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Berkshire Hathaway, David Sokol, and Much Ado About Nothing
by John Tamny, Toreador Research and Trading (Guest Contributor)
Even if David Sokol knew that Berkshire Hathaway would ultimately buy Lubrizol, which is a fanciful assumption on its very best day, many investors (including this one) want those pitching companies to have a stake in them. The greater conflict is when they don't, and as Berkshire is presented with myriad deals on a daily basis, the idea that Sokol bought shares knowing he would ultimately profit is a laugh for countless reasons, including the simple fact that not all Berkshire investments are winners.
The alleged scandal surrounding once-presumed Warren Buffett heir apparent David Sokol has quite predictably generated all manner of breathy headlines about a Teflon-coated Berkshire Hathaway suffering a besmirched reputation. As if often the case, the supposed ill deed in no way measures up to the hype.
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If the media accounts of the story are true, Sokol, in a routine meeting with Citigroup investment bankers eager to pitch deals to serial acquirer Berkshire Hathaway, was presented with Lubrizol as a potential target. Apparently impressed with the company's prospects, Sokol bought shares on his own. Months later, similarly impressed with Lubrizol, Berkshire bought the company, and Sokol, having previously purchased shares, made $3 million.
That Sokol profited from a subsequent Berkshire transaction is the "scandal", but if the media narrative is true, there's nothing untoward to speak of, and Buffett has said just that. A simple review of what seemingly happened reveals why.
First up is Sokol's purchase. It's impossible to know, but it's fair to suggest that on account of the myriad deal ideas sent Berkshire's way, many in the firm's employ do just as Sokol did. It's been asked if Sokol erred by not immediately making known his stock acquisition, but his purchases should be his own private affair.
Of course assuming Sokol had publicized his transaction, it's fair to suggest that he could have profited sooner based on investors bidding up the share price of a company that had won a top-level Berkshire executive's attention. That he did not is immaterial, and presumably normal considering Berkshire is doubtless full of individuals who regularly speculate on the prospects of companies with their own money.
Some argue that Sokol should have revealed his purchase given Berkshire's outsized role in the market for company acquisitions. This, it could be said is a ridiculous assertion because it presumes that once senior Berkshire executives buy shares in anything, that the firm becomes a Berkshire target. Not knowing the inner workings of a somewhat secretive holding company, the very suggestion is laughable.
Berkshire executives are almost certainly approached by investment bankers with great regularity who pitch numerous deals, and for Sokol to guess with any certainty that Lubrizol would eventually become a Berkshire acquisition quite simply defies common sense. He, or any Berkshire executive for that matter, should be extremely lucky if even a small fraction of their personal stock buys actually become Berkshire-owned and operated companies.
But assuming for a moment that stock buys within the firm did and do lead to acquisitions with any kind of frequency, even then Sokol couldn't be sure of achieving profits on his speculation. To name but two Buffett investments, a stake in U.S. Airways long ago didn't quite work out for the Oracle of Omaha, not to mention the near collapse of Goldman Sachs' shares after he made an investment there in 2008.
Some say that Sokol unfairly gained over the long-term for having shares in a company that Berkshire did buy, but even there there's no story. Instead, Sokol should be cheered by investors inside and outside Berkshire for him having risked his own money in Lubrizol such that he provided both sets of investors with precious market signals as to the company's direction. All economic activity is speculation, and Sokol, whether he made or lost money on the investment, provided the markets with necessary information.
Of course some suggest that Sokol's seniority within Berkshire gave him a privileged perch from which to recommend the company's purchase in a way that he profited from. If we ignore first how immaterial $3 million is to someone of Sokol's stature, it's safe to say yet again that irrespective of seniority, Berkshire acquisitions of companies in which its executives already own shares is surely the exception to the rule. Berkshire is inundated with deal ideas, so there was no way Sokol could know with certainty that his stock buy would eventually be followed by a Berkshire acquisition. And as evidenced by the U.S. Airways and Goldman investments, not every Buffett/Berkshire investment goes up.
