Tell Me the Bad News Now
Yesterday, in a New York Times interview, Lawrence W. Kellner, Chairman and CEO of Continental Airlines, said:
“People have a tendency to deliver good news. I mean if somebody unscheduled pops up to my office, the odds are they’ve got a piece of good news and they’re eager to share it. But when something is going wrong, they have to feel they can flag it as quickly as when it’s going right, so that you can shift the organization and try to solve the problem. It’s a leadership structure that says, “Look, I don’t care how bad the situation is — the sooner you catch it, the better.” But if you’ve known about it for months and have been hoping against hope that all your other contingencies would solve the problem and you’ve burned up all our opportunities to solve it, I’m going to be a whole lot more unhappy.”
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Corner Office, “Bad News or Good, Tell Me Now,” New York Times, September 27, 2009
Warren would certainly agree. In recalling the 1990-1991 Salomon scandal, in a July 23, 2008 memo he told Berkshire Hathaway managers:
“…..let me know promptly if there’s any significant bad news. I can handle bad news but I don’t like to deal with it after it has festered for awhile. A reluctance to face up immediately to bad news is what turned a problem at Salomon from one that could have easily been disposed of into one that almost caused the demise of a firm with 8,000 employees.”
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Monday, September 28, 2009
Thursday, September 24, 2009
The 2-and-20 Crowd
In his recent New York Times article, Andrew Ross Sorkin reports on a conversation he had with Guy Hands, a longtime private equity manager who “offered the most frank assessment of the private equity world-including his mistakes-I had ever heard from anyone still gainfully employed in the business.”
“We all had too much money. It was just too easy.” That’s the unvarnished appraisal of the private equity business by Guy Hands, perhaps best known for his unfortunate $4.73 billion purchase of the record company EMI in March 2007, the peak of the buyout boom — a bet that will almost certainly lose his investors and his firm, Terra Firma, a fortune.
That ill-timed acquisition aside, Mr. Hands’s surprisingly candid assessment of the private equity industry is worth sharing. He was in the midst of the industry’s growth to dizzying heights during the debt-fueled boom, and he is now having to deal with the aftermath of its shopping spree. Like others, he is desperately trying to keep businesses afloat and pay off the equivalent of huge monthly mortgage payments to the banks that financed them.
The problem, he said, was that the funds had grown so big that the 2 percent became just as important as the 20 percent.
"Clearly a large number of P.E. firms were totally overpaid at the peak of the market,” he said. “The fees were an entirely unwarranted windfall....."
_______________________________________
Andrew Ross Sorkin, A Financier Peels Back the Curtain, New York Times, September 22, 2009
Warren Buffett has long been critical of the private equity business.
“In 2006, promises and fees hit new highs. A flood of money went from institutional investors to the 2-and-20 crowd. For those innocent of this arrangement, let me explain: It’s a lopsided system whereby 2% of your principal is paid each year to the manager even if he accomplishes nothing – or, for that matter, loses you a bundle – and, additionally, 20% of your profit is paid to him if he succeeds, even if his success is due simply to a rising tide. For example, a manager who achieves a gross return of 10% in a year will keep 3.6 percentage points – two points off the top plus 20% of the residual 8 points – leaving only 6.4 percentage points for his investors. On a $3 billion fund, this 6.4% net “performance” will deliver the manager a cool $108 million. He will receive this bonanza even though an index fund might have returned 15% to investors in the same period and charged them only a token fee.
…. the 2-and-20 action spreads. Its effects bring to mind the old adage: When someone with experience proposes a deal to someone with money, too often the fellow with money ends up with the experience, and the fellow with experience ends up with the money.”
______________________________________________
Warren Buffett, 2006 Letter to Berkshire Hathaway Shareholders
"Some years back our competitors were known as “leveraged-buyout operators.” But LBO became a bad name. So in Orwellian fashion, the buyout firms decided to change their moniker. What they did not change, though, were the essential ingredients of their previous operations, including their cherished fee structures and love of leverage.
Their new label became “private equity,” a name that turns the facts upside-down: A purchase of a business by these firms almost invariably results in dramatic reductions in the equity portion of the acquiree’s capital structure compared to that previously existing. A number of these acquirees, purchased only two to three years ago, are now in mortal danger because of the debt piled on them by their private-equity buyers. Much of the bank debt is selling below 70¢ on the dollar, and the public debt has taken a far greater beating. The private equity firms, it should be noted, are not rushing in to inject the equity their wards now desperately need. Instead, they’re keeping their remaining funds very private."
