"I want that CEO equation to be that if this place goes down or needs government help, I'm busted."
In his January 20, 2010 CNBC Squawk Box interview, Buffett presents his solution to change future behavior of bank management and directors.
"I think, and I'm not even sure how you draft this into statutes, but the banks that got into big trouble, it was management at the top. And a number of those went away rich. They didn't go away as rich as they were earlier, but I think that's terrible. I think, if I were on the board of directors of a bank, and you do this in conjunction with the government, but I think you should have something so that if a bank ever has to go to the Federal government, not to the FDIC because that's a form of insurance, but if they have to go to the Federal government to be saved, the CEO and any CEO of the previous two years before that, and his wife, they sign something so that they are essentially wiped out. If an institution that's so important to this country really causes the country great difficulty, I think the CEO, I want that CEO's equation to be that if this place goes down or needs government help, I'm busted. And I can't put it all in my wife's name and she's busted, too. And then I would have strict penalties for directors, probably five times their average compensation or something. I think that would do more to change behavior, the kind of behavior that gets us into trouble, then anything else you could do."
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CNBC Squawk Box Interview, January 20, 2010
Showing posts with label Executive Behavior. Show all posts
Showing posts with label Executive Behavior. Show all posts
Wednesday, February 3, 2010
Tuesday, January 26, 2010
A Tax Inefficient Sale
In his recent CNBC Squawk Box interview, Warren Buffett was sharply critical of Kraft management's decision to sell its pizza business to Nestle, and unnecessarily incurring a $1.2 billion tax bill to do so.
"Well, I think-I think Kraft has got a wonderful portfolio of businesses including their pizza business which Nestle now has, having paid $1.2 billion more for it than we received in terms of cash......
Well, when you look closely, you find $3.7 billion becomes $2.5 billion. And it was an enormously tax inefficient way to get rid of it. If you wanted to sell it, it was tax inefficient. Back when Kraft got rid of Post cereals, they did it in a tax efficient way. It's not that they don't know how to do it, but in this case, they did it in an enormously tax-inefficient way. When you have a business with virtually no basis, Procter & Gamble's gone through this, Kraft, other people. There are ways to handle spinoffs that avoid cutting the government in for almost one-third ownership of the business. And unfortunately, they headlined the $3.7 billion. I don't think I have read anyplace about the fact that they're only getting $2.5 billion. And it was Nestle that pointed out that this business does $2.1 billion in sales and makes $280 million. And giving up $280 million of earnings in a business that's been growing over the years for $2.5 billion of cash, I think, is a big mistake and I think it's a bigger mistake when you're paying -probably counting all of the costs involved including the undervaluation of the Kraft shares given, you're probably paying in the range of maybe 17 times earnings for Cadbury, I think is a big mistake."
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CNBC Squawk Box Interview, January 20, 2010
In his recent CNBC Squawk Box interview, Warren Buffett was sharply critical of Kraft management's decision to sell its pizza business to Nestle, and unnecessarily incurring a $1.2 billion tax bill to do so.
"Well, I think-I think Kraft has got a wonderful portfolio of businesses including their pizza business which Nestle now has, having paid $1.2 billion more for it than we received in terms of cash......
Well, when you look closely, you find $3.7 billion becomes $2.5 billion. And it was an enormously tax inefficient way to get rid of it. If you wanted to sell it, it was tax inefficient. Back when Kraft got rid of Post cereals, they did it in a tax efficient way. It's not that they don't know how to do it, but in this case, they did it in an enormously tax-inefficient way. When you have a business with virtually no basis, Procter & Gamble's gone through this, Kraft, other people. There are ways to handle spinoffs that avoid cutting the government in for almost one-third ownership of the business. And unfortunately, they headlined the $3.7 billion. I don't think I have read anyplace about the fact that they're only getting $2.5 billion. And it was Nestle that pointed out that this business does $2.1 billion in sales and makes $280 million. And giving up $280 million of earnings in a business that's been growing over the years for $2.5 billion of cash, I think, is a big mistake and I think it's a bigger mistake when you're paying -probably counting all of the costs involved including the undervaluation of the Kraft shares given, you're probably paying in the range of maybe 17 times earnings for Cadbury, I think is a big mistake."
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CNBC Squawk Box Interview, January 20, 2010
Sunday, January 17, 2010
Wall Street Ethos
On January 14, Andrew Ross Sorkin reports on the exchange between Phil Angelides, chairman of the Financial Crisis Inquiry Commission and Lloyd C. Blankfein, chairman of Goldman's Sach's, at the Commission's hearings the day before.
Angelides "asked Mr. Blankfein to explain how his firm could have sold bundles of troubled mortgages at the same time it placed bets with Goldman's own money that their value would fall. Mr. Blankfein responded, Goldman's clients knew what they were buying and that his firm was simply providing a customer service. These are professional investors who want this exposure."
Sorkin concluded, "The exchange was partcularly revealing because it laid bare an essential truth about the Wall Street ethos: if there's a buyer-no matter how sophisticated-there's always a seller."
