition of a non-U.S. company. For Fruit of the Loom, Buffett bought Russell Athletics. Berkshire took control of Equitas, assuming the old claims of Lloyd's of London in exchange for $7 billion worth of insurance float, and also bought electronics distributor TTI. Buffett invested steadily in the stock of BNSF (Burlington Northern Santa Fe) railroad in 2007, setting off a minor flurry of interest in railroad stocks. His interest in railroads was built on the thesis that U.S. imports from Asia, especially China, would continue to stay high--and the goods would have to be transported to markets all over the United States. Railroads have an advantage over trucking because of their greater fuel efficiency. The level of imports at the time he began buying this stock reflected a relatively weak dollar (compared to what came later) and a boom economy. As these conditions reversed, he stayed true to his long-term strategy; he would eventually increase Berkshire's stake in BNSF to more than twenty percent of the railroad.

One investment that Buffett did not make was in the Wall Street Journal. Although it was his favorite newspaper, he had never owned its stock. When press lord Rupert Murdoch offered to buy the paper in 2007, some Journal editors and staffers hoped that Buffett would save it in the cause of quality journalism. But he would not pay a premium price for what he considered a rich man's trophy, even to play a potentially historic role in media. Long ago, during the days of the Washington Monthly, the unsentimental side of Buffett had divorced his fondness for journalism from his wallet. Nothing had changed that.

In Buffett's lifetime, the rapid "disintermediation" of the entirety of traditional media--that is, the replacement, at varying speeds, of recorded music, movies, newspapers, radio, television, and magazines by a single medium, consisting of the Internet and various hard storage devices such as the personal computer and the iPod--was the greatest change in business that he had ever witnessed in any of the industries he had studied. Even his favorite of Walter Annenberg's "essentialities," the Daily Racing Form, had become, for all practical purposes, toast.

Buffett would always love reading newspapers, but his investing was tightly focused on simple businesses that were as close to immortal as possible. Newspapers--in fact, any sort of media--no longer qualified. Candy, on the other hand, was an immortal business, and the economics of the candy business remained predictable.

In 2008, candy maker Mars, Inc. announced that it was buying Wm. Wrigley Jr. Company for $23 billion. Buffett agreed, through Berkshire, to lend $6.5 billion as part of the deal, in an arrangement facilitated by Byron Trott, his investment banker at Goldman Sachs. Trott had been responsible for several of Berkshire's acquisitions. He understood how Buffett thought, and Buffett said that Trott had Berkshire's interests at heart. Like many of Buffett's investments, the Wrigley deal harkened back to his childhood, when he had refused to sell a single stick of gum to Virginia Macoubrie. "I've been conducting a seventy-year taste test," Buffett said about Wrigley's.

Buffett's first thought after agreeing to make the loan--of course--had been to call Kelly Muchemore Broz and ask her to set aside a little space at the next shareholder meeting, in case Mars and Wrigley wanted to sell products to his shareholders. The 2008 meeting turned into a mini-festival of candy and chewing gum. Attendance set a new record: 31,000 people.

In another deal that year typical of Buffett, Berkshire acquired Marmon Holdings, a small industrial conglomerate with sales of $7 billion. The seller was Chicago's Pritzker family, which had decided to break up its business to settle family squabbling that had broken out after the death of Buffett's old coattailing hero Jay Pritzker in 1999.

Around this time, Buffett had also become more interested in the energy business, even though he had sold the PetroChina stock--for which he had recently taken a lot of heat, because when the price of crude oil peaked in July 2008 at $147 per barrel, six months after the sale, PetroChina's stock kept rising. Buffett's critics didn't hesitate to speak up; he was accused of selling PetroChina too soon. Buffett said that he felt Berkshire had made enough money on the stock. What no one knew at the time was that Buffett was buying a huge slug--66.4 million shares--of ConocoPhillips stock. He was also increasing Berkshire's stake in NRG Energy, Inc.

ConocoPhillips was the cheapest of the major energy stocks, and Buffett was concerned about inflation. Still, it was a surprising move at a time when complaints were proliferating that speculators were manipulating the energy market. Buffett's next move was equally counterintuitive. He wrote various derivative contracts for Berkshire that amounted to optimistic calls on the stock market in various economies. Some of these were direct bets on the market, and others were indirect bets that tied up some of Berkshire's capital, rendering it unavailable in the event of a market crash.

The direct bets were "put options" on four stock indices--the Euro zone, the United States, the United Kingdom, and Japan--that would expire between 2019 and 2028. Berkshire would pay the buyers if any of the indices were lower at expiration than they had been when the puts were written. The total maximum exposure to these contracts (before taxes, and before $4.9 billion of premiums and the investment income they will earn) was $37.1 billion. Most likely, Berkshire would lose nothing, or a smaller amount. To lose the entire $37.1 billion, all four stock indices would have to fall to zero, in which case the world and whoever is running Berkshire at that time will have far bigger problems to worry about.

In deciding to insure investors against the risk that most of the world (except China) becomes insolvent, Buffett had handicapped the situation the way he would a catastrophe reinsurance contract--by assessing probabilities--and concluded that he liked the price compared to the risk Berkshire was taking. One curious aspect of these deals was their duration. Buffett had entered into contracts worth tens of billions of dollars, which would take up a chunk of Berkshire's capital and whose value would not be known until he was between eighty-nine and ninety-eight years old. It was as if he had staked out a plot of capital within Berkshire, and leased it for this term. For the first time, he seemed to be acting on his determination to match Rose Blumkin's lifespan.