______________________________________________
Warren Buffett, 2008 Letter to Berkshire Hathaway Shareholders
In his recent New York Times article, Andrew Ross Sorkin reports on a conversation he had with Guy Hands, a longtime private equity manager who “offered the most frank assessment of the private equity world-including his mistakes-I had ever heard from anyone still gainfully employed in the business.”
“We all had too much money. It was just too easy.” That’s the unvarnished appraisal of the private equity business by Guy Hands, perhaps best known for his unfortunate $4.73 billion purchase of the record company EMI in March 2007, the peak of the buyout boom — a bet that will almost certainly lose his investors and his firm, Terra Firma, a fortune.
That ill-timed acquisition aside, Mr. Hands’s surprisingly candid assessment of the private equity industry is worth sharing. He was in the midst of the industry’s growth to dizzying heights during the debt-fueled boom, and he is now having to deal with the aftermath of its shopping spree. Like others, he is desperately trying to keep businesses afloat and pay off the equivalent of huge monthly mortgage payments to the banks that financed them.
The problem, he said, was that the funds had grown so big that the 2 percent became just as important as the 20 percent.
"Clearly a large number of P.E. firms were totally overpaid at the peak of the market,” he said. “The fees were an entirely unwarranted windfall....."
_______________________________________
Andrew Ross Sorkin, A Financier Peels Back the Curtain, New York Times, September 22, 2009
Warren Buffett has long been critical of the private equity business.
“In 2006, promises and fees hit new highs. A flood of money went from institutional investors to the 2-and-20 crowd. For those innocent of this arrangement, let me explain: It’s a lopsided system whereby 2% of your principal is paid each year to the manager even if he accomplishes nothing – or, for that matter, loses you a bundle – and, additionally, 20% of your profit is paid to him if he succeeds, even if his success is due simply to a rising tide. For example, a manager who achieves a gross return of 10% in a year will keep 3.6 percentage points – two points off the top plus 20% of the residual 8 points – leaving only 6.4 percentage points for his investors. On a $3 billion fund, this 6.4% net “performance” will deliver the manager a cool $108 million. He will receive this bonanza even though an index fund might have returned 15% to investors in the same period and charged them only a token fee.
…. the 2-and-20 action spreads. Its effects bring to mind the old adage: When someone with experience proposes a deal to someone with money, too often the fellow with money ends up with the experience, and the fellow with experience ends up with the money.”
______________________________________________
Warren Buffett, 2006 Letter to Berkshire Hathaway Shareholders
"Some years back our competitors were known as “leveraged-buyout operators.” But LBO became a bad name. So in Orwellian fashion, the buyout firms decided to change their moniker. What they did not change, though, were the essential ingredients of their previous operations, including their cherished fee structures and love of leverage.
Their new label became “private equity,” a name that turns the facts upside-down: A purchase of a business by these firms almost invariably results in dramatic reductions in the equity portion of the acquiree’s capital structure compared to that previously existing. A number of these acquirees, purchased only two to three years ago, are now in mortal danger because of the debt piled on them by their private-equity buyers. Much of the bank debt is selling below 70¢ on the dollar, and the public debt has taken a far greater beating. The private equity firms, it should be noted, are not rushing in to inject the equity their wards now desperately need. Instead, they’re keeping their remaining funds very private."
______________________________________________
Warren Buffett, 2008 Letter to Berkshire Hathaway Shareholders
Tuesday, September 22, 2009
Cash vs. Stock Acquisitions
Yesterday morning, it was reported that computer maker Dell will purchase information-technology company Perot Systems for $3.9 billion in cash. Buffett has always strongly preferred cash over stock acquisitions. In fact, he says his worst mistake was the stock acquisition of Dexter, a shoe business.
“From the economic standpoint of the acquiring company, the worst deal of all is a stock-for-stock acquisition. Here, a huge price is often paid without there being any step-up in the tax basis of either the stock of the acquiree or its assets. If the acquired entity is subsequently sold, its owner may owe a large capital gains tax (at a 35% or greater rate), even though the sale may truly be producing a major economic loss”
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Warren Buffett, 1999 Letter to Berkshire Hathaway Shareholders
"Finally, I made an even worse mistake when I said “yes” to Dexter, a shoe business I bought in 1993 for $433 million in Berkshire stock (25,203 shares of A). What I had assessed as durable competitive advantage vanished within a few years. But that’s just the beginning: By using Berkshire stock, I compounded this error hugely. That move made the cost to Berkshire shareholders not $400 million, but rather $3.5 billion. In essence, I gave away 1.6% of a wonderful business – one now valued at $220 billion – to buy a worthless business.