But let's assume for a moment that as the presumed heir to Buffett, Sokol enjoyed outsized influence on Berkshire's investment committee such that any alleged endorsement by him of Lubrizol increased the odds of the subsequent purchase. If so, is this something that would in any way anger Berkshire shareholders? Not likely.
To see why we need to ask if Berkshire investors would prefer that the executives overseeing their funds have a little or a lot of skin in the game, and a little or a lot of knowledge of the companies they analyze. Logic says they would prefer that individuals like Sokol be shareholders of acquired companies given the logical presumption that as shareholders, their knowledge of the companies purchased would be that much greater. Indeed, it's said that Sokol had a conflict for already possessing a stake in Lubrizol, but assuming he recommended the firm as an acquisition target, the arguably greater conflict as it applies to Berkshire shareholders would have been him recommending a company in which he had no personal stake.
News accounts point to a looming SEC investigation of the alleged Sokol misdeed, but as is often the case with SEC activity, any sleuthing here will be a waste of time. Sokol provided capital to a company whose prospects he liked, and in doing so, he gave investors inside and outside Berkshire important information that is necessary for markets to function.
Ultimately, it has to be remembered that we live in a world of limited capital, and it's the speculations of individuals like Sokol that aid deployment of it as efficiently as possible. For the SEC to penalize Sokol, Berkshire or both for providing information to the marketplace would not only be unfortunate for the man and the firm, it would also be bad for economic growth utterly reliant on information-infused market signals.
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You sir, are a fucking idiot. The audit committee's report proves that without a shadow of a doubt.
"If we ignore first how immaterial $3 million is to someone of Sokol's stature . . . ."
This writer is beyond clueless, and knows nothing about bankers. Above all else, bankers care about bonus, especially on deals. Make no mistake, that $3 million is all Sokol cared about, period. "Stature" my ass. Sokol -- or any other banker -- would sell their nuts to a miller if it meant more end-of-year play-dough. Believe it.
How in the HELL did this bullshit end up on ZH? Oh, i know. FAIL.
I have a slightly different view. Its good to have this kind of claptrap publicly outed. It sets a good example. If he has the balls to say this in public, lets humiliate him.
Unfortunately, tnx to the Tele-POTUS, guys like this are not cowering in the corners anymore. Suddenly, they were right all along.
It's worthless shit like this that has me clicking less and less on the articles at the top of ZH.
You need to be bitch slapped in the face.
"bitch slapped in the face"
Um...where else would you get...
Never mind.
care to explain?
WB March 11 Interview....contd.
How worried were you?
"I wasn't worried because I knew the government would do the right thing. I knew they had the tools to do the right thing, they were the only ones that had the tools and I knew the people in charge were not the type to freeze in the headlights. I knew the president came out and said that he supported action. "Congress wasn't worried for a while ... but I felt that Congress would do the right thing once they understood the situation. I didn't feel like they understood the situation as fast as some of the others. "I really wasn't worried. We invested $15.5 billion in three weeks after Lehman. I thought it was an opportunity, but I did feel it was absolutely vital that the U.S. government realize the incredible seriousness of the situation and act promptly and in some unprecedented way. They guaranteed commercial paper, they guaranteed money market funds, and none of that was in their charter a week earlier."
So who's to blame for the financial crisis?
"The American people, including banks, Congress, the administration, Freddie Mac and Fannie Mae, the media - they all subscribed to the idea that residential housing could not collapse .... The idea that a $22-trillion asset class in an economy that is only worth in aggregate maybe $55-60 trillion, which for two-thirds of people with their own homes was their major asset, and in many cases they borrowed very significant funds against something that would plunge in value - this was something that we all participated in. "It was a collective delusion, that once adopted, spread through all kinds of institutions and instruments of finance so that the interdependence of these items, once the delusion became exposed, once it became apparent that the emperor had no clothes, swept through the economy with the impact and the speed of a tsunami. All kinds of things happened that you wouldn't have thought possible because of this huge interdependence in markets."
You didn't mention the rating agencies.
"It includes them - there were a few people out there shoring up subprime, but basically it includes everybody."