This analysis of Buffett's actions in recent years is constrained by close perspective and lack of hindsight; it is more akin to reporting and should be considered as such--in other words, more subject to revision than other portions of the book. However, it appears that Buffett, the ultimate capital allocator, did not fully understand how much capital he was committing to these deals. Buffett's analysis excluded one other variable. Investors on the other side of Berkshire's equity-index puts needed to hedge their credit risk on Berkshire. Buffett would later acknowledge (at the 2009 shareholders meeting) that he did not realize this. He thought of Berkshire, with its "Fort Knox" balance sheet and triple-A credit rating, as having essentially no credit risk, even though investors looked at it differently--quantitatively. If Berkshire could not pay for any reason, they would lose money. The investors bought credit default swaps (CDSs), a type of derivative that insures against credit risk, to make bets that would pay off if Berkshire stock fell.

The CDS price, or "swap spread," is an indicator of a company's bankruptcy risk. Stocks tend to trade in the reverse direction of their swap spreads. The CDS market has certain flaws, an important one being that a company's bankruptcy risk grows as its stock price falls, and its stock price falls if its perceived bankruptcy risk rises. This self-reinforcing loop means that even companies with strong finances can find their balance sheets encumbered by perceived credit risk if their stock prices fall when their swap spreads rise.

Initially, this feedback loop did not seem important to Berkshire. Its stock price was approaching an all-time high; few people were paying attention to the puts; Berkshire's balance sheet seemed impregnable.

Buffett's sanguine attitude about the market, as displayed in the Conoco--Phillips stock, the derivative deals, and his investing in a pair of Irish banks that were profiting from the booming--some said speculative--Irish economy, was all of a piece with another decision: to maintain large positions in certain stocks, specially financial stocks, but also in the rating agency Moody's and in Coca-Cola, despite record stock valuations and signs of a bursting real estate bubble. In his mind, Buffett could clearly foresee the outlines of a potential financial meltdown. He explained how he wanted Berkshire to be positioned if that happened: "We want to be the lender of last resort." Berkshire's balance sheet made it, as Buffett always said, the "Fort Knox of capital."

But it was as if he had never sat down and asked himself: What would Berkshire's balance sheet look like if global stock markets fell by fifty percent?

This would later prove an important omission.

Copyright © 2009 by Alice Schroeder. Excerpted by permission of Bantam, a division of Random House, Inc. All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.

Fortune 's Stanley Bing: Has Warren Gone Off the Rails?

2009-11-05T12:54:10Z

I've been in a good mood all week about the announcement that Warren Buffett was investing $32 billion in Burlington Northern Santa Fe, the nation's 2nd largest railroad. "From my standpoint, it's a lot easier to make a $32 billion investment than 10 $3 billion investments," Mr. Buffett said, and also noted, with his customary dry wit, that he was probably doing it because his dad never bought him a train set as a kid.

At first blush, this is so radically counter-intuitive a move that you just don't know what to say about it. A railroad? Really? Isn't that hopelessly brick-and-mortar? And so 19th century? Why not an investment in this and that? High-tech wazoos or something? Synthetic brain cells, maybe? Online gadgetrons? There's so much fascinating new stuff out there! But choo-choos? Seriously?

And then you think, wait... this is Warren Buffett we're talking about. The guy who never invests in anything he doesn't understand. How much of what's going on right now do YOU understand? Want somebody to explain the business model for the latest Silicon Alley start-up to you again? How about stem-cell research? Cloning? Alternative energy sources that may be commercialized one day?

We do know one thing. As the American economy improves, people are going to need to ship things from one end of the country to another. Rail is a cheaper way for people to do so than a lot of other methods. If you believe in our nation and its businesses, the move makes tremendous sense, even if it doesn't adhere 100% to conventional wisdom.

How stupid has conventional wisdom been this year?

Let's take a little quiz. If you had $30 billion and you had a choice where to put it, would you invest in...

-- Railroads or Airlines? (Railroads)

-- Railroads or magazines? (Railroads)

-- Railroads or newspapers? (Railroads)

-- Railroad or automotive companies? (Railroads)

-- Railroads or the latest social networking phenom? (Railroads!)

-- Railroads or chicken? (Chicken)

In the latter case, you should probably know that I will always bet on chicken if given the opportunity. The ubiquity of chicken in our daily lives shows no signs of diminution. Wherever you turn around, somebody's eating one. You can bet that's going to continue. So compared with most other investments available right now, other than insured triple tax free bonds, chicken is even better than railroads.

Other than that, you have to like the way Warren is thinking. It says that you don't have to be nuts or smoking something in order to put your money on the home team, which is not Wall Street -- it's America. It's a bet FOR something, not against.

Railroads? I'm on board.

Warren Buffett Buys A RAILROAD? Berkshire Hathaway Acquires Burlington Northern Railroad

2009-11-03T08:25:29Z

NEW YORK — The biggest name in investing is making what he calls an "all-in wager" on the U.S. economy – $34 billion to own a railroad that hauls everything from corn to cars across the country.

The acquisition of Burlington Northern Santa Fe, the nation's second-largest railroad, would be the biggest ever for Warren Buffett's Berkshire Hathaway investment company.

Chip Conley: Is Conscious Capitalism an Oxymoron?