To date, Dexter is the worst deal that I’ve made. But I’ll make more mistakes in the future – youcan bet on that. A line from Bobby Bare’s country song explains what too often happens with acquisitions: “I’ve never gone to bed with an ugly woman, but I’ve sure woke up with a few.”
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Warren Buffett, 2007 Letter to Berkshire Hathaway Shareholders
Yesterday morning, it was reported that computer maker Dell will purchase information-technology company Perot Systems for $3.9 billion in cash. Buffett has always strongly preferred cash over stock acquisitions. In fact, he says his worst mistake was the stock acquisition of Dexter, a shoe business.
“From the economic standpoint of the acquiring company, the worst deal of all is a stock-for-stock acquisition. Here, a huge price is often paid without there being any step-up in the tax basis of either the stock of the acquiree or its assets. If the acquired entity is subsequently sold, its owner may owe a large capital gains tax (at a 35% or greater rate), even though the sale may truly be producing a major economic loss”
__________________________________________________
Warren Buffett, 1999 Letter to Berkshire Hathaway Shareholders
"Finally, I made an even worse mistake when I said “yes” to Dexter, a shoe business I bought in 1993 for $433 million in Berkshire stock (25,203 shares of A). What I had assessed as durable competitive advantage vanished within a few years. But that’s just the beginning: By using Berkshire stock, I compounded this error hugely. That move made the cost to Berkshire shareholders not $400 million, but rather $3.5 billion. In essence, I gave away 1.6% of a wonderful business – one now valued at $220 billion – to buy a worthless business.
To date, Dexter is the worst deal that I’ve made. But I’ll make more mistakes in the future – youcan bet on that. A line from Bobby Bare’s country song explains what too often happens with acquisitions: “I’ve never gone to bed with an ugly woman, but I’ve sure woke up with a few.”
______________________________________________
Warren Buffett, 2007 Letter to Berkshire Hathaway Shareholders
Sunday, September 20, 2009
Boardroom Atmosphere
In today’s New York Times, Gretchen Morgenson writes the following:
“ARE the days of the cocooned corporate director finally coming to an end? One can only hope. Even though directors — through the boards they sit on and the various committees they oversee — are supposed to keep wayward or incompetent chief executives at bay, all too often they are, in practice, just cronies of management.
For years, shareholders have done little to voice complaints about such cozy relationships, but it seems that the financial fiasco of the last few years, and the lackadaisical performance by directors at major banks that contributed to the meltdown, is encouraging investors to become more vocal.
Signs of such a welcome development can be seen in the results of this year’s director elections at annual corporate meetings. According to an early assessment of these shindigs, shareholders voiced significantly greater opposition to directors who were up for election this year than they did in 2008. Although such “no” votes aren’t binding, they send a powerful message that should reverberate throughout corporate board rooms.
Investors are clearly angry with their companies, and they have their reasons. Director accountability to the shareholders they are supposed to serve has been sorely lacking for decades. Even as they rubber stamp risky corporate practices and excessive executive pay, directors continue to win re-election to their increasingly lucrative board seats.
It is unfortunate that the only way to force some directors to live up to their duties is for shareholders to keep them worried about an embarrassing vote. But since that is the only weapon investors have, it’s gratifying that more of them seem ready to rumble.”
___________________________________________________
Gretchen Morgenson, Too Many ‘No’ Votes to Be Ignored, New York Times, September 20, 2009
As early as 1993, Warren Buffett has spoken out on the abuses of “Boardroom Atmosphere.” Following is only a short sample, chronologically, of his views:
“…Directors should behave as if there was a single absentee owner, whose long-term interest they should try to further in all proper ways….
And if able but greedy managers over-reach and try to dip too deeply into the shareholders’ pockets, directors must slap their hands……
The outside board members should establish standards for the CEO’s performance and should periodically meet, without his being present, to evaluate his performance against these standards."
______________________________________________
Warren Buffett, 1993 Letter to Berkshire Hathaway Shareholders
“Why have intelligent and decent directors failed so miserably? The answer lies not in inadequate laws-it’s always been clear that directors are obligated to represent the interests of shareholders-but rather in what I’d call “boardroom atmosphere.
It’s almost impossible, for example, in a boardroom populated by well-mannered people, to raise the question of whether the CEO should be replaced. It’s equally awkward to question a proposed acquisition that has been endorsed by the CEO, particularly when his inside staff and outside advisors are present and unanimously support his decision. (They wouldn’t be in the room if they didn’t.) Finally, when the compensation committee – armed, as always, with support from a high-paid consultant – reports on a mega grant of options to the CEO, it would be like belching at the dinner table for a director to suggest that the committee reconsider…..
