Category: Current Events

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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

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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)

 

 

 

 

 

 

 

 

 

Handstand

2011-09-10 10.22.03

 

 

 

 

 

 

 

 

 

Tennis Anyone?

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The Crystal Ball for 2015

In thinking about national politics for the upcoming year, the Supreme Court is the wildcard.  What will we be talking about during the first half of the year?  The usual suspects probably–taxes, immigration, foreign policy, climate change, etc.  If King v. Burwell goes against the Administration, though, we will be talking about nothing but health care in the second half of the year.  We will have no choice, as Congress and most of the states will have to come up with a response to the loss of subsidies for millions of people.  If King goes the other way, though, then we won’t be talking about health care much at all.

I haven’t a clue as to what the Court will do in King.  Oral argument in March will either be very anticlimactic or thrilling–stay tuned.

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“The Interview” and Eminent Domain

Personally I hope that the NSA figures out a way to knock North Korean State TV off the air.  In the meantime, though, the United States should exercise eminent domain and buy the movie from Sony as a partial compensation for its loss.  Then the Administration should make the movie freely available with dubbing and commentary in as many languages as possible.

I’m disturbed to hear some discussion in the vein of “Oh, it looks like a terrible and offensive movie, so why should we stir up a hornet’s nest by going after the hackers?”  Major free speech issues often involve unsavory expression–who cares about whether “The Interview” is up for any Oscars?  I don’t expect a principled stance from a corporation, but I do expect one from public officials and citizens.

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The Roberts Convention

When I think about NFIB v. Sebelius, my understanding of what Chief Justice Roberts did was to say that in an election year the Justices appointed by one political party should not strike down the signature legislation of the other political party.  I have no idea what the Chief Justice thinks that the Chief Justice did two years ago, but how would what I just said apply to King if the decision is 5-4 against the Administration.

Well, 2015 is not an election year, and King would not strike down the Affordable Care Act.  But is an adverse ruling tantamount to striking it down given that Congress will not do much in response?  I don’t know.  I get different views on that from health law experts.  Some say this would be crippling, others say not so much.  One would think that the briefs will try to convince the Chief one way or the other on this–that matters as much as the technical aspects.

One other note–Paul Krugman’s column in today’s NY Times today on King is the liberal equivalent of a Rush Limbaugh tirade.  I don’t have time to go through all of the flaws.  I love reading him and think his economic views are spot on, but on this one he doesn’t know what he’s talking about.

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Berkshire and Coca-Cola: Deja Vu All Over Again

 

 

In response to the business media frenzy over what challenges at the Coca-Cola Company mean for Berkshire Hathaway, which owns a large stake in the company acquired in 1988, herewith an excerpt for perspective from Berkshire Beyond Buffett, my book released yesterday.  The book focuses on Berkshire’s 50 main wholly owned businesses, but also has brief passages on some of the companies in which Berkshire owns a minority position.  The following is the passage on The Coca-Cola Company, pages 181-182.  You might call it: Berkshire and Coca-Cola: We Have Been Here Before. 

Before presenting the passage, a related note: when activist Coke shareholders (like David Winters) agitating for change complain about their futile efforts to lure Buffett into their fight, remember that Buffett works for Berkshire and its shareholders, not for Coke or its shareholders. While activism might boost Coke’s shareholders today, Berkshire’s patient quiet approach has boosted Berkshire’s shareholders year in and year out.  For example, the model of quiet patience is precisely why Berkshire was able to reap such enormous gains from its investments during the 2008 financial crisis.

CokeWith sales in 2013 reaching $50 billion, the Coca-Cola Company is about as powerful a brand and company as can be, at home in Atlanta and around the world. Its success is due ultimately to a single product, originally a mixture created in 1886 by pharmacist John Styth Pemberton of sugar, water, caffeine, and cocaine (extracts of the coca leaf and the kola nut). In 1891, fellow pharmacist Asa G. Candler gained control of the product and initiated steps to launch the business. Among early moves was the first bottling franchise in 1899, an investment in local partnerships that became the scaffolding to build the brand: the company makes concentrate for sale to bottlers that mix it into liquid form and package it for sale to retailers. Other early milestones include the 1905 removal of cocaine from the mix and the 1916 creation of the unique contour-shaped bottles.