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Andrew Ross Sorkin, Wall St. Ethos Under Scrutiny at Hearing, New York Times, January 14, 201o
Buffett would agree. Twenty-one years ago, he wrote:
"Our comments about investment bankers may seem harsh. But Charlie and I-in our hopelessly old-fashioned way-believe that they should perform a gatekeping role, guarding against the promotor's propensity to indulge in excess. Promotors, after all, have throughout time exercised the same judgment and restraint in accepting money that alcoholics have exercised in accepting liquor. At a minimum, therefore, the banker's conduct should rise to that of a responsible bartender who, when necessary, refuses the profit from the next drink to avoid sending a drunk out on the highway. In recent years, unfortunately, many lending investment firms have found bartender morality to be an intolerably restrictive standard. Lately, those who have traveled the right road in Wall Street have not encountered heavy traffic."
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Warren Buffett, 1989 Letter to Berkshire Hathaway Shareholders
On January 14, Andrew Ross Sorkin reports on the exchange between Phil Angelides, chairman of the Financial Crisis Inquiry Commission and Lloyd C. Blankfein, chairman of Goldman's Sach's, at the Commission's hearings the day before.
Angelides "asked Mr. Blankfein to explain how his firm could have sold bundles of troubled mortgages at the same time it placed bets with Goldman's own money that their value would fall. Mr. Blankfein responded, Goldman's clients knew what they were buying and that his firm was simply providing a customer service. These are professional investors who want this exposure."
Sorkin concluded, "The exchange was partcularly revealing because it laid bare an essential truth about the Wall Street ethos: if there's a buyer-no matter how sophisticated-there's always a seller."
___________________________________________________
Andrew Ross Sorkin, Wall St. Ethos Under Scrutiny at Hearing, New York Times, January 14, 201o
Buffett would agree. Twenty-one years ago, he wrote:
"Our comments about investment bankers may seem harsh. But Charlie and I-in our hopelessly old-fashioned way-believe that they should perform a gatekeping role, guarding against the promotor's propensity to indulge in excess. Promotors, after all, have throughout time exercised the same judgment and restraint in accepting money that alcoholics have exercised in accepting liquor. At a minimum, therefore, the banker's conduct should rise to that of a responsible bartender who, when necessary, refuses the profit from the next drink to avoid sending a drunk out on the highway. In recent years, unfortunately, many lending investment firms have found bartender morality to be an intolerably restrictive standard. Lately, those who have traveled the right road in Wall Street have not encountered heavy traffic."
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Warren Buffett, 1989 Letter to Berkshire Hathaway Shareholders
Friday, November 13, 2009
Greed and Fear
"We are never going to get rid of greed. We are never going to get rid of fear," so said Warren Buffett yesterday at the Columbia Business School.
I believe one of Buffett's most under-recognized and under-appreciated strengths is his extraordinary ability to understand human behavior, especially in time of crisis. A striking example (including the prophetic "rhyme with 1929 prediction" made in May, 2007) follows:
"I mean it's just the scope of human beings to do crazy things, self-destructive things, things as a mob they do. You saw it on October 19, 1987...You saw Long-Term Capital Management. You've seen all kinds of things. There will be other things in the future. They will all have similar factors. The human factor will be at the bottom of them. They won't be exactly the same. But it's like Mark Twain said, "You know history doesn't repeat itself, but it rhymes." We will see some things that rhyme with 1929 or whatever else it may be.
Well I've seen all kinds of people with 160 IQ's with intense interest in the subject, lots of experience in the investment world. I've seen them self-destruct. And you have to have a certain amount of natural flow of juices just to be excited about the game and those participating. And the trick of course is to keep control of those juices. And most people, even smart people, have trouble getting caught up in the game and thinking I'll just dance one more dance like Cinderella at five minutes till twelve or something like that because they think they are smarter than the rest of the public.....Or they don't protect themselves against something that will come totally from right field. Long Term Capital Management is a good example of that."
_______________________________________________________________
Warren Buffett, "An Exclusive Conversation with Warren Buffett," Interview with Charlie Rose, (May 10, 2007).
"We are never going to get rid of greed. We are never going to get rid of fear," so said Warren Buffett yesterday at the Columbia Business School.
I believe one of Buffett's most under-recognized and under-appreciated strengths is his extraordinary ability to understand human behavior, especially in time of crisis. A striking example (including the prophetic "rhyme with 1929 prediction" made in May, 2007) follows:
"I mean it's just the scope of human beings to do crazy things, self-destructive things, things as a mob they do. You saw it on October 19, 1987...You saw Long-Term Capital Management. You've seen all kinds of things. There will be other things in the future. They will all have similar factors. The human factor will be at the bottom of them. They won't be exactly the same. But it's like Mark Twain said, "You know history doesn't repeat itself, but it rhymes." We will see some things that rhyme with 1929 or whatever else it may be.
Well I've seen all kinds of people with 160 IQ's with intense interest in the subject, lots of experience in the investment world. I've seen them self-destruct. And you have to have a certain amount of natural flow of juices just to be excited about the game and those participating. And the trick of course is to keep control of those juices. And most people, even smart people, have trouble getting caught up in the game and thinking I'll just dance one more dance like Cinderella at five minutes till twelve or something like that because they think they are smarter than the rest of the public.....Or they don't protect themselves against something that will come totally from right field. Long Term Capital Management is a good example of that."
_______________________________________________________________
Warren Buffett, "An Exclusive Conversation with Warren Buffett," Interview with Charlie Rose, (May 10, 2007).
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.”
________________________________________________________________
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.”
_______________________________________________
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.”
________________________________________________________________
Gretchen Morgenson, They Left Fannie Mae, but We Got the Legal Bills, New York Times, September 6, 2009
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