. In recent years compensation committees too often have been tail-wagging puppy dogs meekly following recommendations by consultants, a breed not known for allegiance to the faceless shareholders who pay their fees. (If you can’t tell whose side someone is on, they are not on yours.) True, each committee is required by the SEC to state its reasoning about pay in the proxy. But the words are usually boilerplate written by the company’s lawyers or its human-relations department. This costly charade should cease.
The acid test for reform will be CEO compensation. Managers will cheerfully agree to board
“diversity,” attest to SEC filings and adopt meaningless proposals relating to process. What many will fight, however, is a hard look at their own pay and perks.
Directors should not serve on compensation committees unless they are themselves capable of negotiating on behalf of owners. They should explain both how they think about pay and how they measure performance. Dealing with shareholders’ money, moreover, they should behave as they would were it their own.
In the 1890s, Samuel Gompers described the goal of organized labor as “More!” In the 1990s,
America’s CEOs adopted his battle cry. The upshot is that CEOs have often amassed riches while their shareholders have experienced financial disasters.
Directors should stop such piracy. There’s nothing wrong with paying well for truly exceptional business performance. But, for anything short of that, it’s time for directors to shout “Less!” It would be a travesty if the bloated pay of recent years became a baseline for future compensation. Compensation committees should go back to the drawing boards."
_______________________________________________
Warren Buffett, 2002 Letter to Berkshire Hathaway Shareholders
“True independence-meaning the willingness to challenge a forceful CEO when something is wrong or foolish-is an enormously valuable trait in a director. It is also rare."
________________________________________________
Warren Buffett, 2003 Letter to Berkshire Hathaway Shareholders
“At Berkshire, board members travel the same road as shareholders.”
___________________________________________
Warren Buffett, 2004 Letter to Berkshire Hathaway Shareholders
In today’s New York Times, Gretchen Morgenson writes the following:
“ARE the days of the cocooned corporate director finally coming to an end? One can only hope. Even though directors — through the boards they sit on and the various committees they oversee — are supposed to keep wayward or incompetent chief executives at bay, all too often they are, in practice, just cronies of management.
For years, shareholders have done little to voice complaints about such cozy relationships, but it seems that the financial fiasco of the last few years, and the lackadaisical performance by directors at major banks that contributed to the meltdown, is encouraging investors to become more vocal.
Signs of such a welcome development can be seen in the results of this year’s director elections at annual corporate meetings. According to an early assessment of these shindigs, shareholders voiced significantly greater opposition to directors who were up for election this year than they did in 2008. Although such “no” votes aren’t binding, they send a powerful message that should reverberate throughout corporate board rooms.
Investors are clearly angry with their companies, and they have their reasons. Director accountability to the shareholders they are supposed to serve has been sorely lacking for decades. Even as they rubber stamp risky corporate practices and excessive executive pay, directors continue to win re-election to their increasingly lucrative board seats.
It is unfortunate that the only way to force some directors to live up to their duties is for shareholders to keep them worried about an embarrassing vote. But since that is the only weapon investors have, it’s gratifying that more of them seem ready to rumble.”
___________________________________________________
Gretchen Morgenson, Too Many ‘No’ Votes to Be Ignored, New York Times, September 20, 2009
As early as 1993, Warren Buffett has spoken out on the abuses of “Boardroom Atmosphere.” Following is only a short sample, chronologically, of his views:
“…Directors should behave as if there was a single absentee owner, whose long-term interest they should try to further in all proper ways….
And if able but greedy managers over-reach and try to dip too deeply into the shareholders’ pockets, directors must slap their hands……
The outside board members should establish standards for the CEO’s performance and should periodically meet, without his being present, to evaluate his performance against these standards."
______________________________________________
Warren Buffett, 1993 Letter to Berkshire Hathaway Shareholders
“Why have intelligent and decent directors failed so miserably? The answer lies not in inadequate laws-it’s always been clear that directors are obligated to represent the interests of shareholders-but rather in what I’d call “boardroom atmosphere.
It’s almost impossible, for example, in a boardroom populated by well-mannered people, to raise the question of whether the CEO should be replaced. It’s equally awkward to question a proposed acquisition that has been endorsed by the CEO, particularly when his inside staff and outside advisors are present and unanimously support his decision. (They wouldn’t be in the room if they didn’t.) Finally, when the compensation committee – armed, as always, with support from a high-paid consultant – reports on a mega grant of options to the CEO, it would be like belching at the dinner table for a director to suggest that the committee reconsider…..