2009-10-30T15:00:00Z

Unconscious Capitalism...we've witnessed that. Even Drunk Capitalism may sound more accurate than Conscious Capitalism. But, the truth is we can't afford to have Capitalism be anything but Conscious given the stakes involved and the power wielded by the world of business.

I've just come back from the 2nd annual Conscious Capitalism conference in the hill country of Austin. This gathering of CEO's, entrepreneurs, financiers, and academics gave me some encouragement that those handling the machinery of industry have come to realize that they can't operate this delicate and powerful equipment while inebriated on short-term ambition and unconscious plundering.
What does it mean to be a conscious capitalist? Here's my stab at a list of 5 basic rules (fueled by some of the discussions at the conference):

Focus on the Long-Term. While short-term profits are the milk, smart investors and business execs understand that building a relationship with the cow is far more valuable in the long-term. Warren Buffett asks his CEO's to operate their businesses as if they were never to be sold or merged for 100 years. And, the academic authors of "Firms of Endearment" have proven that long-term minded companies outperform the S&P 500 by eight times over a ten year period.

Bow at the Altar of Purpose. An expansive Purpose that addresses the needs of a broad definition of stakeholders - employees, customers, vendors, the community, the environment, not just investors - provides an animating and attracting force for a company. Proctor & Gamble's new CEO recently remade the company's business plan so that it is purely focused on how P&G delivers on its Purpose to all of its broad definition of stakeholders. And, great companies from Southwest ("freedom to fly") to Apple ("a bicycle for your brain") have great Purposes that energize those who come into contact with them.

Think of Business as a Practice. Few of us see businesspeople as "practicing" their craft like a doctor, lawyer, athlete, musician, or spiritual leader. But, this new generation of leaders at companies like Patagonia (which is now teaching Wal-Mart how to green their supply chain), Whole Foods Markets, and PepsiCo are approaching their work with a level of conscious practice that suggests that they understand there's a systemic effect in the decisions they make. Kip Tindell, CEO of the Container Store, says that leaders need to understand the size of the "wake" they create based upon the decisions they make. Business leaders can no longer afford to take an unconscious "just do it" approach to how they make decisions.

Redefine what "Winning" means. Life and business are all about where you pay your attention. MBA's have been taught to "manage what you can measure," but unfortunately, what's most measurable in life and in business isn't usually what's most valuable (think Mastercard's "Priceless" commercial). Conscious capitalists recognize that intangibles like brand value, culture, and intellectual property are making a mockery of the 500-year old tradition of the balance sheet where these valuable assets can't be found as line items. The good news is that "valuing intangibles" has become the hottest topic on American business school campuses. Jack Welch's traditional bottom-line definition of "Winning" has lost its luster.

Leverage Loyalty. Leverage has been a dirty word this decade and we've even created new recessionary phrases like "America is de-levering herself" (that just sounds painful). Yet, the ultimate leverage in a downturn is loyalty. In today's "word of mouse" era in which social media and Web 2.0 sites are the primary means that people use to tell their friends and colleagues about their favorite (or least favorite) products or companies, reputation and loyalty have become the primary sustainable competitive advantage for companies. Tech-savvy leaders like Tony Hsieh at Zappos (who has tens of thousands of followers on Twitter) have created an evangelical collection of customers that is leveraged into market share momentum.

We may be entering an era of Karmic Capitalism when business realizes what goes around, comes around. Let's hope that the captains of industry realize that noblesse oblige (nobility is obligated) - a century's old concept - should be applied to the business world. Since corporations are treated as if they are a body, they should also have some of the obligations of citizenry in terms of what they give back and contribute to the good of society. And, they should be held accountable for operating in this fashion.

Chip Conley is the Founder and CEO of Joie de Vivre Hospitality and the author of PEAK: How Great Companies Get Their Mojo From Maslow.

Alice Schroeder: Warren Buffett and the Business of Life: Part 1 of 7

2009-10-29T13:24:59Z

When THE SNOWBALL: WARREN BUFFETT AND THE BUSINESS OF LIFE (BANTAM) was originally published in fall 2008, Alice Schroeder's intimate account of the man known as "The Oracle of Omaha" made national headlines. The book's publication also happened to coincide with the depression of the global economy and the collapse of America's banking system. In this seven-part series, Schroeder details Buffett's reaction to the economic crisis, the November presidential race and election of Barack Obama, as well as the decline of Berkshire Hathaway's stock from Triple-A status.
_______________

On October 23, 2006, Berkshire Hathaway became the first American stock to trade above $100,000 per share. By the end of 2007, BRK reached $149,200, which gave Berkshire a market value of more than $200 billion. Berkshire was the world's most respected company, according to a Barron's survey. Buffett's personal fortune exceeded $60 billion, and only a few months earlier, the Dow had reached its all-time high of 14,164.53.2 Businesses were posting record earnings; the market, as a discounting machine, built into stock prices the expectation that an even greater and growing stream of money could be coaxed from consumers' pockets.

Buffett dampened his own shareholders' expectations of Berkshire, yet showed no signs of giving up control or competing any less aggressively than before. Even so, a few of Berkshire's longtime shareholders began to sell stock. Some were donating appreciated shares to charity at a recently run-up price. Others cited Buffett's age; he was approaching seventy-eight. And inevitably, the $149,200 price tag for a single share of BRK drew in the sort of new investors who always buy in at the top.