In 1919, Candler sold the company to Ernest Woodruff and an investor group which promptly took it public. In 1923, Ernest’s son, Robert Winship Woodruff, became president, a position he held through 1954, followed by serving as a director through the 1980s. Coke went global in the 1940s, establishing bottling plants near the fronts in World War II. With the stewardship of CEO William Robinson, in 1960, Coke acquired Minute Maid Corporation and in 1961, launched Sprite, the first of many brand expansions it would continue as it developed its product line of five hundred different drinks.

Under Paul Austin during the 1970s, despite reasonable sales, the company stumbled from one problem to another. Bottlers felt misunderstood, migrant workers in the Minute Maid groves were mistreated, environmentalists complained about its containers, and federal authorities challenged the legality of its franchise bottling system. Although Austin launched Coca-Cola into China and was responsible for other international achievements, critics say he neglected the flagship brand by diversifying into water, wine, and shrimp. With investors punishing the stock, the board finally ousted Austin in 1980, replacing him with Roberto C. Goizueta, Coca-Cola’s most famous CEO, serving from 1981 through 1997.

A legendary businessman and Wall Street darling, Goizueta returned to basics, focusing on the Coke brand and rejuvenating Coca-Cola’s traditional corporate culture of product leadership and cost management. During his tenure, Goizueta led the company to widen profit margins from 14 to 20 percent, boosted sales from $6 billion to $18 billion, drove profits from less than $1 billion to nearly $4 billion, and pushed returns on equity from 20 to 30 percent.  These measures were propelled by expanding Coke’s global network and the successful 1982 launch of Diet Coke.

There were, of course, a few errors along the way. One, the lamentable 1985 birth and death of New Coke after it flopped with consumers, simply revealed the power of the core brand. Another was Coca-Cola’s 1982 acquisition and 1987 divestiture of Columbia Pictures after it had become disillusioned with the inscrutable ways of Hollywood. But this diversion simply proved the durability of Coke’s corporate culture—and was also lucrative, as the company paid $750 million for Columbia and sold it for $3.4 billion.

In 1988 and 1989, Buffett heralded Goizueta’s achievements when Berkshire bought the large block of Coca-Cola shares it still owns today and Buffett joined the board (on which he served until 2006). After Goizueta’s sixteen years, however, the company’s CEOs came and went more like temps, four in thirteen years. But despite mistakes, none could fail so spectacularly as to ruin the Coke brand or Coca-Cola’s corporate culture. Douglas Ivester (1997–2000) swapped the contour-shaped Coke bottle for a larger unfamiliar variant, compromising a valued trademark. Douglas N. Daft (2000–2004) fired large numbers of people, a slap in the face to the employee-centric culture that prided itself on lifetime employment.

Yet changing strong corporate cultures is not easy, and at Coca-Cola, successors quickly reversed course. E. Neville Isdell, who returned from retirement to right the ship, and Muhtar A. Kent, who took over in 2009, revived a decentralized structure and the professional style that Goizueta favored. They also understood the importance of international markets, especially in southeast Asia, where growth prospects remain strong. Kent celebrates Coca-Cola’s greatest tradition, epitomized by its history of using hundreds of bottling partners: being simultaneously global and local.

Coca-Cola has been a profitable investment for Berkshire—worth today twelve times what Berkshire paid for it. And Buffett’s son Howard has been on its board since 2010. The company appears to be prospering, and the Buffetts are bullish on it. Buffett and Munger continue to give the brand free advertising by sipping it on the podium at Berkshire’s annual meetings. But skeptics wonder about the durability of its economic characteristics in a health-conscious world turning away from carbonated beverages.

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What Did They Put in the Water of PA’s Prosecutors?

Pennsylvania’s Supreme Court Justice receiving hard-core pornographic emails? Check.  Another Justice using that fact as an opportunity to call for his long-term rival’s resignation? Check. My friends: the problems of Pennsylvania’s legal culture, in one nicely-wrapped, festering, package. And now, the made-for-Above-the-Law story is getting worse:

“Attorney General Kathleen G. Kane’s unprecedented move to expose the swapping of pornographic e-mails on state time has so far cost four men their jobs, put another at risk of being stripped of his state post, and left three others deeply embarrassed.