. In recent years compensation committees too often have been tail-wagging puppy dogs meekly following recommendations by consultants, a breed not known for allegiance to the faceless shareholders who pay their fees. (If you can’t tell whose side someone is on, they are not on yours.) True, each committee is required by the SEC to state its reasoning about pay in the proxy. But the words are usually boilerplate written by the company’s lawyers or its human-relations department. This costly charade should cease.
The acid test for reform will be CEO compensation. Managers will cheerfully agree to board
“diversity,” attest to SEC filings and adopt meaningless proposals relating to process. What many will fight, however, is a hard look at their own pay and perks.
Directors should not serve on compensation committees unless they are themselves capable of negotiating on behalf of owners. They should explain both how they think about pay and how they measure performance. Dealing with shareholders’ money, moreover, they should behave as they would were it their own.
In the 1890s, Samuel Gompers described the goal of organized labor as “More!” In the 1990s,
America’s CEOs adopted his battle cry. The upshot is that CEOs have often amassed riches while their shareholders have experienced financial disasters.
Directors should stop such piracy. There’s nothing wrong with paying well for truly exceptional business performance. But, for anything short of that, it’s time for directors to shout “Less!” It would be a travesty if the bloated pay of recent years became a baseline for future compensation. Compensation committees should go back to the drawing boards."
_______________________________________________
Warren Buffett, 2002 Letter to Berkshire Hathaway Shareholders
“True independence-meaning the willingness to challenge a forceful CEO when something is wrong or foolish-is an enormously valuable trait in a director. It is also rare."
________________________________________________
Warren Buffett, 2003 Letter to Berkshire Hathaway Shareholders
“At Berkshire, board members travel the same road as shareholders.”
___________________________________________
Warren Buffett, 2004 Letter to Berkshire Hathaway Shareholders
Tuesday, September 15, 2009
A Case Study of a Buffett Business Principle
As both a “student” and “teacher” of Warren Buffett’s business principles the past three years, I am continually amazed at their timelessness. I remember once reading that he said they’re not principles if they’re not timeless.
Twenty-four years ago, he wrote:
“ When a management with a reputation for brilliance tackles a business with a reputation for poor fundamental economics, it is the reputation of the business that remains intact.”
___________________________________________________
Warren Buffett, 1985 Letter to Berkshire Hathaway Shareholders
Now, let’s fast forward to a recent article in the New York Times regarding Chrysler. Included below are selected excerpts from the article:
"FOR Steve Feinberg, the onetime owner of Chrysler, the past year has been a crawl toward defeat. He lost billions of dollars. He lost prestige. He lost his privacy. And he ended up a ward and supplicant of the federal government…..
Mr. Feinberg took over Chrysler almost exactly two years ago, promising to revive the company. Chrysler filed for bankruptcy protection at the end of April. So how he and his private equity firm, Cerberus Capital Management, chose to describe their journey with Chrysler is a delicate matter.
If he says he should have shelled out more money to help Chrysler, he could face the ire of investors who have already suffered heavy losses on his gambit. If he says he should have simply dumped Chrysler’s auto arm, while clinging to its more promising finance unit, he could be accused of caring more about his wallet than he did about Chrysler’s workers and the automaker’s role in the economy.
When Cerberus began poking around Detroit, some at the firm said that the American automobile industry was going to be the biggest turnaround story in history. In sessions with potential investors in the last few years, the Cerberus team came across as passionate, skilled and incredibly confident that they should succeed where others had failed.
Cerberus and its co-investors ultimately invested $7.4 billion in Chrysler, a sum now worth an estimated $1.4 billion. Ideally, Cerberus hoped to wed Chrysler’s finance arm to another finance company it controlled, GMAC. To that end, the risks in Chrysler’s auto business were something that the Cerberus team thought it could manage and that wouldn’t stand in the way of making billions of dollars for investors.
……GMAC and Chrysler became so weak that they needed $22.6 billion in government aid in the last year to stay afloat. For Chrysler and its workers, investors, business partners and customers, was all of that worth it?
According to Maryann Keller, a longtime auto analyst and consultant, the company that Mr. Feinberg took over was already suffering from myriad problems: a bad cost structure, a limited product line and no pipeline of more diverse offerings. In short, she says, Cerberus had simply bought a “basket case.”
Cerberus now values its Chrysler stake at 19 cents on the dollar. It is humbling and embarrassing figure for Mr. Feinberg. But its better than zero cents on the dollar, which is what his stake might have been worth had the government not bailed him out."
