Author: Lawrence Cunningham


NetJets Shuffle: Costs of Deviations from the Berkshire Model

aaaaaaaWarren Buffett just oversaw an executive shuffle at Berkshire Hathaway’s NetJets. He  accepted the resignation of Jordan Hansell, CEO since 2011, and hired into the top jobs two company veterans who had resigned last month, Adam Johnson and Bill Noe. Two narratives are emerging: that the shuffle strengthens the case that Berkshire’s 1998 acquisition of NetJets was a mistake or that they illustrate flaws in Berkshire’s model of decentralization and autonomy. Here’s a third alternative: the circumstances show the strength of the Berkshire model, with pitfalls revealed by deviations from it.

As background, Richard T. Santulli, who in the 1980s pioneered the fractional aviation industry at NetJets, by 2005 had joined the short list of people widely seen as a likely successor to Buffett.  A mathematics whiz, Santulli built NetJets by selling fractional interests in planes to multiple owners. In exchange for customer fees, NetJets operates the fleet, as well an additional fleet of company-owned planes necessary to make certain that there are always enough planes to meet customer needs at any time. The business model is challenging: capital intensive and competitive with unionized pilots and a demanding clientele (the likes of David Letterman and Tiger Woods).

In the early 1990s, Sanutlli personally guaranteed NetJets’ loans to escape bankruptcy and in the mid-1990s sold 25% of the company to Goldman Sachs to obtain capital.  In 1998, he sold the company to Berkshire. Despite thin margins due to high costs, NetJets had relatively low debt, an impeccable safety record, and growth prospects as a first-mover. While NetJets produced profits in most of its first decade with Berkshire, the recession that began in 2008 throttled it. NetJets took a $700 million write-down on its fleet, erasing years of profits and tallying a large loss that year. Yet it had also had incurred considerable debt to expand its fleet.

By late 2009, Buffett decided to change course, as he conferred with David Sokol, another Berkshire executive on the short list to succeed Buffett. Sokol, who built and was then running Berkshire’s energy business, was a ruthless cost cutter, and perceived NetJets to be bloated. Taking over as CEO of NetJets, while still running the energy business, Sokol slashed expenses right down the income statement. But Sokol, who stands out as the least Berkshire-like CEO—he built the energy business by hostile takeovers and used brokers to scout for acquisitions—soon resigned after being caught front-running, shattering Buffett’s erstwhile trust in him.

At NetJets, Sokol left behind both his thrifty business model and a successor, Hansell, whom Sokol had recruited from Berkshire’s energy business. NetJets’ pilots love Santulli and have always lamented his departure. They detest both Sokol and Hansell, and especially their low-cost strategy. After Santulli left, management-labor relations deteriorated steadily, and lately the union hurled invective at Hansell in aggressive campaigns from the internet to the Wall Street Journal and Omaha World Herald. Pilots picketed by the hundreds outside Berkshire’s annual meeting in 2014 and 2015.

Amid mounting turmoil, in early 2015, two Santulli-era senior executives resigned from NetJets and those are the two now returning to lead NetJets. Johnson has stated that their goal is to reengage NetJets’ employees in the business and return the company to greatness. In other words, they appear poised to abandon the Sokol business model in favor of Santuilli’s original concept.

From these circumstances, it is tempting to infer that Berkshire’s acquisition of NetJets was a mistake. Apart from first-mover advantage, its business moat was insubstantial and Buffett’s usual rationality may have been colored by his devotion to NetJets as a customer. Yet NetJets was profitable during most of its first decade with Berkshire and continues to show strengths. NetJets may well belong on the short list of costly acquisitions that are due to Buffett being Berkshire’s sole decision maker, with limited input from one or two trusted insiders. But I think there is another lesson to discern, also about Berkshire’s managerial model.