As reflected in Berkshire's stock price, Buffett had been enjoying a period of almost unbroken success since the end of the Internet bubble. Only one episode of any significance marred the record of these six years. This was a legal threat to Buffett and to Berkshire that, at least initially, was as serious as Buffett's earlier encounter with the SEC over Blue Chip, and Salomon's near brush with death. It had to do with General Re, Buffett's onetime problem-child investment, which had--at least financially--undergone a remarkable recovery.

By 2007, the company had become the most successful of Berkshire's long string of insurance turnarounds. After $2.3 billion of cumulative losses related to insurance and reinsurance sold in prior years, and $412 million of charges for the runoff of Gen Re Securities, the company's derivatives unit, General Re was reporting the most profitable results in its history, with $2.2 billion of pretax operating earnings.3 It had earned back the losses and restored its balance sheet to a better condition than when Buffett bought it; it was operating with nearly one-third fewer employees and the company had been transformed.

General Re had escaped the fate of Salomon and overcome the stigma of its Scarlet Letter. Buffett was finally able to praise it and its senior managers, Joe Brandon and Tad Montross, in some depth in his 2007 shareholder letter, saying "the luster of the company has been restored" by "doing first-class business in a first-class way."

But at the beginning of 2008, four employees of General Re and one employee of AIG were put on trial in Hartford, Connecticut, on charges of federal criminal conspiracy. For those on trial, the next few months would bring to a climax the years of hell that white-collar criminal investigations impose on their subjects. For Buffett, the trial would mean the beginning of the end to this particularly golden chapter of his life.

The trial came about as a consequence of General Re's last act of ignominy before its change of management in 2001. General Re had created a Salomontype scandal of its own in which it broke Buffett's rule of not "losing reputation for the firm." This was the event that had, as it unfolded, adjusted Buffett's perception of the new legal-enforcement environment, in which showing extreme contrition and cooperation produced no advantage in how a company was treated by prosecutors. Extreme contrition and cooperation were now the expected minimum standard--in part because of Salomon. Anything short of that--for a company to defend itself or its employees, for example--could be considered grounds for indictment. Trying to exceed the minimum threshold for extreme contrition and cooperation, as Buffett was always inclined to do when confessing any sort of mistake or flaw, could even be a disadvantage now, attracting more attention to a company at a time when the fairness of certain state and federal criminal procedures was being questioned.

General Re had first become entangled in legal and regulatory problems when New York Attorney General Eliot Spitzer started investigating the insurance industry over "finite" reinsurance in 2004. "Finite" reinsurance has been defined in many ways, but, put simply, it is a type of reinsurance used by the client mainly for financial or accounting reasons--either to bolster its capital or to improve the amount or timing of its earnings. While usually legal and sometimes legitimate, finite reinsurance had been subject to such widespread abuse that accounting rulemakers have spent decades trying to rein it in.

In 2003, both General Re and Ajit Jain's Berkshire Re were condemned in a special investigation for selling finite reinsurance that allegedly contributed to the 2001 collapse of an Australian insurer, HIH. Two years later, General Re was accused by insurance regulators and policyholders of having sold fraudulent reinsurance in the 1990s in connection with the failure of a Virginia medical malpractice insurer, the Reciprocal of America. Though the Department of Justice investigated the allegations extensively, no charges were brought against Gen Re or any of its employees.8 That same year, Eliot Spitzer's investigation of the insurance industry prompted an additional investigation that concluded that six General Re employees had conspired with one AIG employee to aid and abet an accounting fraud for AIG. Before long, the New York State investigation was joined by the SEC and the Department of Justice.

In June 2005, two of the conspirators, Richard Napier and John Houlds - worth, plea-bargained and agreed to testify for the prosecution against General Re's former CEO, Ronald Ferguson; its former chief financial officer, Elizabeth Monrad; its head of finite reinsurance, Christopher Garand; and its general counsel, Robert Graham; as well as Christian Milton, head of reinsurance at AIG, all of whom were indicted on federal conspiracy and fraud charges. At the same time, the SEC and the Department of Justice began pursuing a settlement of some sort with Berkshire Hathaway.

The defendants were tried together as conspirators in a case that began in federal court in Hartford in January 2008 and lasted for several weeks. It was noteworthy for the prosecution's use of numerous e-mails and taped telephone conversations in which several of the defendants had repeatedly discussed the matter in colorful terms. The fraud had been executed through a reinsurance transaction designed to deceive investors and Wall Street analysts by transferring $500 million in reserves to AIG to window-dress AIG's balance sheet. This made AIG appear to have more claim reserves than it actually had, which soothed analysts' worries that AIG might be overstating its earnings by failing to record sufficient expenses for claims. In fact, AIG was doing just that.Spitzer, joined by the SEC and the Department of Justice, had investigated this question, and Munger, Tolles & Olson, led by partner Ron Olson, who sat on Berkshire's board, had conducted a massive internal investigation at Berkshire Hathaway. The investigation, which subsequently expanded to include the AIG deal, focused mainly on General Re and its employees. Munger, Tolles was required to, in effect, act as an arm of the prosecution, and worked with the handicap of representing Berkshire Hathaway, General Re, and Buffett personally as its clients. The conflicts posed by this set of relationships were unusual, although not unheard of in the legal profession. Ordinarily Buffett would not tolerate, much less create, such a conflict-riddled situation, but the investigation terrified him and threatened his deeply ingrained desire for privacy.