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Louise Story, For Private Equity, a Very Public Disaster, New York Times, August 9, 2009
The Fallout
"Investors in hedge funds run by Cerberus Capital Management LP, whose audacious multi-billion dollar bet in the U.S.auto industry went bust, are bolting for the door, clinching one of the highest-profile falls from grace of a superstar in the investment world.
Clients are withdrawing more than $5.5 billion, or nearly 71% of the hedge fund assets, in response to big investment losses and their own need for cash, according to people familiar with the matter."
________________________________________________________
Peter Lattman and Jenny Strasburg, Clients Flee Cerberus, Fallen Fund Titan, New York Times, August 29, 2009
As both a “student” and “teacher” of Warren Buffett’s business principles the past three years, I am continually amazed at their timelessness. I remember once reading that he said they’re not principles if they’re not timeless.
Twenty-four years ago, he wrote:
“ When a management with a reputation for brilliance tackles a business with a reputation for poor fundamental economics, it is the reputation of the business that remains intact.”
___________________________________________________
Warren Buffett, 1985 Letter to Berkshire Hathaway Shareholders
Now, let’s fast forward to a recent article in the New York Times regarding Chrysler. Included below are selected excerpts from the article:
"FOR Steve Feinberg, the onetime owner of Chrysler, the past year has been a crawl toward defeat. He lost billions of dollars. He lost prestige. He lost his privacy. And he ended up a ward and supplicant of the federal government…..
Mr. Feinberg took over Chrysler almost exactly two years ago, promising to revive the company. Chrysler filed for bankruptcy protection at the end of April. So how he and his private equity firm, Cerberus Capital Management, chose to describe their journey with Chrysler is a delicate matter.
If he says he should have shelled out more money to help Chrysler, he could face the ire of investors who have already suffered heavy losses on his gambit. If he says he should have simply dumped Chrysler’s auto arm, while clinging to its more promising finance unit, he could be accused of caring more about his wallet than he did about Chrysler’s workers and the automaker’s role in the economy.
When Cerberus began poking around Detroit, some at the firm said that the American automobile industry was going to be the biggest turnaround story in history. In sessions with potential investors in the last few years, the Cerberus team came across as passionate, skilled and incredibly confident that they should succeed where others had failed.
Cerberus and its co-investors ultimately invested $7.4 billion in Chrysler, a sum now worth an estimated $1.4 billion. Ideally, Cerberus hoped to wed Chrysler’s finance arm to another finance company it controlled, GMAC. To that end, the risks in Chrysler’s auto business were something that the Cerberus team thought it could manage and that wouldn’t stand in the way of making billions of dollars for investors.
……GMAC and Chrysler became so weak that they needed $22.6 billion in government aid in the last year to stay afloat. For Chrysler and its workers, investors, business partners and customers, was all of that worth it?
According to Maryann Keller, a longtime auto analyst and consultant, the company that Mr. Feinberg took over was already suffering from myriad problems: a bad cost structure, a limited product line and no pipeline of more diverse offerings. In short, she says, Cerberus had simply bought a “basket case.”
Cerberus now values its Chrysler stake at 19 cents on the dollar. It is humbling and embarrassing figure for Mr. Feinberg. But its better than zero cents on the dollar, which is what his stake might have been worth had the government not bailed him out."
________________________________________________________________
Louise Story, For Private Equity, a Very Public Disaster, New York Times, August 9, 2009
The Fallout
"Investors in hedge funds run by Cerberus Capital Management LP, whose audacious multi-billion dollar bet in the U.S.auto industry went bust, are bolting for the door, clinching one of the highest-profile falls from grace of a superstar in the investment world.
Clients are withdrawing more than $5.5 billion, or nearly 71% of the hedge fund assets, in response to big investment losses and their own need for cash, according to people familiar with the matter."
________________________________________________________
Peter Lattman and Jenny Strasburg, Clients Flee Cerberus, Fallen Fund Titan, New York Times, August 29, 2009
Sunday, September 13, 2009
Financial Regulatory Reform
A Case Study You Won’t Believe
President Obama’s speech at Federal Hall in New York City on Monday “will focus on the need to take the next series of steps on financial regulatory reform to ensure what happened a year ago…doesn’t happen again and cause the type of havoc that we’ve seen in our economy,” said White House spokesman Robert Gibbs.
Hopefully, in considering the Obama administration’s proposed financial regulatory revamp, Congress will take note of, learn from, “and ensure the following doesn’t happen again.” In Buffett’s words:
“For a case study on regulatory effectiveness, let’s look harder at the Freddie and Fannie example. These giant institutions were created by Congress, which retained control over them, dictating what they could and could not do. To aid its oversight, Congress created OFHEO in 1992, admonishing it to make sure the two behemoths were behaving themselves. With that move, Fannie and Freddie became the most intensely-regulated companies of which I am aware, as measured by manpower assigned to the task.