PS : I would love somebody to contextualize these comments in relation to Oct. 2008. I don't know all the details just the broad post-crisis picture. Anybody care to comment?
House prices were a "collective delusion" says Wise Uncle Warren.
Funny, but I don't remember Warren giving us any Irrational Exuberance warning speeches in 2005. Or 2006. Or 2007.
Is this a joke? Or do people like this fucking dickhead really have jobs managing peoples money?
So what if there was a little insider trading...everybody's doing it...Right? What's a little front running amongst friends ... Right? Laws? LOL!!!!! Those are for the little people. Right?
Guys like this need to be publicly bitch slapped on every possible opportunity.
Excerpts of WB interview March 11 Korean NEWS/THe Marker
What would have happened if the U.S. government had not bailed out the banks?
"[The problem] wasn't the banks so much - the number-one part of the bailout was to the American public. Immediately post-Lehman, there were $3.5 trillion in money market accounts. That was half of all the domestic deposits at the banks of the United States: 30 million people had their money in money market accounts. They did not have FDIC insurance and the first three days of the week following Lehman, $175 billion disappeared from those accounts.
"It was a cascade of fear, and if the government had not stepped in to bail out those 30 million people .... They were bailing out everybody, and as a practical matter they were trying to save the American economy, which was sputtering, from coming to a complete stop.
"I give enormous credit to [U.S. Federal Reserve Chairman Ben] Bernanke and [Hank] Paulson [Treasury secretary at the time] and to President [George W.] Bush and Sheila Bair [chairwoman of the U.S. Federal Deposit Insurance Corporation] and [U.S. Treasury Secretary] Tim Geithner.
"They acted in a way that was absolutely necessary, and only government could have done it. And they did it, they did the right things."
.....No comment....
The politics of Oligarchical self imposed criteria...playing on people's "fear factor" ,gullibility and ignorance of how the wheels turn....Awesome!
by John Tamny
Is this jerkoff a CNBS mouthpiece or just clueless??
Well, I really hate to come down on someone I don't know. But if he is brave enough to publish this he deserves to be called to the carpet.
If you look at his website, the answer to your question is both.
What is troubling is that someone like who has little understanding of conflicts of interest internal controls is involved with the management of other people's money.
He does a great disservice by publishing this kind of a convoluted justification for behavior which at best amounts to shoddy ethical practices and worst, behavior violating the securities laws.
He has worked for Goldman Sachs
http://www.trtadvisors.com/content/our-team
didn't someone muse that blogs were being infiltrated
see Cass Sunstein
http://www.scribd.com/doc/25440897/CASS-SUNSTEIN-Infiltrate-Conspiracy-F...
I suggest you read this and then reconsider what you have said here.
http://dealbook.nytimes.com/2011/04/05/the-private-equity-parallels-with...
Even Buffet is now having to get the Oligarchy to explain its direction. When the top man is lost in the fog, afraid to be misunderstood by his peers as they shake in their democratic shoes. The institutions are now tearing apart in an open two tier economy...The plutocrats and the others...the 99%, those we call Main Street America. Not easy to lie to all the people all the time...
How to play bridge with an ace up your sleeve...
Ya... Buffet's right hand man goes in and says "I really want to buy this company. It meets all of our value investing criteria". What do you think Buffet is going to say? Try again.
We're witnessing the decline of an empire.
As anyone who has ever worked for an investment bank or properly managed fund knows, there are well worn compliance and ethical rules governing this type of behavior. Those rules are not written on the back of Warren and Charlie's envelope. This is obvious for those of us who are tired of hearing about how "we do it back in Omaha."
Their shareholders may or may not care, but they can spare the rest of us their folksy Uncle Warren says bullshit.
Right, WB7. And Tamny knows it, but he's a slimeball like Sokol, and the Geriatric Greedsters.
How did Sokol defend himself?: "I don't think I did anything wrong. Charlie Munger owned 3% of BYD before he sent me to look into the company."
In other words, "Charlie and Warren front-run the Berkshire shareholders all the time. Why shouldn't I?"