Today’s shuffle seems to recognize and correct two mistakes that involved deviations from the Berkshire model: replacing Santulli and installing Sokol. After all, Buffett does not usually second-guess subsidiary CEOs, especially not company founders, so intervening against Santuli violated the Berkshire model. Nor does Berkshire usually move executives from one subsidiary to another, especially not assigning two companies to a single CEO, so installing Sokol at NetJets also deviated from the Berkshire model. The pair of highly unusual moves amounts to the sharpest instance of exceptions to the Berkshire model in its history.  They are also costly, given Santulli’s departure and Sokol’s fate, but measurement is elusive. It would also be useful to know more inside information about how Santulli’s ouster and Sokol’s ascension came to be.

Lawrence A. Cunningham, a professor at George Washington University,  has written numerous books, including “Berkshire Beyond Buffett,” through which he interviewed Santulli, became acquainted with Hansell, and spoke with numerous NetJets pilots and union officials.  


The Integrity of Clayton Homes and the Politics of “Investigative Journalism”

The following is adapted from “Berkshire’s Blemishes,” a working paper delineating the costs, rather than the vaunted benefits, of Warren Buffett’s Berkshire Hathaway as a management model, including its commitment to integrity and its elements of subsidiary autonomy and corporate decentralization.   

aaaaaOn April 3, 2015, two purported journalists, Daniel Wagner and Mike Baker, reported an investigative piece challenging Clayton Homes, Berkshire Hathaway’s vertically integrated manufacturer and financier of manufactured housing. Writing in the Seattle Times a piece sponsored by the Center for Public Integrity, the writers alleged that Clayton’s  sales team channeled buyers into Clayton mortgages, that they were offered few or no alternative financing options, that terms were seductive (including low down payment requirements), that defaults and foreclosures were high and that collection practices were aggressive. One assertion the piece specifically highlighted: a significant portion of Clayton loans carried interest rates exceeding fifteen percent. The writers reported that “more than a dozen” customers offered complaints along with two former dealers who confirmed their legitimacy—notable numbers considering that Clayton sells and finances some 30,000 homes per year.

Clayton promptly issued a response disagreeing with every negative assertion in the piece. It stressed its policies of customer protection while acknowledging that, in a minority of cases such as the writers portrayed, customers facing periodic life challenges have difficulty repaying loans and may face foreclosure. The authors responded with a point-by-point rebuttal. At the Berkshire annual meeting five weeks later, Mr. Buffett also repudiated the piece and, again, one of the writers responded with continued skepticism.  Yet all the claims contradict everything Clayton Homes stands for, as I explained in both my book, Berkshire Beyond Buffett, and in a New York Times column ninety days before this piece—a column, incidentally, which the company cited in its response and which the writers dismissed in rebuttal because written by me, whom they called “a longtime Buffett acolyte.” (Notably, it also came out that one of the writers, Mr. Wagner, had an undisclosed conflict of interest: his sister is a lawyer representing plaintiffs in lawsuits against Clayton Homes.)

The real reasons behind the piece now seem to be more political than at first appears. At the time of the report, Congress had begun debating regulations applicable to manufactured housing loans. After the financial crisis of 2008, the Dodd-Frank Act added disclosure and timing requirements to such loans bearing high interest rates, which Congress has been considering repealing as onerous and costly—a House vote was set for mid-April.  Clayton and other industry leaders support repeal while some homeowner and consumer groups are opposed.  Although the original report did not mention these points, the writers added the theme in a story last week—linking their original assertions to Clayton’s incentives in the political debate and making it clear that they are on the other side of that debate, opposing repeal.   Thus it now appears as if the authors wrote a piece of political advocacy, not investigative journalism, and targeted Clayton for ulterior motives, not as neutral reporters of facts.   (Notably, once Mr. Wagner’s conflict of interest was revealed, bylines in the two subsequent pieces credit only Mr. Baker, with Mr. Wagner demoted from the byline to credit for additional reporting.)