On June 15, 2003, OFHEO (whose annual reports are available on the Internet) sent its 2002 report to Congress – specifically to its four bosses in the Senate and House, among them none other than Messrs. Sarbanes and Oxley. The report’s 127 pages included a self-congratulatory cover-line: “Celebrating 10 Years of Excellence.” The transmittal letter and report were delivered nine days after the CEO and CFO of Freddie had resigned in disgrace and the COO had been fired. No mention of their departures was made in the letter, even while the report concluded, as it always did, that “Both Enterprises were financially sound and well managed.”
In truth, both enterprises had engaged in massive accounting shenanigans for some time. Finally, in 2006, OFHEO issued a 340-page scathing chronicle of the sins of Fannie that, more or less, blamed the fiasco on every party but – you guessed it – Congress and OFHEO.”
_______________________________________________
Warren Buffett, 2008 Letter to Berkshire Hathaway Shareholders
P.S. Remarkably, the principal, if not sole, responsibility of over 100 OFHEO employees was to oversee the operations of Fannie Mae and Freddie Mac.
Hopefully, Congress will ask Buffett for his testimony and/or written recommendations.
To add insult to injury, read Gretchen Morgenson’s recent article in the New York Times, excerpted below:
“With all the turmoil of the financial crisis, you may have forgotten about the book-cooking that went on at Fannie Mae. Government inquiries found that between 1998 and 2004, senior executives at Fannie manipulated its results to hit earnings targets and generate $115 million in bonus compensation. Fannie had to restate its financial results by $6.3 billion. Almost two years later, in 2006, Fannie’s regulator concluded an investigation of the accounting with a scathing report. “The conduct of Mr. Raines, chief financial officer J. Timothy Howard, and other members of the inner circle of senior executives at Fannie Mae was inconsistent with the values of responsibility, accountability, and integrity,” it said.
That year, the government sued Mr. Raines, Mr. Howard and Leanne Spencer, Fannie’s former controller, seeking $100 million in fines and $115 million in restitution from bonuses the government contended were not earned. Without admitting wrongdoing, Mr. Raines, Mr. Howard and Ms. Spencer paid $31.4 million in 2008 to settle the litigation.
When these top executives left Fannie, the company was obligated to cover the legal costs associated with shareholder suits brought against them in the wake of the accounting scandal. Now those costs are ours. Between Sept. 6, 2008, and July 21, we taxpayers spent $2.43 million to defend Mr. Raines, $1.35 million for Mr. Howard, and $2.52 million to defend Ms. Spencer.……
An additional $16.8 was paid in the period to cover legal expenses of workers at the Office of Federal Housing Enterprise Oversight, Fannie’s former regulator. These costs are associated with defending the regulator in litigation against former Fannie executives….
A spokesman for the agency said it would not comment for this article.”
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Gretchen Morgenson, They Left Fannie Mae, but We Got the Legal Bills, New York Times, September 6, 2009
A Case Study You Won’t Believe
President Obama’s speech at Federal Hall in New York City on Monday “will focus on the need to take the next series of steps on financial regulatory reform to ensure what happened a year ago…doesn’t happen again and cause the type of havoc that we’ve seen in our economy,” said White House spokesman Robert Gibbs.
Hopefully, in considering the Obama administration’s proposed financial regulatory revamp, Congress will take note of, learn from, “and ensure the following doesn’t happen again.” In Buffett’s words:
“For a case study on regulatory effectiveness, let’s look harder at the Freddie and Fannie example. These giant institutions were created by Congress, which retained control over them, dictating what they could and could not do. To aid its oversight, Congress created OFHEO in 1992, admonishing it to make sure the two behemoths were behaving themselves. With that move, Fannie and Freddie became the most intensely-regulated companies of which I am aware, as measured by manpower assigned to the task.
On June 15, 2003, OFHEO (whose annual reports are available on the Internet) sent its 2002 report to Congress – specifically to its four bosses in the Senate and House, among them none other than Messrs. Sarbanes and Oxley. The report’s 127 pages included a self-congratulatory cover-line: “Celebrating 10 Years of Excellence.” The transmittal letter and report were delivered nine days after the CEO and CFO of Freddie had resigned in disgrace and the COO had been fired. No mention of their departures was made in the letter, even while the report concluded, as it always did, that “Both Enterprises were financially sound and well managed.”