Buffett thought of himself and Berkshire as indistinguishable. He had fought like a Rottweiler earlier in his career to escape being named in the consent decree to the Blue Chip fraud case. He was far more invested in his gargantuan reputation now, both psychologically and from a business standpoint. During the months in 2005 and 2006 that the investigation was at full boil, the threat to his reputation from the case obsessed him.

Buffett was put through an awkward investigative process by Munger, Tolles and interviewed by the government, but Spitzer was quick to clear him. In April 2005 (five months after he entered the race for governor of New York), Spitzer told George Stephanopolous on ABC This Week that Buffett was "only a witness." He called Buffett an "icon" who had "succeeded in the right way" and who stood for "transparency and accountability." One need not be a cynic to detectthat Spitzer might have been angling for an endorsement from the Buffalo News in the governors' race.

After New York handed the criminal charges over to the Justice Department for prosecution, Buffett still remained in some jeopardy. If prosecutors could find enough evidence to indict Buffett, they would certainly do so. The question was, what is "enough"?

Contrary to the way they are often portrayed on television, modern prosecutors are not simply on a moral crusade trying to bring the guilty to justice; they are pragmatists who make strategic and tactical decisions. Faced with Warren Buffett, America's icon of business ethics, the prosecutors churned through a unique calculus. There could be no greater prize for a prosecutor than to convict Warren Buffett; locking up Buffett could put a journeyman attorney on the road to the Supreme Court.

On the other hand, who would take the risk of prosecuting Warren Buffett and failing to convict him? If Buffett had been caught on videotape mugging and snatching a purse from a ninety-year-old lady, there was a pretty good chance a jury would decide that the tape was doctored, she was the mugger, and he deserved a medal--and he would walk. Not only that, prosecutors wanted Buffett as a potential witness because of the star power and credibility he would bring if he testified on their behalf.

In the end, Buffett was omitted from the government's list of unindicted coconspirators. Some believed that he received kid-glove treatment because of his status as an almost untouchable figure in business. Many in the insurance industry were infuriated because they felt Ferguson and the others were being treated unjustly, especially by comparison. Buffett was left wide open to such perceptions in part because Berkshire did not hire an outside law firm to conduct its internal investigation. Thus no matter how well MTO had performed its responsibilities, the appearance that the investigation was actually not independent was impossible to overcome.

In the trial, the defendants invoked a "Buffett defense," saying that Buffett had approved the outlines of the structured transaction and was involved in setting the fee. The question, however, was not whether Buffett knew about the transaction--he did--but whether he knew it was fraudulent.

General Re's CEO, Joseph Brandon, had been listed among the various unindicted co-conspirators in the case. He had received a "Wells Notice" (of possible civil fraud prosecution) from the SEC, although no civil charges were ever filed. He cooperated with federal prosecutors without asking for immunity. During the trial, Brandon was cited by the defendants' lawyers as having knowledge of the deal; General Re's chief operating officer, Tad Montross, was also named by the defendants as having knowledge of the transaction. In the end, none of the three men--Buffett, Brandon, or Montross--testified in the case.* After weeks in court and a short jury deliberation, in February 2008 all five defendants were convicted on all counts in the indictment and were sentenced to terms ranging from a year and a day (Robert Graham) to four years (Chris Milton of AIG). The convicted defendants said they would appeal.

In April 2008, shortly after the trial ended, Brandon resigned as CEO of General Re to help facilitate a settlement between the company and government authorities that has yet to take place. The settlement, when it comes, is likely to include fines, other penalties, and adverse publicity.

Only a month after the jury reached its verdicts, New York Governor Eliot Spitzer resigned following revelations that he patronized the prostitutes of an escort service called the Emperor's Club.

The Gen Re-AIG case he launched through his investigation was noteworthy in several respects. It is the only U.S. case in which financial reinsurance has resulted in criminal charges and prison sentences, rather than civil settlements. In recent corporate history, no other criminal aiding-and-abetting case has stuck; convictions in a Merrill Lynch case related to Enron were thrown out. For the first time, therefore, employees of one company were held responsible for a fraud committed by another company.

The Gen Re case also was one of the last corporate fraud cases prosecuted under the government policy of compelled waiver of the attorney-client privilege and the attorney work-product doctrine, which was revised after being declared unconstitutional by the U.S. District Court for the Southern District of New York. Thus, the defendants were arguably convicted using evidence that either would not have been available to prosecutors or would have been thrown out if the trial were held today.

Even though he was obsessed during this period with the investigation's potential to harm his reputation, Buffett was able to compartmentalize the way he always did. Whenever a business opportunity presented itself, he'd shift with startling speed from anxious ruminant to hungry great white shark. Buffett was never more himself than when given the chance to invest in something he wanted at a price of his choosing.

Excerpted from The Snowball:: Warren Buffett and the Business of Life by Alice Schroeder Copyright © 2009 by Alice Schroeder. Excerpted by permission of Bantam, a division of Random House, Inc. All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.

Dan Dorfman: Watch Out for the Turkeys!

2009-10-28T18:16:04Z

With Thanksgiving Day (November 26) less than a month away, let's talk turkey. No, not the turkey we can't wait to eat, but what some Wall Street professionals regard as the "economic turkeys."