While wrongful activity within a subsidiary of a decentralized corporation would reveal costs of such a model, given the political context of the purported exposé, that does not appear to be an implication in this case.   On the contrary, the political benefits of a piece attacking Clayton would be proportional to Clayton’s reputation for integrity—if even those reputable entrepreneurs sell or finance manufactured homes to troubled buyers, imagine what the rest of the industry looks like!  Had there been a real problem—whether dealers wrongly steering customers toward inferior loans or loan officers deceiving customers—there would be reason to consider the efficacy of Clayton’s vertically integrated structure—making, selling, financing and insuring manufactured homes operating as walled-off business silos.  Likewise, if Clayton’s formal response and Mr. Buffett’s oral comments had missed their mark, consideration should be given to changing Berkshire’s lean anti-bureaucratic model to add departments of political or public affairs at both the subsidiary and parent levels.  But no such costs appear to warrant such a revision.  (Indeed, it was Mr. Buffett who called out Mr. Wagner’s undisclosed conflict of interest, in an interview with the writers at the annual meeting—not a fact he likely dug out himself.)

Lawrence A. Cunningham, a professor at George Washington University,  has written numerous books on a wide range of subjects relating to business and law. 


Berkshire Trivia Contest: Win $100 in Books

Berkshire-Beyond-Buffett-Flyer-2Ace the following quiz and win a $100 Amazon gift certificate (or, if you prefer, take $100 worth of my own books directly from me).  All answers may be found in Berkshire Beyond Buffett:  The Enduring Value of Values.  Feel free to share with friends.  Email your answers to me.  Offer limited to the first person to submit all answers correctly by Friday May 29, 2015  at midnight EDT.

1. Who founded The Pampered Chef and what job did that founder holder before doing so?
2. Who founded FlightSafety and what was that founder’s favorite charity?
3. What medical scare did John Justin Jr. face in 1968?
4. At what age did Rose Blumkin pass away?
5. What was Lubrizol’s most pivotal acquisition under CEO James Hambrick?
6. What was the original name at its creation of the company today called Berkshire Hathaway Energy?
7. Who christened the company now called MiTek and what was it called before that?
8. What company most assisted McLane as it expanded in the 1960s and 1970s?
9. What CEO and company minted the “I Am Loved” campaign?
10. Identify the origins of the name Marmon, stating year, deal and source of name.
11. What company provided the inspiration for the founding of GEICO?
12. Name the Berkshire executive listed as the largest donor by the Chronicle of Philanthropy from 2000 to 2009.
13. Berkshire is to Fruit of the Loom as Philadelphia & Reading is to what company?
14. Name the bidder that Berkshire outbid to acquire Clayton Homes.
15. Name three Berkshire CEOs who have won the Horatio Alger Award.
16. Name four minority positions Berkshire has swapped for entire businesses.
17. Name four Berkshire subsidiaries that have been through bankruptcy.
18. Name the individual who introduced the deal for Berkshire to acquire Star Furniture.
19. Name all Buffett family members who have served on Berkshire’s board.
20. Who wrote the foreword to Berkshire Beyond Buffett and what is that author’s role at Berkshire?

Lawrence A. Cunningham, a professor at George Washington University,  has written numerous books on a wide range of subjects relating to business and law. 


A Berkshire Opportunity Cost: Listed Family Firms

aaaaaThe following is adapted from “Berkshire’s Blemishes,” a working paper delineating the costs, rather than the vaunted benefits, of Warren Buffett’s Berkshire Hathaway as a management model.  

Warren Buffett loves family businesses whose owner-managers care more about their constituents than about profits, recognizing instead that customer care tends to translate into economic gain. Those entrepreneurs, in turn, love Berkshire Hathaway, Buffett’s company, because it offers intangible benefits such as managerial autonomy and a permanent home. When family businesses sell to Berkshire, they know they can still run them as they see fit and will not be sold if prospects falter: Berkshire has not sold a subsidiary in forty years and promises not to.

Buffett hates using Berkshire stock to pay for acquisitions, however, since few companies can match the time-tested premium currency Berkshire has come to represent. In fact, Berkshire’s worst acquisition was paid for in stock and Buffett still translates the cost into current values: $443 million paid in 1993, equivalent to more than $5 billion in Berkshire stock now. Preferring to pay cash, Berkshire is often able to acquire family businesses at a discount because selling shareholders value Berkshire culture. Buffett also hates auctions, plagued by frightful dangers like the winner’s curse, which can push bids well above value, rationally calculated.

