Category: Current Events

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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

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Harper Lee’s Alleged Sequel to “To Kill a Mockingbird”

To_Kill_a_Mockingbird_(1962)_trailer_2I realize that this is not exactly a legal post, but the story that the publisher released today about the “discovery” of a lost sequel to “To Kill a Mockingbird” strikes me as rather fishy.

The claim, in a statement attributed to Harper Lee, goes something like this.  In the 1950s, Lee wrote a novel set in the present about Scout, Atticus Finch, and many of her other famous characters.  She then set that aside and wrote what amounted to a prequel set in the 1930s–“To Kill a Mockingbird.”  Sixty years later, the original novel was found by somebody after everyone, including Lee, though that the manuscript was lost.

I find this all rather hard to believe.  First of all, Lee is nearly 90 years old, suffered a stroke in 2007, and lives in a nursing home.  Thus, I wonder to what extent any statement can be attributed to her.  Second, it’s an interesting coincidence that this novel was “found” not long after Lee’s sister, an attorney who acted as her advisor for decades, passed away.  Third, exactly where was this manuscript found?  In somebody’s attic?  In the same place where the “The Hitler Diaries” came from?

A fortune stands to be made from a sequel to one the most beloved books of all time.  Before it is published, I think someone should make sure that this is a genuine manuscript and that Lee is competent to make a decision to publish.  For all I know, this novel is something that she’s had all along and did not want to publish, but now that she cannot speak for herself another party (an attorney, an agent, etc.) wants to take unfair advantage of her fame.

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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.