In truth, both enterprises had engaged in massive accounting shenanigans for some time. Finally, in 2006, OFHEO issued a 340-page scathing chronicle of the sins of Fannie that, more or less, blamed the fiasco on every party but – you guessed it – Congress and OFHEO.”
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Warren Buffett, 2008 Letter to Berkshire Hathaway Shareholders
P.S. Remarkably, the principal, if not sole, responsibility of over 100 OFHEO employees was to oversee the operations of Fannie Mae and Freddie Mac.
Hopefully, Congress will ask Buffett for his testimony and/or written recommendations.
To add insult to injury, read Gretchen Morgenson’s recent article in the New York Times, excerpted below:
“With all the turmoil of the financial crisis, you may have forgotten about the book-cooking that went on at Fannie Mae. Government inquiries found that between 1998 and 2004, senior executives at Fannie manipulated its results to hit earnings targets and generate $115 million in bonus compensation. Fannie had to restate its financial results by $6.3 billion. Almost two years later, in 2006, Fannie’s regulator concluded an investigation of the accounting with a scathing report. “The conduct of Mr. Raines, chief financial officer J. Timothy Howard, and other members of the inner circle of senior executives at Fannie Mae was inconsistent with the values of responsibility, accountability, and integrity,” it said.
That year, the government sued Mr. Raines, Mr. Howard and Leanne Spencer, Fannie’s former controller, seeking $100 million in fines and $115 million in restitution from bonuses the government contended were not earned. Without admitting wrongdoing, Mr. Raines, Mr. Howard and Ms. Spencer paid $31.4 million in 2008 to settle the litigation.
When these top executives left Fannie, the company was obligated to cover the legal costs associated with shareholder suits brought against them in the wake of the accounting scandal. Now those costs are ours. Between Sept. 6, 2008, and July 21, we taxpayers spent $2.43 million to defend Mr. Raines, $1.35 million for Mr. Howard, and $2.52 million to defend Ms. Spencer.……
An additional $16.8 was paid in the period to cover legal expenses of workers at the Office of Federal Housing Enterprise Oversight, Fannie’s former regulator. These costs are associated with defending the regulator in litigation against former Fannie executives….
A spokesman for the agency said it would not comment for this article.”
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Gretchen Morgenson, They Left Fannie Mae, but We Got the Legal Bills, New York Times, September 6, 2009
Wednesday, September 9, 2009
Three years ago, I began teaching a course on Warren Buffett at the Washington University in St. Louis Lifelong Learning Institute. From day one, he has enthusiastically supported the course. He and I have regularly exchanged emails regarding the course. In January 2007, at his invitation, I traveled to Omaha and met him at his office. As busy as he is, he has always had time for me.
This blog will be about his wisdom, his ideas and his philosophy of life, including:
-The Berkshire Hathaway model of managing a business, large or small, employing his unconventional and “old fashioned” business management principles and practices (in Buffett’s words, “simple, old and few”). When you strip it all away, effective business management, the Warren Buffett way, is remarkably obvious and simple, and
-Using common sense, acquiring wisdom every day, having a passion for work and having fun and a sense of humor.
Can all of this be learned from one man? YES! There are some people who are simply so unique, so very special, that no words can do them justice. Buffett’s genius is his character. His integrity is unsurpassed. His patience, discipline and rationality are extraordinary. In the words of Charlie Rose, “It is his passion for his company, passion for his friends, passion for his work and a passion for living life. This is a man who has fun.”
Topics to be regularly covered will include:
This blog will be about his wisdom, his ideas and his philosophy of life, including:
-The Berkshire Hathaway model of managing a business, large or small, employing his unconventional and “old fashioned” business management principles and practices (in Buffett’s words, “simple, old and few”). When you strip it all away, effective business management, the Warren Buffett way, is remarkably obvious and simple, and
-Using common sense, acquiring wisdom every day, having a passion for work and having fun and a sense of humor.
Can all of this be learned from one man? YES! There are some people who are simply so unique, so very special, that no words can do them justice. Buffett’s genius is his character. His integrity is unsurpassed. His patience, discipline and rationality are extraordinary. In the words of Charlie Rose, “It is his passion for his company, passion for his friends, passion for his work and a passion for living life. This is a man who has fun.”
Topics to be regularly covered will include:
- Shareholders as Partners
- Corporate Culture
- Communication
- Executive Behavior
- Executive Compensation
- Management Principles,Practices, and Mistakes
- Life Choices
- Stories and Humor
- Investing
- Charlie Munger
- Ben Franklin
I look forward to hearing from you.
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