Sensible as these tenets are, there is always an opportunity cost, in this case forsaking listed family firms–publicly traded companies controlled by a family. Unlike those owned solely by close-knit groups who all wish to sell to Berkshire, directors of listed family businesses owe duties to non-family shareholders when selling control. In most states, led by Delaware, they are duty-bound to get the best value for shareholders.  (The doctrine is known by famous cases illustrating it, including Revlon and Paramount v. QVC.)

In a stock deal where all holders share gains in future business value, directors could consider Berkshire’s special culture in valuing the transaction. But with cash, all such future value goes to Berkshire’s shareholders, not selling public stockholders, who would also gain nothing from the autonomy or permanence that family members prize in a sale to Berkshire. So directors resist an all cash sale at a discount and seek rival suitors at higher prices, even stimulating an auction to drive price up—repelling Berkshire’s interest.

An example can be drawn from Berkshire’s 2003 acquisition of Clayton Homes, a publicly traded family business bought for a modest (seven percent) premium to market. Many Clayton shareholders objected; one, Cerberus Capital Management, told Clayton it wanted the chance to make a competing bid; another sued. The result was a six-month delay in getting to a shareholder vote, which narrowly approved the Berkshire deal. Many Clayton shareholders were disappointed, but Cerberus opted not to outbid Berkshire, and the court dismissed the lawsuit.

The scenario remains unattractive to Berkshire, however, given the risk of litigation, delay and rival bids. After all, courts might require directors to take affirmative steps, presenting the risk of an auction, which in itself suffices to deter Berkshire from bidding in the first place. The upshot: the publicly traded family business is outside Berkshire’s acquisition model, amounting to an opportunity cost for what would otherwise be a sweet spot. On balance, it is probably a price worth paying, but it’s useful to know the price.

Lawrence A. Cunningham, a professor at George Washington University,  has written numerous books on a wide range of subjects relating to business and law. 


As Yanks Fail to Pay A-Rod When Due, Is Settlement On Brew?

aaaa Alex Rodriquez roamed Washington DC’s power corridors Wednesday (pictured), while his agents back home in New York drafted grievance papers against the Yankees for nonpayment of $6 million, due Friday.[i] A-Rod claims the sum as an agreed bonus for hitting his 660th home run on May 1, tying Willie Mays for fourth place on the all-time list. The Yanks say the bonus isn’t due unless achieving the milestone is commercially marketable, which they signal it isn’t, without saying why. A-Rod’s advisors will challenge that conclusion as well as whether the team reached it in good faith, or as a pretext to avoid a sizable payday.[ii]

The outcome is uncertain. While both sides seem to agree that the sole test is whether the Yankees hold a good faith belief that the milestone is not commercially marketable, they may disagree about what those two concepts entail in this particular setting. When contract fights boil down to such disagreements over the contextual meaning of an abstract phrase, a good bet is that both sides will seek to settle rather than fight, as Michael McCann suggests might happen here.

The concept of commercial marketability is inherently elastic. Its meaning has ranged from simple readiness of an economic good or service for public sale or distribution to some reasonable prospect of achieving meaningful levels of sales or profits. In baseball, a player and his achievements have been recognized as such an economic entity whose identity and record translate into revenue and gain for players and teams alike. Broad standards like these leave a wide range of discretion in the party who gets to make the determination of commercial marketability. In this case, that party is the Yankees.

To constrain that discretion, the A-Rod/Yanks contract and general principles of contract law require that the Yankees exercise it in good faith. That means the team must make a determination based on information, experience and judgment about the prospects. They may weigh fan and media interest in home run races generally—the effects when number one Barry Bonds overtook number two Hank Aaron say—and probably would be constrained to consider other races A-Rod has been in, including his current quest for 3,000 hits. The team will heavily weight A-Rod’s poor reputation among fans, given drug abuse and other blemishes; many baseball fans detest the tarnished player’s run for records held by revered titans, like Willie Mays, the beloved “say-hey kid,” or his Godson, Bonds.