All of them may be collateral damage.

So far, Kane has not landed a major blow on the man who sources say has long been her main target: former state prosecutor Frank Fina.

In fact, she’s been muzzled from doing so …

Fina is a career prosecutor known for high-profile public-corruption cases at the Attorney General’s Office. He now works for Philadelphia District Attorney Seth Williams.

Numerous people with knowledge of their quarrel – including sources close to both – have said Fina participated in the exchange of X-rated e-mails.

According to the same sources, Kane was intent on making that fact public.

She wanted to expose what she believed was an entrenched misogynistic culture in the Attorney General’s Office when Fina was a ranking prosecutor and before she took charge, people close to her say.”

According to the story, Fina obtained a gag order preventing the Attorney general from evening mentioning his name by going to a suburban judge overseeing a grand jury, on the theory that “Kane’s office was using the threat of tying him to the sexually explicit e-mails to intimidate and silence him and others.” But today’s story (seemingly by sources close to the Attorney General) would appear to sap the vitality of that gag order, which may now be extinguished. And enterprising journalists might fairly ask Philadelphia’s District Attorney what he thinks of Fina’s conduct, and whether the DA has asked his employee if Fina indeed sent and received hard-core pornographic emails to colleagues and to Justices on Pennsylvania’s Supreme Court. This scandal, already so damaging for the reputation of Pennsylvania’s bench and bar, may get worse.

 

 

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The Same-Sex Marriage Cases

Just a quick thought about the Court’s certiorari denials today.  All eyes now turn to the Sixth Circuit, where a case is pending that could produce an opinion upholding same-sex marriage prohibitions.  Depending on when that opinion comes down, the Supreme Court could resolve the constitutional issue this Term.  Or perhaps next Term.

Or not. The Sixth Circuit rarely misses an opportunity to go en banc.  If the panel opinion is taken en banc, then who knows when that opinion would reach the Justices.  Perhaps the losers in the Sixth Circuit will not request en banc review (I don’t know if the Sixth ever goes en banc sua sponte), but that is far from clear.

Bottom line–don’t expect a Supreme Court decision on this until 2016 at the earliest.  That might be bad news the Republican presidential nominee, who may have to take an unpopular stand saying no to same-sex marriage into the general election.

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Scottish Independence

120px-Scottish_Flag_-_detailNext week Scotland will vote on independence.  No matter the outcome, the result will be more federalism in Great Britain.  Even if Scotland votes nae, that vote will still probably be close.  And much like what happened in Canada with Quebec, Parliament will have to give Scotland more autonomy to prevent a future vote from going the other way.  (Indeed, a proposal of this sort is already being floated to sway undecided voters.)  If Scotland votes aye, then one would expect Wales to demand and get more autonomy to stay in the Union, though Wales is a less viable independent states.

One curiosity about the upcoming vote is that Britain is due to hold a general election next year.  If Scotland votes aye on independence, then would it still get to vote in that election?  It will probably take more than a year to finalize Scottish secession, but it would be weird if a departing part of the country gets to form a new government.  (And then, I guess you’d have to have a new election as soon as all of the Scottish MPs leave.)  Of course, Parliament could simply postpone the election (something that cannot be done under our Constitution), but that creates its own difficulties.

One last thought.  At what point will a federal Britain need an English Parliament as distinct from Westminster?  In other words, right now there is no English provincial government–there are only national, Scottish, Welsh, and local ones.  How long is that sustainable if Scotland and Wales get more power within Britain?

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Chapter 8 of Berkshire Beyond Buffett: An Excerpt and Link

untitledThe following is an excerpt from Chapter 8, Autonomy, from Berkshire Beyond Buffett: The Enduring Value of Values; the full text of the chapter, which considers the case for Berkshire’s distinctive trust-based model of corporate governance, can be downloaded free from SSRN here.