They're the ones operating on the delusional premise that the recession is history and that by mid-2010 the economic downturn, the real estate mess, rising unemployment, falling incomes and bashed banks will begin to become fleeting memories.

Regarded as the more conspicuous economic turkeys,those who have openly signaled the death of the recession, are President Obama, Ben Bernanke and Warren Buffett. Likewise, an editorial turkey, as some economic trackers see it, is Newsweek magazine, which unequivocally declared on an early August cover that "The recession is over."

Turkeys screech gobble, gobble; the economic turkeys, in turn, are spouting dribble, dribble, say the non-believers, some of whom offer compelling arguments why the recession is very much alive and kicking.

One of them is Olivier Garret, the CEO of Casey Research, a national economic consulting service based in Stowe, Vt., who contends that "economically, we're still in the eye of the hurricane." The stock market rebound has people believing we're out of the economic woods, but that's just not true, he says.

As Garret assesses the schizophrenic economic scene, "we're now in a deep recession, if not a depression, that's going to get progressively worse."

Why such a gloomy Gus? Or should I say a gloomy Olivier? For starters, he sees a lot more chaos on the real estate front via a wave of defaults stemming from rate resets on adjustable rate mortgages and growing losses in commercial real estate, which has $3.5 trillion of loans coming due in the next two to three years. Here, values in recent years have tumbled 20% to 50%. In addition, he says, falling income will not let many commercial property owners repay their debt, which he thinks will be a big problem for all banks.

One major economic problem, as Garret sees it, is a tapped-out consumer. Coupled with sharply rising personal bankruptcies, he says retailing will be affected in a big way, in particular, by a rough holiday season.

Speaking of the consumer, Garret sees a great deal more suffering arising from accelerated job losses. As of now, we have a 9.8% unemployment rate, or, if you factor in the government's U-6 measure (part-time workers who can't get full-time jobs and people who have been dropped from the employment rolls because they've been out of work for a long period, say 24 months or more) the jobless rate climbs to 17%.

Many economists see the 9.8% unemployment peaking at 10.3% to 10.5% in the first half of 2010. Not so Garret. Over the next 12 to 18 months, he expects a jump in unemployment to about 15%, with job losses averaging about 200,000 to 500,000 a month. As for U-6, he sees that measurement of the jobless rate ballooning to 23% to 24%.

In arguing his case, he notes that most new jobs are being created by four sectors: retailing, services, housing and technology. Of this group, three, with technology being the exception, are in the job-creating doghouse.

Given his dismal outlook, Garret thinks the 2010 economy will be much bleaker than most people expect. Wall Street's economic consensus calls for GDP growth next year of 2% to 3%. Garret thinks the Street has the numbers right, but, alas, in the wrong direction. His expectation: a GDP decline of 2% to 3%.

Not only that, Garret doesn't see the rebirth of a positive economic environment for at least two years, and possibly five. As you might expect, our economic bear has grim expectations for the stock market, which, based on the state of the economy, he regards as highly overvalued. Not only does he believe that a 10,000 Dow is unsustainable at this juncture, but worse than that, over the next six months, he sees the Dow skidding to below 8,000 and possibly to as low as 7,500.

So where would he have his money? Garret favors cash, gold, commodities and big-cap U.S. companies whose revenue growth is driven by foreign operations that can capitalize on the global recovery.

What about those beaten-up financial stocks, such as Bank of America and Citigroup, that are attracting hordes of bargain hunters? "I would shun the financials," he says, "because of their poor accounting practices and delayed recognition of problem assets. When those assets are written down, he observes, these stocks, which are substantially overvalued, will tumble. What's not being recognized is that there is still a lot of risk in them."

Overall, his bottom line is clear. "People buying stocks now are making an awful mistake." Likewise, watch out for the economic turkeys; they can give you a thick dose of financial heartburn.

Meanwhile, in the market's last four trading sessions, three of them were slammed for Dow declines of more than 100 points. In other words, there are loads of investors out there who think the economic turkeys are for the birds.

Write to Dan Dorfman at Dandordan@aol.com

Eric Schurenberg: Insider Trading for the Rest of Us

2009-10-27T08:01:20Z

Raj Rajaratnam, the putative head of the alleged insider trading ring at the Galleon Fund, may not have a firm grip on his moral compass. But he clearly knows one thing about stock picking -- namely, that the only way to win consistently is to have information the market doesn't.

Rajaratnam's problem, of course, is how he got his information. In addition to the analysts and money managers at his hedge fund, Rajaratnam maintained a network of informants inside companies and on Wall Street trading desks who were paid to deliver hot tips. The SEC and the U.S. district attorney say that some of those tips included material, non-public information that the informants had a duty to keep confidential. If so, and if Rajaratnam knew that when he traded, he's in trouble.

But note: There's nothing wrong with keeping a network of paid informants in itself. Lots of hedge funds do.

If you trade stocks, that ought to give you pause. You already knew that when you buy a stock you're up against professionals backed by platoons of analysts on Bloomberg terminals. Now you learn that some of your competition also maintains paid networks of insiders turning over market-moving tips, legal or otherwise. And the rest of us have...Jim Cramer?