Bob MacManaman argues that it is also relevant how A-Rod’s recent performance contributes to the team’s commercial success. The team is in first place thanks in part to A-Rod. But helping the team win does not automatically mean that home run milestones are commercially marketable. Yet the Yankees muffled the marketing by downplaying the quest. They omitted the home run derby from the list media should watch for, as Billy Witz reported for the New York Times. They have not explained why. In contrast, they stoke other A-Rod quests, including his impending 3,000th hit. To raise doubt about good faith, A-Rod will stress that he and the Yankees have no bonus agreement about 3000 hits and other A-Rod targets they are promoting while ignoring the one that triggers bonuses.

It remains a close call and both sides will thus appeal to the equities—as they have been in the media and on the field. The Yankees must worry about perceptions of even handedness. They do not want to alienate other current or prospective players, which is why owner Hal Steinbrenner stresses that the Yanks honor all their contracts.

A-Rod has to improve his profile to reinforce arguments about commercial marketability. That’s why he has been so well-behaved during this episode. It may help explain why he spent Wednesday visiting with the Georgetown Hoyas in DC, though his enemies, like Phillip Bump, find it characteristically distasteful for A-Rod to be hanging out with DC’s pols in the afternoon.  All of this points to the prudence of settlement rather than arbitration, which is wasteful and risky.


Lawrence A. Cunningham, a professor at George Washington University, is working on a new edition of his book, Contracts in the Real World: Stories of Popular Contracts and Why They Matter, likely including analysis of the A-Rod v. Yankees case.  He is not jealous that A-Rod visited the campus of Georgetown University today. 


[i] The due date appears to be “15 business days after reaching the milestone”, which was met on May 1, translating into this Friday May 22. A-Rod would have 30 days to file a grievance for nonpayment.

[ii] To the Yankees, the payout would include another $6 million to Major League Baseball, under its rules taxing luxurious player compensation in the name of equity across baseball teams.



DuPont Victory Good Sign for Buffett’s Berkshire

aaaaaYou know the activists have made an impact when the prospects of targeting Berkshire Hathaway are taken seriously enough to warrant a question on the subject to Warren Buffett at the company’s famous annual meeting.  Buffett scoffed at the idea by stressing a combination of performance and size—but there is a bit more to say, and now is a good time to say it, in light of yesterday’s stinging rebuke of the notorious activist Nelson Peltz by shareholders of DuPont. (No, greed is not good.)

Berkshire is among the largest, most diversified and profitable corporations in American history. It owns nine subsidiaries that, if they stood alone, would each be a Fortune 500 company, and boasts scores of diverse companies generating revenue from $1 billion to $8 billion apiece. At present, no sensible activist would target the firm, since Warren Buffett built, runs, and controls it by owning 34% of the voting power.

But just as the 84-year old conglomerate builder plans for Berkshire’s fate beyond his lifetime, no doubt activists are planning too. After all, despite a whopping market capitalization of nearly $400 billion, most analysts agree that Berkshire is worth more—that the sum of the parts is greater than the whole.

Citing criticisms of the conglomerate business model, activists will urge management to sell Berkshire’s struggling units, spin-off the mediocre, and install new managers at any failing to meet publicized performance standards.  In the process, they would call for distributing the cash to shareholders. They would explain how what they offer is worth more than Berkshire shares alone: cash plus shares in spun-off subsidiaries along with the continuing Berkshire shares.

The counterargument, familiar to Berkshire’s stalwart shareholders, will stress the value Berkshire has created from its unique business model. It pledges to business sellers that it will hold them indefinitely and give managers autonomy. Such commitments have great economic value not necessarily reflected in either today’s stock price or the valuations of individual business units.  The only way to preserve that premium is sustaining the conglomerate. The value is amplified by the capacity to relocate capital across subsidiaries without taxes, interest, covenants or hassle. Keeping the whole together reinforces the economic value of these and other intangibles, including a culture of trust, thrift, and teamwork. Read More


Berkshire’s Disintermediation

aaaaaDisintermediation” is the business phenomenon of the technology era, when consumers go straight to the source for everything from accommodations to crowdfunding. Yet the greatest exemplar of the practice is the era’s least technologically savvy company, Berkshire Hathaway. Berkshire, 50 years old as a conglomerate and now one of America’s largest public companies, almost never uses intermediaries — brokers, lenders, advisers, consultants and other staples of today’s corporate bureaucracies. There are lessons in the model for the rest of corporate America, as well as investors, and it is an honor to be including a full length piece on the broad topic of disintermediation in the Wake Forest U. symposium on the subject hosted by Alan Palmiter and Andrew Verstein.