. . . Berkshire corporate policy strikes a balance between autonomy and authority. Buffett issues written instructions every two years that reflect the balance. The missive states the mandates Berkshire places on subsidiary CEOs: (1) guard Berkshire’s reputation; (2) report bad news early; (3) confer about post-retirement benefit changes and large capital expenditures (including acquisitions, which are encouraged); (4) adopt a fifty-year time horizon; (5) refer any opportunities for a Berkshire acquisition to Omaha; and (6) submit written successor recommendations. Otherwise, Berkshire stresses that managers were chosen because of their excellence and are urged to act on that excellence.   

Berkshire defers as much as possible to subsidiary chief executives on operational matters with scarcely any central supervision. All quotidian decisions would qualify: GEICO’s advertising budget and underwriting standards; loan terms at Clayton Homes and environmental quality of Benjamin Moore paints; the product mix and pricing at Johns Manville, the furniture stores and jewelry shops. The same applies to decisions about hiring, merchandising, inventory, and receivables management, whether Acme Brick, Garan, or The Pampered Chef. Berkshire’s deference extends to subsidiary decisions on succession to senior positions, including chief executive officer, as seen in such cases as Dairy Queen and Justin Brands.

Munger has said Berkshire’s oversight is just short of abdication. In a wild example, Lou Vincenti, the chief executive at Berkshire’s Wesco Financial subsidiary since its acquisition in 1973, ran the company for several years while suffering from Alzheimer’s disease—without Buffett or Munger aware of the condition. “We loved him so much,” Munger said, “that even after we found out, we kept him in his job until the week that he went off to the Alzheimer’s home. He liked coming in, and he wasn’t doing us any harm.” The two lightened a grim situation, quipping that they wished to have more subsidiaries so earnest and reputable that they could be managed by people with such debilitating medical conditions.   

There are obvious exceptions to Berkshire’s tenet of autonomy. Large capital expenditures—or the chance of that—lead reinsurance executives to run outsize policies and risks by headquarters. Berkshire intervenes in extraordinary circumstances, for example, the costly deterioration in underwriting standards at Gen Re and threatened repudiation of a Berkshire commitment to distributors at Benjamin Moore. Mandatory or not, Berkshire was involved in R. C. Willey’s expansion outside of Utah and rightly asserts itself in costly capital allocation decisions like those concerning purchasing aviation simulators at FlightSafety or increasing the size of the core fleet at NetJets.

 Ironically, gains from Berkshire’s hands-off management are highlighted by an occasion when Buffett made an exception. Buffett persuaded GEICO managers to launch a credit card business for its policyholders. Buffett hatched the idea after puzzling for years to imagine an additional product to offer its millions of loyal car insurance customers. GEICO’s management warned Buffett against the move, expressing concern that the likely result would be to get a high volume of business from its least creditworthy customers and little from its most reliable ones. By 2009, GEICO had lost more than $6 million in the credit card business and took another $44 million hit when it sold the portfolio of receivables at a discount to face value. The costly venture would not have been pursued had Berkshire stuck to its autonomy principle.

The more important—and more difficult—question is the price of autonomy.  Buffett has explained Berkshire’s preference for autonomy and assessment of the related costs: 

We tend to let our many subsidiaries operate on their own, without our supervising and monitoring them to any degree. That means we are sometimes late in spotting management problems and that [disagreeable] operating and capital decisions are occasionally made. . . . Most of our managers, however, use the independence we grant them magnificently, rewarding our confidence by maintaining an owner-oriented attitude that is invaluable and too seldom found in huge organizations. We would rather suffer the visible costs of a few bad decisions than incur the many invisible costs that come from decisions made too slowly—or not at all—because of a stifling bureaucracy.

Berkshire’s approach is so unusual that the occasional crises that result provoke public debate about which is better in corporate culture: Berkshire’s model of autonomy-and-trust or the more common approach of command-and-control. Few episodes have been more wrenching and instructive for Berkshire culture than when David L. Sokol, an esteemed senior executive with his hand in many Berkshire subsidiaries, was suspected of insider trading in an acquisition candidate’s stock. . . .

[To read the full chapter, which can be downloaded for free, click here and hit download]