Want to profit from the Galleon insider trading case? Then take the hint: It's a waste of time trying to beat the pros at the stock picking game. They outgun you, and they don't always play fair. Far better to join them, by investing in low-cost index funds or ETFs, like Vanguard Total Stock Market Index (VTSMX) , as my colleagues Larry Swedroe, Allan Roth and Nathan Hale repeatedly urge you to do. (As do the likes of Peter Lynch and Warren Buffett.) That way, you're buying the whole market at the market price, which incorporates the collective judgment of all the Rajaratnams, Warren Buffetts and Peter Lynchs who have their money in the market. History suggests you'll beat most pros after fees in the long run. Call it insider trading for the rest of us. Without the perp walk.

Continue reading on CBS MoneyWatch.com

Howard Buffett Using Fortune For South African Cheetah Reserve

2009-10-24T16:29:41Z

The New York Times:

"THERE they are!" exclaimed Howard G. Buffett, the Illinois corn farmer, philanthropist and down-home son of one of the world's richest men, as he steered his dusty Toyota Land Cruiser toward a pair of nature's fastest and most majestic creatures.

Alan Schram: The Best Risk Reward Proposition

2009-10-19T17:54:38Z

Asset allocation has been a vexing issue for investors recently.

Because of our expansionary monetary policy (low interest rates, printing money) and stimulative fiscal policy (unprecedented budget deficits), inflation is inevitable. Fixed income is not the place to be during inflationary cycles because bonds are pulverized under the pressures of inflation, as does the purchasing power of their coupon payments. As an asset class, bonds are currently misunderstood and mispriced, with more risk than appears at first glance.

What about real estate? At the end of the first quarter of 2009, about 27% of all outstanding mortgages in the U.S. had negative equity, and that number may double before the housing market stabilizes. Some experts expect half of commercial real estate loans to be in default by next year (compared to a historical average of just 4%). Moreover, they expect severity of losses to be 40%, vs. a historical loss severity of just 10%. Those numbers are truly staggering.

People are now "strategically" defaulting even if they still have a job, as they lost hope of recouping the purchase price of their home, and can now rent a similar house at a price lower than their mortgage payment.

In addition, most banks do not have enough reserves to cover their losses from real estate still on their books. If they took the appropriate marks on their loan books, they would probably be insolvent.

This will be a different kind of inflationary cycle. The dollar will decline, but Real estate prices will not be going up because few property owners can raise rents right now.

In contrast, the spread between stocks and bonds prices is the widest it has been in four decades.

Since stocks and bonds are always in competition for investors' money, it makes sense to monitor the relationship between bond yields and stocks' earning yield (the inverse of a P/E). That relationship has a major impact on equity prices. When you can buy a stock with an earning yield equivalent to that of a similar credit quality bond, the stock is more appealing because it gives you both the earnings yield and the growth of earnings over time, whereas a bond has interest payments that are fixed and aren't even protected against the eroding power of inflation.

Even after this year's rally, many stocks are still reasonably priced. Warren Buffett says if you buy stocks when the total market value of US stocks is 75% of GDP, you are likely to do well over time. We are there now, and there are unique, high quality opportunities selling at bargain prices.

For example, Wal-Mart's earning yield is 7%. Add their 2% growth rate, and you have a 9% "coupon", plus inflation (Wal-Mart raises prices in line with inflation). Compare that to the 4.5% coupon on US government bonds, or even to the average corporate bond yield of 6.17%, which are without inflation protection, and Wal-Mart seems very attractive.

Wal-Mart is currently down 7.5% for the year. Other large cap stocks present a similar opportunity, as this year's rally skipped them. Johnson and Johnson is flat for the year. Berkshire Hathaway is up less than 5%, and all three are unlevered, well managed and very reasonably priced. This is the best risk/reward proposition available to investors right now.

The stock market has a history of appreciating 31% on average in the year following a bear market bottom. I obviously don't know what the indices are going to do in the short run. But I happen to think that the panic selling crescendo in March 2009 was a generational bottom for stocks. We will not go back there even if the economy double dips.

March 2009 may be analogous to 1942, when the market averages bottomed and started a rally that lasted a full generation. At the 1942 bottom, the Dow was at 100. In the late 1960s, it was at 1,000.

Alan Schram is the Managing Partner of Wellcap Partners, a Los Angeles based investment firm. Email at aschram@wellcappartners.com.

John Hope Bryant: Leading With Love: Giving to Your People Gets Results

2009-10-10T18:49:04Z

Giving is as old as the ages, and is even cited in the original business plan for life, the Bible, but very few people see giving as a value added, core competency in business.

Unfortunately, society seems to be teaching us that taking succeeds and suckers give. Well, "suckers" like Bill Gates, Ted Turner, Warren Buffett, former Presidents Bill Clinton and Jimmy Carter, Oprah Winfrey, and entertainment icon Quincy Jones have not done so bad with this giving thing. And some of the most generous "givers" in the corporate space, such as Wells Fargo and US Bank, are also some of the same companies that have emerged on the other end of this global economic crisis with their balance sheets and their businesses still intact.

Giving IS getting.

Giving starts with how you serve those who work inside your organization, and then radiates out to others you serve as part of your mission. How you treat your employees is an important sign of how you treat everyone else in your business and in your life. If you can get it right here, you can get it right with your customers, your clients, your stakeholders.

Why not give? Easy. Fear, and fear is the ultimate prosperity killer -- you will never go wrong, doing right. And do right long enough and it will pay dividends that builds wealth too - as relationships return for repeat business, trust drives business to you that others have not earned, and individuals of power, experience and wisdom chose to make investments in you over others. On every level, love leadership provides the leader in business, politics, civil society, home and life with a strategic advantage over everyone else.