While American companies borrow heavily, Berkshire shuns debt as costly and constraining, preferring to rely on itself and to use its own money. It generates abundant earnings and retains 100 percent, having not paid a dividend in nearly 50 years. In 2014, Berkshire earned $20 billion — all available for reinvestment.  In addition, thanks to its longtime horizon, Berkshire holds many assets acquired decades ago, resulting in deferred taxes now totaling $60 billion. These amount to interest-free government loans without conditions. The principal leverage at Berkshire is insurance float. This refers to funds that arise because Berkshire receives premiums up front but need not pay claims until later, if it all. Provided insurance is underwritten with discipline, float is akin to borrowed money but cheaper. At Berkshire, float now totals $72 billion, which it uses to buy businesses that continue to multiply Berkshire’s value.

American corporations tend to design acquisition programs using strategic plans administrated by an acquisitions department. They rely heavily on intermediaries such as business brokers and investment bankers, who charge fees and have incentives to get deals done; firms also use consultants, accountants and lawyers to conduct due diligence before closing. erkshire has never had any such plans or departments, rarely uses bankers or brokers, and does limited due diligence. In the early days, Berkshire took out a newspaper ad announcing its interest in acquisitions and stating its criteria — which it has reprinted in every annual report. Berkshire now relies on a network of relationships, including previous sellers of businesses.

Today, corporate America’s boards are intermediaries between shareholders and management. Directors are monitors involved in specific strategic decision-making. They meet monthly, using many committees, which in turn hire consultants, accountants and lawyers. American directors are well-paid — averaging $250,000 annually — including considerable stock compensation plus company-purchased liability insurance.  Berkshire’s board, in contrast, follows the old-fashioned advisory model. Composed of friends and family, they are directors because they are interested in Berkshire. They do not oversee management but provide support and advice. There are few committees, no hired advisers, and only two or three meetings a year. Berkshire pays its directors essentially nothing and provides no insurance. Berkshire’s directors are significant shareholders and bought the stock with their own cash — which is why they are there.

Read More


Warren Buffett & Charlie Munger Annotated by Experts in Wall Street Journal

WB1996Warren Buffett’s latest letter to Berkshire Hathaway shareholders is annotated in The Wall Street Journal by 30 professors, authors, and investors.  Editors Erik Holm and Anupreeta Das assigned us each two sentences in the letter, and/or Charlie Munger’s addendum, to amplify.  Here are my two, followed by the list of contributors. Mine address the role Warren’s son Howard will play in succession and what Munger believes concerning what made Berkshire succeed.

Regarding Buffett’s reference to his son Howard (p. 36):   Buffett tries again to defend the choice of Howard to succeed him as board chairman. Many remain skeptical. But critics should appreciate the plan’s savviness. It deftly carves a niche for the son of a legend, as Howard will: (1) not be asked to perform any task his father has performed (like investing or capital allocation) and (2) be asked to perform only one task, which Warren has never performed (monitoring the CEO for adherence to Berkshire culture and dismissing any who fail). This shrewdly avoids the trap many children of legendary parents face of never being able to measure up.

Notably, besides Munger, Howard is the only individual Buffett identifies by name among Berkshire personnel in his anniversary message and, besides Buffett, Munger only names Abel and Jain. In fact, while Munger and Buffett mutually credit the other for minting the Berkshire model, they never credit any other Berkshire personnel for its success. The omission contrasts with Buffett’s letters, which rightly herald specific executives who power Berkshire and animate its culture. The difference is that these messages, while in form historical, are really about the future, and all three people identified by name are referenced in discussions of succession.

