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.
On 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.