Love Leadership. Be a leader who shows up!
Love leadership of your people begins with love leadership inside of you. As the leader of your life, your family, your organization, your community, your city, or your country, you have got to represent the change you want to see in the world.

Show up in the offices of your partners around the world. Show up in underserved communities. Show up at regular staff meetings; sit in the back until asked to speak, if asked to speak. Show up in the lives of the employees, and sometimes their families, too. If a family member passes away, or a team member goes into the hospital, show up at services, make a call, or send a personal note.

Be the boss who is working as hard or harder than your workers do to "get it right" for those you serve.

It does not take much effort, and it takes even less money. But it does take interest. Little things count. Sometimes little things count the most. That's love leadership in action.

Today, show up with a simple question for your employees: "What can I do to help you do your job?" Most of the time the answer is nothing at all, but the staff member usually appreciates that you asked, and that you really listened when they responded. They know they have a chit of sorts in their pocket, if at a time in the future they have a need, or simply want to talk.

Employees want to know that their employer takes an interest in them for the long-term and wants them to succeed.

Intent matters when you are serving people. No matter what your end product or service, success always boils down to the people. Without them, you are nothing. And without serving them, you won't achieve your ambitious goals.

John Hope Bryant is the founder, chairman and CEO of Operation HOPE, vice chairman of the U.S. President's Advisory Council on Financial Literacy as well as chairman of the Council Committee on the Under-Served, financial literacy advisor to the World Economic Forum Global Agenda Council, a Young Global Leaders for the World Economic Forum, and author of LOVE LEADERSHIP; A New Way to Lead in a Fear-Based World (Jossey-Bass), which debuted in August, 2009, #8 in the CEO Reads Top 10 Best Seller List.

Les Leopold: Barkin' Barney Frank: Where's the Bite?

2009-10-09T08:11:50Z

Legislation by Representative Barney Frank to tighten derivatives regulation contains an exemption that may let most financial firms escape new collateral and disclosure rules, the head of the Commodity Futures Trading Commission said.

Bloomberg News

It's time to watch Wall Street flex its political muscle. The financial magicians do not want the government to regulate the fantasy finance securities that were instrumental in our crash - specialty derivatives. These one-of-a-kind securities garner enormous fees for the traders who crate and sell them to investors. They also are what Warren Buffet calls "financial weapons of mass destruction."

It appears that Barney Frank has been lobbied so hard that he is willing to exempt nearly all derivatives from regulation if they are "used for risk management purposes." Come on, Barney! It doesn't take a financial engineer to figure out that you can say any derivative is serving "risk management purposes."

As a result, Barney's bill will continue to allow the kind of rip-offs that were inflicted on the five school districts in the Milwaukee area. In 2006, the Royal Bank of Canada (RBC), through investment advisors at Stifel Nicolaus, sold to the school districts $200 million worth of synthetic CDOs which they claimed where AA-AAA rated. What they really did was turn the Milwaukee schools into an insurance company covering Royal Bank's reckless gambles.

Without knowing it, school board money was being used to insure a high risk tranche of junk debt held by the bank. The money was stashed in a Grand Cayman Island account in case Royal Bank needed it to cover the defaults on their junk debt. From RBC's point of view it was all done for "risk management purposes" -- and of course to make money. The bank took a sweet $11.5 million in up-front fees. Believe me: I saw tapes of the school board meetings and it was like stealing candy from a baby. (See Chapter 1: "The Hooking of Whitefish Bay" in The Looting of America.)

Instead of making safe investments to ensure adequate funding for children's education and to cover other liabilities the five school boards inadvertently ended up paying RBC for the dubious pleasure of insuring it against losses in the bank's junk debt portfolio. Dubious indeed. The schools' investment is now valued at about $6 million. Not only have the taxpayers lost $194 million but they still owe other banks and bond holders they borrowed from to buy the synthetic CDOs.

Barney's bill would exempt such transactions from regulation.

But why is Barney bailing out? Because our bailout money is being used by banks to lobby the bejesus out of Congress. Wall Street lobbyists are on a holy crusade to make sure that their fantasy finance casinos can roll along without interference, just like the old days before the crash. In fact they see renewed riches because everyone knows that the government will again bailout the banks that are too big to fail. So come one, come all to the casino. You can't lose. (Especially when you own the casino.)

Unless an irate public gets into the act, Barney and friends will continue to water down any and all financial regulations on anything Wall Street thinks can earn it riches, especially high-fee specialty derivatives.

Wall Street is counting on the public getting bored and bewildered by the technical details, and distracted by other - admittedly important - issues, like health care reform, Afghanistan, global warming. And they are counting on overwhelming Barney with lobbying and electioneering contributions. Right now it looks like its going to bring sweet paydays to the rich. And if the financial system crashes again, Wall Street is betting that the public will blame the government and not the big banks.

Barney Frank should heed the advice of George Soros who has said we should ban any derivative product regulators can't understand. For sure, Congress doesn't understand them any better than the Milwaukee school boards did.

You want to bet on whether Barney bites or barks? I'm offering deregulated credit default swaps on the outcome -- mind you, just for "risk management purposes."

Les Leopold is the author of The Looting of America: How Wall Street's Game of Fantasy Finance destroyed our Jobs, Pensions and Prosperity, and What We Can Do About It, Chelsea Green Publishing, June 2009.