Where Munger asserts (p. 39) that “The management system and policies of Berkshire . . . were fixed early”:   Munger’s statements about how Berkshire’s “system and policies” were “fixed early” is vague. In one sense, it sounds as if they were part of a master plan at the outset back in the 1960s.  But Buffett has often stressed that Berkshire never had a strategic plan nor any business plan. And through the 1980s, most of Berkshire’s “business” consisted of investments in securities for its insurance companies, not wholly owned operating subsidiaries. So it doesn’t seem likely that, in the 1970s or even as late as the 1980s, Buffett’s goal was to create “a diffuse conglomerate.”

On the other hand, Munger subsequently clarifies (p. 40) that Buffett “stumbled into some benefits [of these policies] through practice evolution” over his career. And Buffett sculpted much of Berkshire’s culture late in the company’s life as part of a process that is still ongoing and extends well beyond these policies. Therefore these passages should not obscure the fact that the “Berkshire system” looks sharper from today’s vantage point than from Buffett’s desk “early” on. That’s important to recognize lest observers commit errors associated with hindsight bias like believing that observed outcomes were predictable, a weakness of human psychology which Munger often lectures against.

Cunningham is the author of Berkshire Beyond Buffett: The Enduring Value of Values and editor and publisher, since 1997, of The Essays of Warren Buffett: Lessons for Corporate America. For more commentary on this topic, see today’s New York Times Dealbook column, here. Read More


Fed Officials Accused of Perjury in AIG Bailout Trial

In the financial trial of the century, the most important document is missing. The document is the term sheet that the government says it gave AIG’s board right before taking the company over in Sept. 2008.  The government says the AIG board thus approved the Draconian terms that benefited Goldman Sachs and other rivals. But other evidence, including  AIG’s contemporaneous securities filings, suggests the board was agreeing only to sell the government warrants not transfer 80% of the common stock to it for a song.  The missing document would prove which side is telling the truth.

That’s one of many amazing points of contention noted by Yves Smith of Naked Capitalism in her relentless digging into what government really did during the financial crisis. Most recently, she alleges and documents perjury and obstruction of justice by top federal officials in the pending case of former AIG shareholders against the US. The case alleges that the government trampled on corporate law rights and that the Fed exceeded its authority—allegations that I document in my book, The AIG Story, written with Hank Greenberg, lead plaintiff in the case.

Smith lays out her claims in an extensive blog post at Naked Capitalism, accompanied by reams of additional documents and examples. For those looking for a skinny version, here is an abridged adaptation. Most examples concern Scott Alvarez, general counsel of the Board of Governors of the Federal Reserve; there is one with with Tom Baxter, general counsel of the New York Fed, who worked with Tim Geithner. The shareholders are represented by the noted trial lawyer, David Boies. The point about the term sheet is at the end.

Example 1

Boies: Would you agree as a general proposition that the market generally considers investment-grade debt securities safer than non-investment-grade debt securities?

Alvarez: I don’t know.


Example 2

Boies: [Presents a copy of the Financial Crisis Inquiry Commission report stating that the Fed had lowered the standards it applied for the quality of collateral for its loans under two programs then devised to support lending and asks] Do you see that?

Alvarez: I see that. . .

Boies: . . . [W]ould you agree that the Federal Reserve had lowered its standards regarding the quality of the collateral that investment banks and other primary dealers could use while borrowing. . . ?

Alvarez: No.

Boies: You would not agree with that?

Alvarez: Right.


Example 3 Read More


Milton Hebald, RIP

The great sculptor, Milton Hebald, passed away at age 97.  May he rest in peace.  The NYT has a fine obituary here.  Accompanying this post are photos of three of his numerous sculptures gracing the grounds at Morefar, the Brewster, NY estate of the late Cornelius Vander Starr, founder of what Hank Greenberg turned into the American International Group.

Boy flying kite at Morefar (pp. 33-34)













Boy Flying Kite

Statue at Morefar (pp. 33-34)











2011-09-10 10.22.03










Tennis Anyone?